Chapter 21:Accounting for Not-

for-Profit Organizations
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

Pearson Education, Inc. publishing as Prentice 21-1

Not-for-Profits : Objectives
1. Learn about the four main categories of not-for-
profit organizations
2. Differentiate between governmental and
nongovernmental not-for-profit organizations.
3. Introduce FASB not-for-profit accounting
principles.
4. Apply not-for-profit accounting principles to
voluntary health and welfare organizations.

Pearson Education, Inc. publishing as Prentice 21-2

Objectives (cont.)
5. Apply not-for-profit accounting principles to
hospitals and other health care organizations.
6. Apply not-for-profit accounting principles to
private not-for-profit colleges and universities.

Pearson Education, Inc. publishing as Prentice 21-3

Accounting for Not-for-Profit Organizations
1: Categories of NFPs

Pearson Education, Inc. publishing as Prentice 21-4

Characteristics
Not-for-profit characteristics
Contributions without expected
commensurate returns
Purpose is other than providing goods or
services
Lacks ownership interests
Accounting for not-for-profits
Governmental: follow GASB
Nongovernmental: follow FASB

Pearson Education, Inc. publishing as Prentice 21-5

Categories of NFPs
1. Voluntary health and welfare
2. Hospitals and health care
3. Colleges and universities
4. Other not-for-profits
Churches, museums
Other NFPs are similar to voluntary
health and welfare, without requiring a
statement of functional expenses

Pearson Education, Inc. publishing as Prentice 21-6

Accounting for Not-for-Profit Organizations
2: Governmental and
Nongovernmental NFPs

Pearson Education, Inc. publishing as Prentice 21-7

Governmental NFPs
Governmental not-for-profits are NFPs with
Officers elected or appointed by government
Government can unilaterally dissolve and
assets revert to government
Has power to enact/enforce taxes

Follow GASB

Pearson Education, Inc. publishing as Prentice 21-8

Nongovernmental NFPs
NFPs that lack the governmental element

Follow FASB
FASB Statement No. 116
Contributions
FASB Statement No. 117
Financial statements
2007 AICPA Audit and Accounting Guide: Not-for-
Profit Organizations

Pearson Education, Inc. publishing as Prentice 21-9

Accounting for Not-for-Profit Organizations
3: Accounting Principles

Pearson Education, Inc. publishing as Prentice 21-10

Financial Statements
Statement of financial position
Statement of activities
Replace with "Statement of operations" and
"Statement of changes in net assets" for
hospitals and health care
Statement of cash flows
Statement of functional expenses
Required only for voluntary health and
welfare organizations

Pearson Education, Inc. publishing as Prentice 21-11

Net Assets
Three categories
1. Permanently restricted net assets
Asset use is limited
Donor imposed stipulations that do not
expire/ cannot be removed by entity
2. Temporarily restricted net assets
Donor imposed restrictions that expire
(time restrictions)
Can be removed by entity fulfilling
stipulations (purpose restrictions)
3. Unrestricted net assets
Pearson Education, Inc. publishing as Prentice 21-12
Statement of Activities
Changes in net assets shown separately for
Unrestricted net assets
Temporarily restricted net assets
Permanently restricted net assets
Revenues and contributions in all three areas
Expenses only in unrestricted net assets
Reclassifications
Move amounts from temporarily restricted to
unrestricted net assets
Expiration of time restrictions
Fulfillment of purpose restrictions

Pearson Education, Inc. publishing as Prentice 21-13

Expenses
Expenses are classified into one of two major
categories
Program services
These are the activities the NFP provides
Examples: Research expense, Educational expense,
Food bank expense, Recreational expense
Supporting services
Management and general expenses
Fund-raising expenses

Pearson Education, Inc. publishing as Prentice 21-14

Contributions
Contributions of cash
Contribution revenue
Conditional promise to give
Will be contribution revenue and receivable
when conditions are substantially met
Unconditional promise to give
Contribution revenue and receivable when
pledged, but is temporarily restricted (time)

Pearson Education, Inc. publishing as Prentice 21-15

Contributions (cont.)
Contributions (cash, pledge, other assets) with
donor imposed restrictions
Contribution revenue as temporarily restricted
(time or purpose) or permanently restricted
When temporary restriction is met, reclassify
temporarily restricted net assets as unrestricted
net assets
Contributions of fixed assets
Temporarily restricted net assets if donor
imposed or board designated as such

Pearson Education, Inc. publishing as Prentice 21-16

Transfers (Non-contribution)
Exchange transactions: Revenues
Sales of products or services
"Donations" with gift of same approximate value
Exchange is unrestricted
Agency transactions
No revenue or contribution
Increase (decrease) both assets and liabilities
Gifts in kind
Contribution revenue (restricted or unrestricted)
Create or enhance nonfinancial assets
Specialized skills that would otherwise have been
purchased
Pearson Education, Inc. publishing as Prentice 21-17
Other Accounting Issues
Measurement
Contributions at fair value
Fair value at time of pledge
Don't recognize increases
Decreases change net assets
Collections (art work, historical treasures)
Capitalization encouraged
Contributions are revenues
Fund accounting
Not required
Fund financial statements may be presented as supplemental
information

Pearson Education, Inc. publishing as Prentice 21-18

Accounting for Not-for-Profit Organizations
4: Voluntary Health and Welfare

Pearson Education, Inc. publishing as Prentice 21-19

Fund Raising
Expenses - supporting services - fund raising 145
Cash 145
Cash 1,950
Unrestricted gains special event 1,950
Unrestricted gains special event 250
Pay general fund raising expenses
Cash 250
Special event fund raisers (two entries)
Receive $1,950 in contributions: gains
Pay fund raising costs of special event $250
Special events are disclosed net of costs
Therefore, the term "gain," not revenue
Pearson Education, Inc. publishing as Prentice 21-20
Cash Donations and Pledges
Cash 4,000
Contributions receivable 6,000
Allowance for uncollectibles 600
Unrestricted support contributions 7,600
Temporarily
Receive cash and restricted supportrestrictions)
pledge (no purpose -
contributions
Cash is unrestricted 1,800
$1,800 of $6,000 pledges are to be collected next year: creates a time
restriction
Support contributions (restricted or not) is revenue
Revenue accounts are closed to net assets (temporarily, permanently or
unrestricted)

Pearson Education, Inc. publishing as Prentice 21-21

Collect a Time-Restricted Pledge
Cash 1,800
Contributions receivable 1,800
Temporarily restricted net asset - reclassification
out 1,800
Unrestricted net assets - reclassification in 1,800
Two entries
Cash collection
Reclassification for expiration of time
restriction
Reclassification accounts are temporary accounts
closed to their respective net asset accounts
Pearson Education, Inc. publishing as Prentice 21-22
Receive Equipment and Use It
Equipment 1,500
Temporarily restricted net assets
contributions 1,500
Depreciation expense - program services -
community service 500
Accumulated depreciation equipment 500
Temporarily restricted net asset -
reclassification out 500
Contribution of equipment is temporarily
Unrestricted(in
netthe
assets - reclassification in up) 500
restricted sense that it gets used
As depreciation is recorded, net assets are
reclassified from temporarily restricted to
unrestricted
Pearson Education, Inc. publishing as Prentice 21-23
Receive Cash with Purpose
Restriction
Cash 1,000
Temporarily restricted support
contributions 1,000
Expenses - program services research 900
Cash 900
Temporarily restricted net asset -
reclassification out 900
Receive cash for research
Unrestricted net assets - reclassification in
Pay research costs fulfills purpose restriction900
Two entries: record expenses, reclassify net
assets
If cash was for buying equipment, reclassify as it is
depreciated
Pearson Education, Inc. publishing as Prentice 21-24
Receive Donated Services
Expenses - support services - management
and general 500
Unrestricted support - donated services 500
Construction in process 1,200
Unrestricted support - donated services 1,200
Accounting, specialized services that would have to
be purchased: record as both expense and revenue
Services of general labor (non-specialized) that result
in nonfinancial assets: record asset and revenue
Services of other general labor (door-to-door collections):
not recorded

Pearson Education, Inc. publishing as Prentice 21-25

Statement of Financial Position

Pearson Education, Inc. publishing as Prentice 21-26

Statement of Activities

Pearson Education, Inc. publishing as Prentice 21-27

Statement of Activities (cont.)

Changes in unrestricted net assets: revenues, increases

from reclassifications, and all expenses
Changes in temporarily restricted net assets: revenues
and resources released and reclassified to unrestricted
Changes in permanently restricted net assets: revenues
Pearson Education, Inc. publishing as Prentice 21-28
Statement of Cash Flows

Pearson Education, Inc. publishing as Prentice 21-29

 Statement of Functional Expenses
Expenses as
reported on
the
Statement
of Activities

Pearson Education, Inc. publishing as Prentice 21-30

Accounting for Not-for-Profit Organizations
5: Hospitals and Other Health Care

Pearson Education, Inc. publishing as Prentice 21-31

Hospitals and Health Care
Applies to nongovernmental, not-for-profit
hospitals and health care agencies
Governmental: GASB
Private, for-profit: FASB as for businesses

Pearson Education, Inc. publishing as Prentice 21-32

Revenues and Other Receipts
Unrestricted:
Patient revenues is net of
Courtesy discounts
Contractual adjustments
Premium (subscriber or capitation) fees
Other operating revenue, tuition, cafeteria, gift shops, in-room
TV/phone
Non-operating gains, gifts and bequests
Temporarily or Permanently restricted:
"T" or "P" restricted support, donated assets, investments,
gifts, bequests

Pearson Education, Inc. publishing as Prentice 21-33

Hospital Expenses
Classify by function
Nursing services expense
Other professional expense
General services
Fiscal services
Administrative services
Medical malpractice costs
Provision for bad debts
Depreciation expense

Pearson Education, Inc. publishing as Prentice 21-34

Patient Revenue
Patient accounts receivable 1,300
Patient service revenues unrestricted 1,300
Courtesy discounts 9
Contractual adjustments 300
Patient accounts receivable 309
Provision
The fullfor bad debts
amount is charged to the patient bill 26
Upon for
Allowance uncollectibles
approval, the bill is reduced for courtesy 26
discounts and contractual adjustments
Contra-revenue accounts
Uncollectibles are estimated and written off as needed,
like businesses
Pearson Education, Inc. publishing as Prentice 21-35
Cash Contributions
Cash 275
Unrestricted support - nonoperating gains 25
Temporarily restricted support 250
Nursing services expense 250
Cash 250
Temporarily restricted net asset -
reclassification out
Cash contributions 250
can be unrestricted, temporarily or
permanently restricted
Unrestricted net assets - reclassification in 250
"Support" accounts are revenues/gains
When cash restricted for nursing services is spent in
that manner
Reclassify net assets as unrestricted
Pearson Education, Inc. publishing as Prentice 21-36
Receive Donated Assets/Services
Inventory of materials and supplies 130
Unrestricted support - donated supplies 130
Nursing services expenses 70
Unrestricted support - donated services 70
Donated supplies are unrestricted support
Record as inventory and expense as used
Donated specialized services that would otherwise be
purchased
Record as both expense and revenue

Nursing services expense will be the full cost of running the

hospital whether services are donated or purchased. The
donated services are clearly definable.
Pearson Education, Inc. publishing as Prentice 21-37
Hospital Statements
Statement of net assets
Statement of operations
Statement of changes in net assets
Statement of cash flows

The NPF "Statement of activities" includes

changes to unrestricted, temporarily and
permanently restricted net assets
The Hospital's "Statement of Operations" and
"Statement of changes in net assets" together,
provide that information
Pearson Education, Inc. publishing as Prentice 21-38
Statement of Operations: Hospital

Pearson Education, Inc. publishing as Prentice 21-39

Statement of Changes in Net
Assets: Hospital

Shows the net changes in unrestricted net assets

from the Statement of operations
Shows the details on temporarily and
permanently restricted net assets
Pearson Education, Inc. publishing as Prentice 21-40
Accounting for Not-for-Profit Organizations
6: Colleges and Universities

Pearson Education, Inc. publishing as Prentice 21-41

Colleges and Universities
Applies to nongovernmental, not-for-profit
colleges and universities
Governmental: GASB
Private, for-profit: FASB as for businesses

Pearson Education, Inc. publishing as Prentice 21-42

Tuition and Scholarships
Tuition and fees: revenue at gross amount
Tuition waivers: contra revenue
Reported tuition revenue is reduced by employee discounts
and non-employment fellowships

Scholarships
From outside sources: collect the account
receivable from the donor
Awarded by the college itself: reduce accounts
receivable and record "Expenses Educational
and general student aid"

Pearson Education, Inc. publishing as Prentice 21-43

College Expenses
Expenses are only in the unrestricted net assets
Classify by function:
Instruction expense
Research expense
Public service expense
Academic support
Student services
Institutional support
Operation and maintenance of plant
Student aid

Pearson Education, Inc. publishing as Prentice 21-44

Tuition Revenues
Accounts receivable 1,000
Unrestricted revenues - tuition and fees 1,000
Tuition reduction: unrestricted - student aid 50
Accounts receivable 50
Expenses - educational and general -
institutional support 30
Tuition is recorded
Allowance at gross amount
for uncollectibles 30
Tuition waivers are contra-revenues
Bad debts are recorded as for businesses
Grouped with institutional support expenses

Pearson Education, Inc. publishing as Prentice 21-45

Receive Appropriations
Cash 700
Unrestricted support - state appropriation 700

Appropriations received from governments and

other sources are support revenue
Unrestricted
For general operations
College board has ability to designate as
unrestricted
Restricted
Temporary or permanently restricted

Pearson Education, Inc. publishing as Prentice 21-46

Funds Held for Students
Cash 150
Grant funds held for students 150
Grant funds held for students 150
Cash 150
Receive cash that is to be distributed to students
Grant funds held for students is a liability
Distribute cash to appropriate students

If some of those funds are applied to student

accounts, the second entry would credit accounts
receivable rather than cash.
Pearson Education, Inc. publishing as Prentice 21-47
Endowments
Cash 50
Permanently restricted support - endowment
contribution 50
Cash 4
Temporarily restricted support - endowment income 4
Expenses - unrestricted - student aid 3
Cash 3
Temporarily
Receiverestricted
cash for permanent
net assets endowment,
- reclassifications out with3
income restricted
Unrestricted net assetsto student aid in
- reclassifications 3
Receive income on endowment
Classify as temporarily restricted
Spend cash on student aid
Reclassify net assets
Pearson Education, Inc. publishing as Prentice 21-48
Auxiliary Services
Cash 61
Revenues - auxiliary enterprises 61
Expenses - auxiliary enterprises 28
Cash 28
Auxiliary services: residence halls, food
services, intercollegiate athletics
Unrestricted revenues and expenses
Statement of activities: total revenues and total
expenses for auxiliary services
Subsidiary records are maintained

Pearson Education, Inc. publishing as Prentice 21-49

Statement
of
Activities:
College

Pearson Education, Inc. publishing as Prentice 21-50

State. of Activities: College (cont.)

Pearson Education, Inc. publishing as Prentice 21-51

All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall

Pearson Education, Inc. publishing as Prentice 21-52