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Chapter Eleven
Lecture Notes
Unique Aspects of Accounting
for Not-for-Profit and
Health Care Organizations
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Statement of Financial Position
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Not-for-profit organizations do not have to segregate assets
and liabilities into current and long term. But they must either:
- show assets in order of declining liquidity, or
- disclose relative liquidity in the notes to the financial statements.
Not-for-profit organizations must segregate assets that are subject
to donor-imposed restrictions.
- Fund accounting tracks each restricted pool of assets in a
separate entity.
- Restricted funds may not be commingled for operating
purposes but are usually commingled for reporting purposes.
- Only assets not available for current use are segregated for reporting.
Net Assets must be divided into unrestricted, temporarily restricted, and
permanently restricted categories. Self-Imposed restrictions may also
be shown.
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Meals for the Homeless
Statement of Financial Position
As of December 31, 2011
ASSETS
Cash
LIABILITIES AND NET ASSETS
$
Marketable Securities
Accounts Receivable, Net
100
3,000
55,000
LIABILITIES
Wages Payable
Accounts Payable
2,000
6,000
Inventory (LIFO basis)
2,000
Notes Payable
Prepaid Expenses
1,000
Mortgages Payable
Property
40,000
Cash Restricted for Building Acquisition
Equipment, Net
8,000
Total Assets
$145,000
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Total Liabilities
16,000
$26,000
900
35,000
Investments
$ 2,000
NET ASSETS
Unrestricted
$84,100
Temporarily Restricted
4,900
Permanently Restricted
30,000
Total Net Assets
$119,000
Liabilities and Net Assets
$145,000
Statement of Activities
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Revenues and support are shown as increases in
unrestricted net assets unless there are donor-imposed
restrictions.
Expenses are reported as decreases in unrestricted net
assets. Expenses must be reported separately from
revenues. Netting is generally not permitted.
Gains and Losses on Investments are shown as changes
in unrestricted net assets unless specific donor-imposed
restrictions prohibit their use.
As donor restrictions expire, donations become unrestricted
support.
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Unrestricted
Temporarily Permanently
Restricted
Restricted
Total
Revenues and Support
Meals for
the
Homeless
Activity
Statement
For the
Year
Ending
December
31, 2011
Client Revenue
$ 11,000
$ 11,000
City Revenue
20,000
20,000
County Revenue
10,000
10,000
Foundation Grants
60,000
Annual Ball
12,000
Contributions
65,000
Total Revenue and Support
$
10,000
70,000
12,000
5,000
$
3,000
73,000
15,000
$
3,000
$196,000
$178,000
$
$ 10,000
$ (10,000)
2,000
(2,000)
Total Net Assets Released from Restrictions
$ 12,000
$ (12,000)
$
0
Total Unrestricted Revenues and Other
Support
Expenses
$190,000
$
$
3,000
Net Assets Released from Restrictions
Satisfaction of Program Restrictions
Expiration of Time Restrictions
Meals
3,000
$
0
$196,000
$ 67,000
$ 67,000
Counseling
35,000
35,000
Administration, Fund Raising and General
Bad Debts
75,000
4,000
75,000
4,000
Depreciation
10,000
10,000
Total Expenses
$191,000
$
0
$
0
$191,000
Increase/(Decrease) in Net Assets
$ (1,000)
$
3,000
$
3,000
$ 5,000
1,900
27,000
114,000
4,900
$ 30,000
$119,000
Net Assets at Beginning of Year
Net Assets at End of Year
85,100
$ 84,100
$
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Statement of Functional Expenses
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Functional Expenses must be presented either in the activity
statement or the notes for all NFP organizations.
Voluntary health and welfare organizations (VHWOs) must
report information by both function and nature in a separate
Statement of Functional Expenses. What is a VHWO?
Columns two and three represent program services. What are
program services?
Columns four and five show support services expenses. Why is
it important to separate support services from program services?
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Meals for the Homeless
Statement of Functional Expenses
For the Year Ending December 31, 2011
Program Services
Meals
Counseling
EXPENSES
Salaries and Benefits
Food
$35,000
$35,000
Support Services
G&A
Fund Raising
$40,000
$17,000
17,000
Total
$127,000
17,000
Supplies and Brochures
2,000
1,000
1,000
2,000
6,000
Office Expenses
1,000
1,000
1,000
3,000
6,000
14,000
1,000
2,000
1,000
18,000
Rent
Professional Fees
Bad Debts
3,000
3,000
4,000
4,000
Depreciation
10,000
________
_______
_______
10,000
Total Expenses
$83,000
$38,000
$47,000
$23,000
$191,000
This statement is required only for VHWO organizations.
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Fund Accounting
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Fund accounting separates the organization into a number of
distinct entities called funds (not used for reporting, which
presents the organization as a whole).
- unrestricted funds are used to account for day-to-day operations.
- restricted funds correspond to pools of assets given to the
organization by donors who have restricted their use in some way.
- In endowment funds organizations are generally only allowed
to use the earnings on the endowment for operating purposes.
- Custodial funds are those being held for another entity.
- Board designated funds contain resources that have been
internally restricted for some special purpose. For reporting
purposes, these funds are unrestricted.
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Donated Goods and Services
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Contributions, gifts, and donations are recorded at fair market value
at the time of donation.
Personal Services are recorded as both support and an expense if:
- they create or enhance nonfinancial assets (e.g. equipment), or
- the services require specialized skill, are provided by individuals
with those skills, and they would typically need to be purchased
if they were not donated.
Which of the following services would be recorded as support and an
expense? Why?
- a parent who transports children to a school soccer match?
- a corporate CEO who makes fundraising calls?
- a plumber who installs a new gas stove?
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Federal Income Taxes
 Not-for-Profit Organizations are generally exempt from federal
income taxes.
 The Unrelated Business Tax – income tax on profits from
activities that compete with for-profit organizations. For
example:
 No tax on an inpatient pharmacy profits in a hospital, but hospital
must pay tax on profits from its outpatient pharmacy that competes
with private for-profit pharmacies.
 Growing pressure to tax all NFP organization profits.
 Separation of church and state issues.
 Failure to provide sufficient charitable benefit to society issue.
 Payments in lieu of taxes
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