Accounting for Not-for-Profit

Entities and Cooperatives

Peterson Y. Manalac, CPA
NON-PROFIT ORGANIZATION
CHARACTERISTICS OF NON-PROFIT
ORGANIZATION
 As to purpose:
 Non-profit organizations exist to pursue missions that address the
needs of society in a variety of sectors, such as: Education,
Religion, Health, Social Services, The Arts, and etc.
 As to Ownership:
 Nonprofits do not have commercial owners and must rely on funds
 As to earnings/Dividends:
 Re-invest any profits they make in their public benefit purpose and
their own operations.
 As to source of funds:
 Typically funded by donations from the private or public sector or
the government. Tax-exempt.
Comparison between not-for-profit and
for-profit organization
NON-PROFIT FOR PROFIT
GAAP Yes (FAS 116&117) Yes
OWNERS None Stockholders
PRIMARY MISSION Provide services Earn profits for
needed by society stockholders
SECONDARY Ensure that revenues Provide services or sell
MISSION are greater than goods
expenses so that the
services provided can
be maintained or
expanded
TAX Usually tax exempt Corporations (or their
owners) are subject to
income taxes
Comparison between non-for-profit and for
profit organization(Financial Statements)
NON-PROFIT FOR PROFIT
Statement of Financial Position Statement of Financial Position
Statement of Activities Income Statement/Statement of
financial performance
May opt to have separate Statement of Changes in Equity
statement of changes in net
assets
Statement of Cash Flows Statement of Cash Flows
Statement of Functional
Expenses (for some NPO)
Notes Notes
Accounting for Non-Profit Organizations
 Basis: Fund Theory
 Fund theory stresses great importance on the custody and
administration of funds.
 Source, nature and purpose of funds held by the NPO are
disclosed in order to give information necessary for users to
assess the organizations stewardship over those funds.

 Fund Accounting
 Main accounting unit is the fund
 PFRS does not require the use of this since various funds are
treated as separate accounting units. This could make
accounting burdensome for NPOs managing different funds.
 Entities are not prohibited to use this method
Comparison between Fund Theory and
Fund Accounting
FUND THEORY
Accounting unit is the whole
organization
Adheres to accounting point-of-view
of providing useful information to
external users
Funds is commonly used to refer to the
net assets
Provides disclosures on the types of
restrictions on net assets and revenues
(i,e., unrestricted, temporarily
restricted and permanently restricted
Current Trend
FUND ACCOUNTING
Accounting units are various funds
held
Adheres to bookkeeping point-of-view
of providing useful information to
managers
Funds refer to specific funds consisting
of cash and non-cash assets
Focuses on classifying assets, net assets
and changes in them strictly in
accordance with their fund
classifications
Traditional
Net Assets
 The net assets section of a nonprofit's statement of
financial position reports totals for each of the following
classifications:
 1) Unrestricted net assets
 2) Temporarily restricted net assets
 3) Permanently restricted net assets

These classifications are based on the restrictions made by the

donors at the time of their contributions.
Contributions
 Contributions refer to resources in non-
reciprocal transactions.
 Donor’s Restrictions:
REPORTED AS
 1. Unrestricted UNRESTRICTED SUPPORT

 2. Temporarily Restricted
 3. Permanently Restricted
REPORTED AS
RESTRICTED SUPPORT
Unrestricted
 If a donor does not specify a restriction on his or her
contribution, the amount received by the nonprofit is
recorded as an asset and as unrestricted contribution
revenues. Unrestricted contribution revenues (reported
on the statement of activities) also cause the amount of
unrestricted net assets to increase.
 If the nonprofit's board of directors and/or management
designates some of the nonprofit's unrestricted assets for a
specific purpose, those assets must continue to be reported
as unrestricted net assets.
 Recognition and measurement: FAIR VALUE AT THE
DATE OF CONTRIBUTION
Unrestricted - Illustration
 A Non-profit Organization receives cash of 200,000.00
and land with fair value of 1 million pesos to be used at
the entity’s discretion
DR CR
Cash 200,000.00
Land 1,000,00.00
Contribution Revenue – 1,200,000.00
Unrestricted support

*To record receipt of unrestricted donations of cash and

land.
Temporarily Restricted
 If a nonprofit receives a contribution that has a donor
imposed restriction (other than to be held in perpetuity),
the amount is usually recorded as an asset and as
temporarily restricted contribution revenues. Temporarily
restricted contribution revenues (reported on the statement
of activities) also cause the amount of temporarily
restricted net assets to increase.
 Temporarily restricted shall be reclassified as
Unrestricted when the task is performed, the event
occurred or the time restraint passes.
 Recognition and measurement: FAIR VALUE AT THE
DATE OF CONTRIBUTION
Temporarily Restricted - Illustration
 David donates to an NPO P20,000.00 with the
requirement that the nonprofit use it to purchase a vehicle
that is urgently needed in one of the nonprofit's programs.

DR CR
Cash 20,000.00
Contribution Revenue – 20,000.00
Temporarily restricted support

*To record receipt of temporarily restricted donation of

cash
Temporarily Restricted - Illustration
 If the NPO acquires vehicle amounting to P20,000.00, the
journal entries under FUND ACCOUNTING are as
follows:
Unrestricted Temporarily
Restricted
DR CR DR CR
Cash 20,000.00 20,000.0
0
Net Asset Released from 20,000.0 20,000.0
Restrictions 0 0

*To record fund release

Motor Vehicle 20,000.00
Cash 20,000.0
0
 Temporarily Restricted - Illustration
 Fund Theory:
DR CR
Net Asset Released from Restrictions – 20,000.00
Temporarily Restricted
Net Asset Released from Restrictions – 20,000.00
Unrestricted
*To record fund release
Motor Vehicle 20,000.00
Cash 20,000.00
*to record acquisition of vehicle

 Remember that in Fund Theory, the accounting unit is the

whole organization
Temporarily Restricted
 The net assets released from restrictions should be
reported separately from other transactions and should be
shown in the Statement of Activities.
 a reclassification is reported to reflect the decrease in
temporarily restricted net assets and the increase in
unrestricted net assets. Thus, the related effects of that
time-restricted gift are reported in the period of receipt as
well as the period in which the nature of the restriction
changes.
Permanently Restricted
 If a donor stipulates that her contribution must be held by
the nonprofit in perpetuity (forever, not be used up), the
amount is recorded as an asset and as permanently
restricted contribution revenues. Permanently restricted
contribution revenues (reported on the statement of
activities) also cause the amount of permanently restricted
net assets to increase.
 The organization may be able to use the income generated
from permanently restricted contributions.
 Recognition and measurement: FAIR VALUE AT
THE DATE OF CONTRIBUTION
Permanently Restricted - Illustration
 Melanie contributes investment in equity securities with
fair value of 1 million pesos to a nonprofit and stipulates
that only the interest on the investment can be spent by
NPO for its operations.

DR CR
Investment in Equity Securities 1,000,000.00
Contribution Revenue – 1000,000.00
Permanently restricted support

*To record receipt of Permanently restricted donation

Unconditional and Conditional
Promises
 Unconditional Promise
 Recognized when the unconditional promise to give is received
from the donor
 Classified as temporarily restricted contribution
 In the event that promised contribution becomes doubtful of
collection, an allowance for uncollectability should be
recognized.

 Conditional Promise
 Recognized only when the attached conditions are substantially
met
 Considered as Unconditional Promise when the possibility that
the conditions will be met is reasonably certain
Unconditional and Conditional
Promises - Illustration
 On January 1, 2020, Entity A receives a formal promise from Donor X to
donate 1 million pesos.
 Case 1: The donation is unconditional and to be received on February 14,
2020.

DR CR
Donations receivable 1,000,000
Contribution Revenue – Temporarily 1,000,000
restricted support
*To recognize unconditional donation
Cash 1,000,000
Donations receivable 1,000,000
*To record receipt of unconditional donation

If effect of time value of money is material, receivables should be

measured at PRESENT VALUE
Unconditional and Conditional Promises
- Illustration
 On January 1, 2020, Entity A receives a formal promise from Donor X to
donate 1 million pesos.
 Case 2: The donation is conditioned on the submission of detailed formal
plan for a proposed project. As of January 1, 2020, the plan is not yet
substantially complete
DR CR
*No Accounting Entry

 Case 3: Entity A receives the promised contribution before the attached

condition is substantially met.
DR CR
Cash 1,000,000
Liability for refundable advance 1,000,000
Services
 Contributions of services are recognized if the
services received:
 Create or enhance nonfinancial assets; or
 Require specialized skills, are provided by
individuals possessing those skills, and would
typically need to be purchased if not provided by
donation
 Services
that do not meet the above criteria
should not be recognize
Works of Art and Similar Items
 Works of art, historical treasures and similar
assets should not be recognized if the donated
items are added to collections that meet ALL
of the following conditions:
 Held for public exhibition, education, or research in
furtherance of public service rather than financial
gain;
 Protected, kept unencumbered, cared for, and
preserved; and
 Proceeds from sales of collection items are to be
used to acquire other items for collections.
Other Funds Held by NPOs
 Endowment Fund
 A. Term endowment fund
 NPO can use portion the principal
 Classified as Temporarily Restricted
 B. Regular endowment fund
 NPO cannot spend any of the principal
 Classified as Permanently Restricted
 If the donation involves third-party (i.e. Donor establishes
fund in a third-party trust company in favor of the NPO), no
journal entry shall be made but shall be recorded through
MEMO ENTRY. Journal entry shall be made when the NPO
received the contributions from the investment income.
Other Funds Held by NPOs
 Agency Fund
 NPO act as custodian
 Recognized as liabilities
 No entry shall be made if the NPO is merely acting as an agent and
not as custodian of fund (i.e. Helping in distributing received goods)
 Plant Fund
 For acquisition, renewal and replacement of plant assets
 For investment in plant assets
 For retirement of indebtedness
 Board-designated Fund (quasi-endowment)
 Restricted at the sole discretion of NPO board
 Internal restrictions are classified as UNRESTRICTED
Illustration – Endowments
 NPO receives 100,000 cash donation under a charitable
remainder annuity trust agreement with the following
provisions:
 NPO is the designated trustee who undertakes to invest the cash
donation and make annual year-end payments of 5,000.00 to
Mr. A, the annuitant, for the remainder of his life
 Upon death of Mr. A, the NPO may use its remainder interest
for any purpose consistent with its mission.
 Appropriate discount rate is 10% and the annuitant life
expectancy is 5 years.
 PV factor of 10% ordinary annuity is 3.7908
Illustration – Endowments
 Annuities Payable = 5,000.00 x 3.7908 = 18,954.00
 Contribution revenue – temporarily restricted support
=100,000.00 – 18,954.00 = 81,046.00
DR CR
Cash 100,000
Annuities Payable 18,954.00
Contribution revenue-temporarily 81,046.00
restricted support
Financial Statements
 Statement of Financial Position
 Shows information on assets, liabilities and net assets
 Assets: cash, receivables, inventories, PPEs, investments
 Liabilities: Accounts Payable, Refundable Advance, Grants Payable,
Notes Payable, Annuity Obligations, Long-Term Debt
 Net Assets: Unrestricted, Temporarily restricted, Permanently Restricted
 Statement of Activities
 Shows information on revenues, expenses and changes in net
assets.
 NPO may still opt to present separate statement of changes in net
assets
 Shows changes in net assets for each categories of support
separately
Expenses
 Expenses could be termed Functional Expenses
since expenses are reported according to these
functions:
 1. Program expenses
 Program expenses (or program services expenses)
are the amounts directly incurred by the nonprofit
in carrying out its programs
 2. Supporting services expenses
 Expenses other than program expenses such as:
Management and general, Fund-raising and
membership-development activities.
Statement of Cash Flows
 The statement of cash flows for a nonprofit organization is similar to that of
a for-profit business.
 It reports the organization's change in its cash and cash equivalents during
the accounting period. Can also be prepared using the direct and indirect
method
 The operating section reports the changes in cash other than those reported in the
investing and financing sections.
 The investing section of the statement of cash flows reports the amounts spent to
purchase long-term assets such as equipment, vehicles and long-term investments.
The investing section also reports the amount received from the sale of long-term
assets.
 The financing section of the statement of cash flows reports the amounts received
from borrowings and also any repayments.
 Restricted assets acquired during the period that are used for long-term
purposes because of donor restrictions are classified as financing activities.
Health Care Organization
 Net patient revenue – gross patient revenue less contractual
adjustments, employee discounts, and billed charity care
 Premium revenue – results from capitation agreements
 Capitation agreements are agreements with the third parties based on the
number of employees instead of services rendered
 Other revenues – all other revenues not classifiable as net patient
revenue or premium revenue
 These revenues pertain only to Unrestricted revenues and may include
revenues from unrestricted contributions. These shall be presented at
the unrestricted revenue and expense portion of Statement of
Operations.
 Revenues from restricted contributions shall be presented separately at
the bottom part of Statement of Operations (in lieu of Statement of
Activities) after unrestricted revenues and expense.
Health Care Organization
 Contractual adjustments
 May arise from reimbursement agreement
 Difference between what the hospital considers fair price for a
service rendered versus an agreed upon amount for the service
with the insurance company
 Employee Discount – special discounts for NPO’s
employees.
 Direct reduction to patient service revenue
 Charity care – free services rendered to patients
 This amount is recorded as a deduction to revenue account and
deduction to receivable account.
Private, non-profit, Colleges and
Universities
 Scholarships and fellowships granted freely are
treated as direct reduction of revenues from tuition
and fees
 Scholarships and fellowships granted as compensation
for services rendered by the grantee are treated as
expenses
 Refund of tuition fees from class cancellations and
other withdrawal of enrolment are treated as direct
reduction of revenues from tuition and fees.
Cooperatives
Basic Features of Cooperative
 The owners of a business in this nature
are called members.
 These members agreed collectively to pay
sums of money for shares.
 All co-operatives use a combination of
features from non profit organizations,
Partnership Companies and Limited
Liability Companies.
SOURCES OF CAPITAL
 The sources of capital for co-operatives are from the
members who apart from purchasing shares may also
purchase goods and services.
 To record the issue of shares, the entries in the General
Journal will be:
 Dr. Bank/Cash
Cr. Share Capital a/c
Financial Statements
At the end of every financial year, co-operatives are
expected to prepare:
 Receipts and Payments account
 Cash Flow statement
 Trading and Profit and Loss Account (Income and
Expenditure account/Income statement)
 Appropriation account
 Balance sheet.
TRADING AND PROFIT AND LOSS
ACCOUNT
 Information to prepare these statements will
come from the Receipts and Payments a/c.
 Revenues and expenses will be used to prepare
these statements which are dependent on the
particular activities of the firm.
 Included in these statements is Honorarium
which is the small amount co-operatives paid to
committee members.
APPROPRIATION ACCOUNT
 Information for this statement comes from the Receipts
and Payments a/c and Income and Expenditure a/c.
 The amounts to be transferred and retained as reserves,
funds or schemes will be decided by the Board of
Directors.
 The remainder of the surplus (after the transfers) is
available for distribution as dividends.
APPROPRIATION ACCOUNT
 After the dividends are paid, the undistributed remainder
will be carried forward to the next period as undistributed
surplus.
BALANCE SHEET
 Information for the Balance Sheet will come from the
Receipts and Payments a/c and the Appropriation a/c.
 The format of the Balance Sheet (Assets and Liabilities)
will be the same as other organisations.