Professional Documents
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7 Characteristics of Nonprofit Organizations
7 Characteristics of Nonprofit Organizations
Among the features of nonprofit organizations that are similar to those of business enterprises are the following:
1. Governance of board of directors. As with business corporations, nonprofit corporations (non-stock) are
governed by elected or appointed directors.
2. Use of accrual basis of accounting. Nonprofit organizations adopt the same accrual basis of accounting
used by business enterprises. Thus, revenues and expenses are recorded as earned and incurred.
Fund Accounting
Fund Accounting has been used to organize and manage resources for various purposes in accordance with
regulations, restrictions, or limitations imposed by parties outside the institution, or with discretions issued by the
governing board. A clear distinction of funds that are externally restricted and those that are internally designated by
action of the governing board has been maintained in the accounts and disclosed on the financial reports.
Financial Statements
Financial statements prepared in accordance with the present GAAP represent a shift away from the fund reporting
to an emphasis on the organization as a whole. The equity account fund balance has been replaced with
the term net assets. Under the present GAAP, it requires classifications of the organization’s net assets based on
the existence or absence of donor-imposed restrictions.
The financial statements display three classes of net assets: unrestricted, temporarily restricted, and
permanently restricted. Any changes of these three classes of net assets must be reported.
Types of Funds
In general, there are two types of funds used by a hospital:
1. General (Unrestricted) Fund – account for all resources of the hospital which are not subject to outside
restrictions. They are used for day-to-day operations. Note that board-designated funds are unrestricted.
Designation is an internal process which can be altered at the discretion of the Board of Trustees of the
hospital. Restrictions are externally imposed and not subject to alteration by the board. Items in this
category include:
a. Assets whose use is limited include assets set aside by the governing board for identified purpose.
b. Agency Funds are included in General Funds as both an asset and a liability. They are used to
account for fees collected as an agent of physicians who have private-practice patients coming to
hospital offices provided to the staff physicians.
c. Property and equipment used for general operations, and the related liabilities.
Property plant and equipment whose use is restricted are reported in the donor-restricted fund.
2. Donor-Restricted Funds – accounts for temporarily restricted and permanently restricted resources. This
class is subdivided into:
a. Temporary Restricted Fund may be a specific purpose fund, a term endowment fund, or a plant
replacement and expansion fund. An annuity and life income fund may also be included.
a.1 Specific Purpose Fund is a restricted fund used by health care providers to account for
principal and income in accordance with donor’s specified restrictions.
a.2 Endowment Fund is used by hospital to account for a trust where the principal must be kept
intact and the income be expanded for either current operations or a specific purpose in
accordance with grantor’s wishes. An endowment may be in perpetuity, or it may be fixed
term or until a specific event occurs.
a.3 Plant Replacement and Expansion Fund is a restricted fund used by hospitals and other
health care providers to account for donor’s contributions that must be used to acquire
property, plant and equipment.
b. Permanently Restricted Fund is also an endowment fund but differs from a term-endowment fund
is that the principal must be maintained intact in perpetuity and only the income may be used in
accordance with the donor’s wishes.
Charity care services provided free of charge to patients who qualify under a hospital’s charity care
policy—are excluded from both gross and net patient service revenues and from expense. The
hospital’s policy for providing charity care and the level of charity care provided are disclosed in the notes
to financial statements.
Net Patient service revenues of hospital are measured by deducting courtesy allowances and
contractual adjustments from gross patient revenues. Uncollectible accounts expenses are not
deducted in computing net patient service revenues. Net patient revenues are reported in the statement of
activities.
Allowance accounts are used to reduce receivables for estimated deductions from revenues, as well as
estimated doubtful accounts. Deductions from revenues include:
a. Courtesy allowances-discounts to doctors and employees.
b. Contractual adjustments-discounts arranged with third-party payers (Phil Health for
example) that frequently have agreements to reimburse at less-than-established rates.
2. Premium Fees also known as subscriber fees or capitation fees, are revenues from agreements which a
hospital provides any necessary patient services (perhaps from a contractually established list of services)
for a specific fee. The fee is usually a specific fee per member per month. The fees are earned whether the
standard charges for services actually rendered are more or less than the amount of the fee-i.e., without
regard to services actually provided in the period. Therefore, they are reported separately from patient
service revenues.
This is a growing portion of hospital revenues in many hospitals.
3. Other Operating Revenues includes revenues from services to patients other than for health care
and revenues from sales and services provided to nonpatients. This classification might include
tuition from schools operated by the hospital, rentals of hospital space, charges for preparing and
reproducing medical records, room charges for telephone calls and television, proceeds from cafeterias, gift
shops, snack bars, donated medicine, linen and office supplies, etc.
The control account Non-operating Revenues records revenue not related directly to an entity’s
principal operations. These items are primarily financial in nature and include unrestricted and donor-
restricted pledges, gifts or grants, unrestricted income from endowment funds, maturing term endowment
funds, income and gain from investments, gains on sale or hospital property. Investments are reported at
fair value with both realized and unrealized gains included as part of non-operating revenue.
Note: The Other Operating Revenue and Non-operating Revenue can be a lump as one account and be
called, as Other Revenue and Gains.
Operating expenses of hospitals are reported on an accrual basis and normally include functional categories for
nursing services (medical and surgical, intensive care, nurseries, operating rooms), other professional services
(laboratories, radiology, anesthesiology, pharmacy), general services (housekeeping, maintenance, laundry), fiscal
services (accounting, cashier, credits and collection, data processing), administrative services (personnel, purchasing,
insurance, governing board) interest, and depreciation provisions.
Although accounts are maintained for employee and contractual allowances, these items are not expenses. As
stated earlier, they are revenue deductions that are subtracted from gross patient service revenues to arrive at net
patient service revenue reported in the statement of operations.
Provision for bad debts is an expense. The difference between charity care and bad debts expense is that charity
care results from the hospital’s policy of providing health care to individuals who meet certain financial criteria,
whereas bad bets results from extension credit. Health care services provided as charity care were never intended to
provide cash flows.
Colleges and universities are required to use fund accounting due to the large amount of restricted resources under
their control. Accrual accounting is used, but there are certain similarities to accounting by governmental funds,
especially in the reporting of expenditures rather than expenses.
Types of Funds
There are six different fund groups which may be used by a college or university. They include the current funds
(unrestricted and restricted) loan funds, endowment and similar funds, annuity and life income funds, plant funds,
and agency funds. Funds are established as needed.
Current Funds
The current funds account for resources of the institution that will be used in carrying out the primary objectives:
instruction, research, extension, and public service. Unrestricted current funds are not subject to outside restraints
on usage and restricted current funds have been restricted by donors or grantors to specific purposes. As in the case
of hospitals, resources designated by the Board of Trustees are still considered unrestricted, since they lack externally
imposed restrictions.
Loan Funds
Loan funds are established for resources that are to be loaned to students, faculty, or staff. The loan fund is not for
loans, notes, or bonds payable to others. It is designated to hold assets, not liabilities. Fund balances should be
separately report restricted and unrestricted amounts. Restricted amounts represent resources which outside parties
provided to the university on condition it will be used for loans. Unrestricted fund balances represent resources
which were placed in the loan fund at the election of the university itself.
Occasionally, a donor will establish an endowment fund, but place the fund with an independent trustee, who will
remit earnings to the university on a regular basis. Since the fund principal is not under the control of the university,
it will not account for it, but simply note the arrangement by memorandum and in the notes to the financial
statements.
Plant Funds
All of the assets and liabilities associated with fixed assets of a university are accounted for in the plant fund. The
plant fund balances include (1) unexpended plant funds, (2) funds for renewals and replacements, (3) funds for
retirement of indebtedness, and (4) investment in plant.
Unexpended plant funds contain liquid assets which are to be used to acquire new plant assets in the future. Funds
for renewals and replacements contain liquid assets which are to be used to replace existing plant assets as needed.
Funds for retirement of indebtedness contain resources to be used to make principal and interest payments on debts
incurred to acquire plant assets. Investment in plant consists of the fixed assets themselves and any long-term debt
issued in connection with acquisitions of these assets.
The fund balances of the first three funds should be subdivided further into restricted and unrestricted balances,
based on whether classification in the plant fund is the result of external requirements or internal designation. The
investment in plant fund balance isn’t subdivided.
Agency Funds
Resources received by the institution which belong to others, such as student body fees, are held in agency funds,
with a liability equal to the assets collected. There is never any fund balance in agency funds, since all assets held are
owed to others.
Revenues include tuition and fees; government appropriations; government grants and contracts; private gifts,
grants, and contracts; endowment income; sales and services of educational activities; sales and services of auxiliary
enterprises (such as residence halls, food services, intercollegiate athletics, and college stores); sales and services of
Expenditures include educational and general expenditures, auxiliary enterprises, hospitals, and independent
operations.
Accounting for Voluntary Health and Welfare Organization and Other Not-for-Profit Organizations
Revenues are recorded using the full accrual basis. A distinction should be made between Public Support
and Revenues.
Public Support is the inflow of resources from voluntary donors who receive no direct, personal benefit
from the organization’s usual programs in exchange for their contributions. They include the following:
1. Contributions
2. Special Events Support
3. Legacies and Bequests
4. Proceeds from fund raisers
Revenues are inflows of resources resulting from a charge for service from financial activities or from
other exchange transactions.
1. Membership Dues
2. Program Service Fees
3. Sales of Publications and Supplies for proceeds from the sales of these items.
4. Investment Income e.g., interest dividends, and other earnings.
Expenses are classified as program services and supporting services and are reported on a functional
basis under these classifications. Examples of program services are research, public education, community
services and patient services.
Program Services relate to the expenses incurred in providing the organization’s social service activities.
Supporting Services consist of administrative expenses and fund-raising costs, and expenses of these
items are so classified in the statement of activities.
In reporting expenses in the statement of activities, the functional classifications might appear as follows:
Expenses
Program Services – it focuses on social services.
Research
Public Education
Professional Education
Community Services
Supporting Services – it focuses on administration and fund-raising activities.
Management and general
Fund-raising
Expenses are recorded on a full accrual basis in a manner similar to that used by business organizations.
Expenses are recorded in each fund that incurs the expenses.
2. Current Fund – Restricted. This fund is used for operations, but only in accordance with a donor or
grantor’s specifications.
Restricted pledges to be used to promote the adoption of handicapped children would be recorded in this
classification.
3. Land, Building, and Equipment Fund. This fund is used to account for:
a. Land, buildings, and equipment acquired by the organization;
b. Liabilities arising from the acquisition or improvement of plant assets;
c. Current assets restricted by donors or grantors for future disposition.
4. Endowment Fund. This fund is used to account for permanently restricted endowment principal to
be maintained intact either in perpetuity or until a specific event occurs and temporary restricted term
endowments.
Accounting Principles
Voluntary health and welfare organizations adhere to the accrual basis of accounting. Revenues are generally
recognized when earned and expenses are shown when the related services of the organization are provided. Sources
and uses of funds are not merely classified as revenues and expenses, however, but are instead broken down into
categories.
Donations of services should be charged to the appropriate expense with an offsetting credit to support.
Donated property should be recorded at fair market value on the date of the gift.
Pledges should be recognized net of uncollectible amounts, and pledges or cash donations that will not be
spendable until a future period should be shown as a deferred credit on the balance sheet.
Voluntary Health and Welfare Organization also must provide a Statement of Functional Expenses. This statement
reports expenses by both function (program and supporting) and by their natural classification (salary expenses,
depreciation expenses, etc)
A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind the
promisor.
An unconditional promise to give depends only on the passage of time or demand by the promise for performance.
A donor-imposed condition provides that the donor will have his resources returned (or will be released from the
promise to give) if the condition is not met.
A donor-imposed restriction only limits the purpose or timing of use of the contributed assets.
Gifts in Kind are reported as unrestricted support that increases unrestricted net assets if the not-for-profit entity
has discretion over the disposition of the resources and a fair value can be reasonably determined. If the fair value
cannot be determined, the items are recorded as sales revenue when they are sold. If the not-for-profit entity has
little or no discretion over disposition of the items, the gifts in kind should be accounted for as agency transactions.
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