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

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 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.

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 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.

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

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 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

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 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

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

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 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

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 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

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

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 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

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 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
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 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
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 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
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 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)

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 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

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

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 Fund Raising
Expenses - supporting services - fund raising 145
Cash 145
Cash 1,950
Unrestricted gains – special event 1,950
Unrestricted gains – special event 250
Cash 250
• Pay general fund raising expenses
• 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
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 Cash Donations and Pledges
Cash 4,000
Contributions receivable 6,000
Allowance for uncollectibles 600
Unrestricted support – contributions 7,600
Temporarily restricted support -
contributions 1,800
• Receive cash and pledge (no purpose restrictions)
– Cash is unrestricted
– $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)
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 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
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 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
Unrestricted net assets - reclassification in 500
• Contribution of equipment is temporarily
restricted (in the sense that it gets used up)
• As depreciation is recorded, net assets are
reclassified from temporarily restricted to
unrestricted
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 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
Unrestricted net assets - reclassification in 900
• Receive cash for research
• Pay research costs – fulfills purpose restriction
– Two entries: record expenses, reclassify net
assets
If cash was for buying equipment, reclassify as it is
depreciated
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 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
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 Statement of Financial Position

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 Statement of Activities

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 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
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 Statement of Cash Flows

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

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

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

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 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
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 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

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 Patient Revenue
Patient accounts receivable 1,300
Patient service revenues – unrestricted 1,300
Courtesy discounts 9
Contractual adjustments 300
Patient accounts receivable 309
Provision for bad debts 26
Allowance for uncollectibles 26
• The full amount is charged to the patient bill
• Upon approval, the bill is reduced for courtesy
discounts and contractual adjustments
• Contra-revenue accounts
• Uncollectibles are estimated and written off as needed,
like businesses
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 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 250
Unrestricted net assets - reclassification in 250
• Cash contributions can be unrestricted, temporarily or
permanently restricted
• "Support" accounts are revenues/gains
• When cash restricted for nursing services is spent in
that manner
• Reclassify net assets as unrestricted
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 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.
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 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
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 Statement of Operations: Hospital

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 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
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Accounting for Not-for-Profit Organizations
6: Colleges and Universities

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

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 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"
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 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
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 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
Allowance for uncollectibles 30
• Tuition is recorded at gross amount
• Tuition waivers are contra-revenues
• Bad debts are recorded as for businesses
• Grouped with institutional support expenses

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 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

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 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.
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 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 restricted net assets - reclassifications out 3
Unrestricted net assets - reclassifications in 3
• Receive cash for permanent endowment, with
income restricted to student aid
• Receive income on endowment
• Classify as temporarily restricted
• Spend cash on student aid
• Reclassify net assets
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 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

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Statement
of
Activities:
College

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 State. of Activities: College (cont.)

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