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TOPIC Accounting for Non-profit Organizations: Voluntary Health and Welfare

Organizations and Other Not-for-profit Organizations

DESCRIPTION The module discusses the accounting concepts, principles and procedures
applicable to voluntary health and welfare organizations and other not-for-profit
organizations, including peculiar accounting practices of these types of non-profit
organization.

LEARNING OBJECTIVES The student will be able to:

a. describe the operations of voluntary health and welfare organizations and
other not-for-profit organizations
b. identify the different funds maintained by voluntary health and welfare
organizations and other not-for-profit organizations
c. discuss the unique accounting terminologies and accounting practices used by
voluntary health and welfare organizations and other not-for-profit
organizations
d. prepare accounting entries to record transactions of voluntary health and
welfare organizations and other not-for-profit organizations

LESSON
PowerPoint slides in PDF file

Notes:
What are voluntary health and welfare organizations? Other not-for profit organizations?
A Voluntary Health and Welfare Organization (VHWO) is formed for the purpose of performing voluntary
services for various segments of society, supported by the public, and operated on a non-for-profit basis. To
qualify as a VHWO, two criteria must be met. First, a primary source of revenue should be contributions
from donors who do not themselves directly benefit from the organization's programs. Second, the
organization's programs should be in the area of health, welfare, or community service, such as care for the
elderly, the indigent, or the handicapped, or projects to protect the environment. Examples include
Salvation Army, Red Cross, and nonprofit organizations whose purpose is to find cures for diseases or to
assist people diagnosed with diseases such as cancer, diabetes, and heart disease.

Other not-for-profit organizations are groups and institutions that are entirely or largely independent and
that have humanitarian or cooperative rather than commercial objectives. They operate primarily for the
specific needs of a community, group, organization, or its members. Revenues generally come from
contributed funds (donated, granted or given as a form of support). These include private agencies in
industrial countries that support international development, indigenous groups organized regionally or
nationally, member groups in villages, charitable and religious associations that mobilize private funds for
development, private community organizations, women’s groups, pastoral associations, citizen groups that
raise awareness and influence policy, among others.
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Funds Used
A. Unrestricted current funds – used for operations that require only the discretion of the governing Board
B. Restricted current funds – used in operations but only in accordance with a donor’s or grantor’s
specifications
C. Custodian funds – resources received but which belongs to other organizations
D. Endowment funds – formed when resources are contributed by outside parties under conditions that
they not be spent and only the income produced by such resources can be used for the organization’s
benefit
E. Land, Building and Equipment Fund – all resources related to the organization’s property and equipment

Accounting for VHWO and Other Not-for-profit Organization

Basis of Accounting
Normal accrual accounting is followed. Fund accounting is also practiced in order to maintain accountability
over restricted resources. In the case of a VHWO, the program must be in the area of health, welfare or
community services.

Sources of Receipts
VHWOs derive revenues primarily from voluntary donations from the general public who receive no direct
personal benefit. Other not-for profit organizations also receive contributions and other forms of public
support. They may also charge for services from financial or other exchange transactions.

Revenue and Expense Classifications

A. Revenues
 Public support – inflow of resources from voluntary donors e.g. contribution, special events support,
legacies and bequests, proceeds from fund raisers
 Revenues – inflow of resources resulting from charge for service from financial transactions or other
exchange transactions, e.g. membership dues, program service fees, sales of publications and
supplies, investment income

B. Expenses
 Program services – organization’s social service activities; those that result in the distribution of
goods and services to fulfill the organization’s purpose/s
 Supporting services – all other activities, including administrative expenses and fund-raising costs

Accounting Procedures
A. Contributed materials, services and facilities –> record at current fair value
B. Commitment by a prospective donor to contribute a specific amount of cash or property on a future date
or in instalments (pledge)
 Unconditional pledge –> record in the unrestricted fund with appropriate provision for doubtful
pledges
 Pledge due in future accounting period or having restriction as to its use –> account for in a restricted
fund
C. Expenses –> recognize in the unrestricted fund properly classified into (a) program services, and
(b) supporting services; report on a functional basis
D. Depreciation –> provide for all property and equipment of the organization, except for individual works
of art or historic treasures having extraordinary long economic useful lives
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Financial Statements
A complete set of general-purpose financial statements of a not-for-profit organization is composed of the
following:
 Statement of Financial Position – shows information on assets, liabilities and net assets
 Statement of Activities – shows information on revenues, expenses and changes in net assets for a
period
 Statement of Cash Flows – shows information relating to cash receipts and cash payments during a
period
 Notes to the Financial Statements

A VHWO that follows U.S. GAAP is also required to present a statement of functional expenses in a matrix
format that reports expenses by both functional (e.g. program and supporting) and natural (e.g. salaries
expense, depreciation expense) classifications. This higher standard of reporting for a VHWO results from its
reliance on voluntary contributions from the general public. The information provided in a statement of
functional expenses allows a donor to evaluate a charity’s efficiency and effectiveness in utilizing the
donations to achieve results.
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LEARNING ENHANCEMENT MATERIALS

1. Accounting for Voluntary Health and Welfare Organizations by Andrew Jacobson

https://www.ajjacobson.us/retained-earnings/ccounting-for-voluntary-health-and-welfare-
organizations-objective7.html

2. Not-for-profit Accounting

http://docshare01.docshare.tips/files/25373/253732869.pdf

3. Sample audited financial statements

https://assets.ayalafoundation.org/uploads/2019/04/AFI-Financial-Statements-2018.pdf

http://pemsea.org/sites/default/files/PC_19_DOC_14b%202018%20PEMSEA%20audited%20FS.pdf

YouTube sites that the student can visit are listed below.

Learn as you watch informative discussions relating to accounting for not-for-profit organizations. You may
also pause at times should you wish to note down points or illustrations for reference or study purposes.

1. https://www.youtube.com/watch?v=-Lgi1dk_aOc

2. https://www.youtube.com/watch?v=DEJHIxljSB4

3. https://www.youtube.com/watch?v=BuVYPfQ8TcU&list=PLxP0KZzCGFYP6ICqE9DfnGaFuJmNUpqVO
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LEARNING ACTIVITIES

A. Multiple Choice. Select the best answer.

1. Which of the following groups can form a not-for-profit organization?

Group 1: pedicab drivers Group 2: lawyers
Group 3: market vendors Group 4: subdivision homeowners

a. Groups 1 and 3 c. Group 2 only

b. Group 2 and 4 d. all of them

2. A not-for-profit organization receives bonds as donation. The deed of donation allows the use of
earnings therefrom in the normal operations. The bonds may be disposed of after 5 years and the
proceeds may then be transferred to the general fund. The donation is classified as:
a. pure endowment c. term endowment
b. quasi-endowment d. special endowment

3. Which of the following is an example of a support service?

a. welfare program for families c. conducting a fund-raising campaign
b. art class at a museum d. research program at a university

4. Royal Cross, a community foundation, incurred P5,000 in management and general expenses during 2021.
In the foundation’s statement of operation and changes in net assets for the year ended December 31,
2021, the P5,000 should be reported as
a. part of program services
b. part of supporting services
c. a contra account offsetting revenue and support
d. a direct reduction of fund balance

5. A voluntary health and welfare organization received unrestricted cash donations of P20,000 from
donors who attended a dinner held for the benefit of the organization. The costs of the dinner, including
room rental, and other expenses, amounted to P7,000. On the statement of activities prepared for the
voluntary health and welfare organization, the expenses of the dinner should be:
a. reported as management and general expenses.
b. netted against the P20,000 of contribution revenue.
c. reported as fund raising costs.
d. reported as programmatic expenses.
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B. Problem Solving

1. Listed below are transactions relating to Infectious Diseases Research Foundation during the fiscal year
ended April 30, 2021:
a. Unrestricted pledges for P3,000,000 were received. It is estimated that 10% will not be
collectible.
b. P2,600,000 was collected on pledges. It is estimated that another P100,000 will be collected
next year.
c. The Foundation received P400,000 from Manila Bulletin as part of its fund-raising. The
amount was net of P50,000 for fund-raising activities.
d. The Foundation invested P350,000 in certificates of deposit. During the year it collected
P20,000 in interest; at year-end, accrued interest amounted to P10,000.
e. The Foundation collected P50,000 in cash from sales of its booklet “How to Avoid Infectious
Diseases”.
f. Expenses paid in cash during the year were as follows:

Salaries P900,000
Employee Fringe Benefits 150,000
Payroll Taxes 160,000
Supplies 70,000
Telephone 15,000
Utilities 60,000
Rent 100,000
Conferences, Conventions and Meetings 50,000
Cost of Booklet, “How to Avoid Infectious Diseases” 10,000
Miscellaneous 30,000

g. Accrued expenses at year-end amounted to P10,000 for utilities and P50,000 for salaries.
h. The Board of Directors specified that P100,000 should be used to purchase a new computer
for research purposes.

Required:
Prepare journal entries to record the above transactions in the unrestricted current fund. Use the
following ledger account titles, where applicable.

Cash Fund Raising Expenses

Pledges Receivable Cost of Sales to Public
Allowance for Uncollectible Pledges Salaries
Interest Receivable Employee Fringe Benefits
Investment Payroll Taxes
Accounts Payable Supplies
Accrued Expenses Payable Telephone
Fund Balance-Unrestricted Utilities
Fund Balance – Restricted for Purchase of Equipment Rent Expense
Contribution Revenue Conference, Conventions and Meetings
Fund Raising Revenue Miscellaneous Expense
Sales – Public Revenue Interest Income