A nonprofit (or not-for-profit) organization is an entity that is operated for the benefit of society as a whole. Examples of nonprofit organizations include colleges and universities, health and welfare organizations, some hospitals, philanthropic foundations, professional societies, and most fraternal and cultural organizations.
For many years, generally accepted accounting principles for business enterprises were not considered to be entirely applicable to nonprofit organizations. In the 1970s, the AICPA issued four Audit and Accounting Guides or Industry Audit Guides for 21 types of nonprofit organizations. Because of inconsistencies among the four Guides, the FASB has issued four Statements of Financial Accounting Standards and the AICPA has issued an Audit and Accounting Guide, "Not-for-Profit Organizations," to provide greater uniformity in accounting for various types of nonprofit organizations.
Nonprofit organizations have some characteristics comparable with those of governmental entities described in Chapter 17 of the textbook, and other characteristics similar to those of profit-oriented business enterprises.
For example, characteristics of nonprofit organizations that resemble those of governmental entities include service to society, absence of the profit motive, financing by citizenry, stewardship for resources, and extensive use of the budgetary process. Characteristics of nonprofit organizations that resemble those of business enterprises include governance by a board of directors, measurement of cost expirations, and use of the accrual basis of accounting.
The basic internal accounting unit for many nonprofit organizations is the fund. Separate funds generally are established for resources that may be used at the discretion of the board of directors and for restricted gifts that must be expended pursuant to instructions of donors. The following funds generally are used by nonprofit organizations:
Unrestricted fund (also called unrestricted current fund, general fund, or unrestricted operating fund)
Restricted fund (also called restricted specific-purpose fund or restricted operating fund)
Endowment fund
Agency or custodian fund
Annuity and life income funds (sometimes called split-interest funds)
Loan fund
Plant fund (also called land, building, and equipment fund)
The unrestricted fund of a nonprofit organization is residual in nature because it includes all resources of a nonprofit organization not earmarked for specific purposes.
Revenues and gains of an unrestricted fund may be derived from numerous sources. For example, revenues for a hospital may result from patient services, educational programs, research and other grants, and contributions of cash, goods, or services. Revenues for a university may include tuition, fees, governmental grants and contracts, private unrestricted income from endowment funds, and revenue from auxiliary enterprises such as student residences and athletic programs. Different sources of revenues are recorded in separate ledger accounts.
Revenues of nonprofit organizations may be in the form of material, facilities, or services, rather than in cash. Significant contributed material and facilities are recognized as revenues at current fair value, offset by a debit to an asset or an expense ledger account, as appropriate. Contributed services are recognized as revenues if they meet certain criteria set forth in FASB Statement No. 116, "Accounting for Contributions Received and Contributions Made."
A pledge is a promise by a donor to contribute a specified amount of cash or property to a nonprofit organization. Pledges generally are recognized as receivables and revenue, with appropriate provision for doubtful amounts.
The various funds of nonprofit organizations may pool resources for investment purposes. The pooling of investment resources requires a careful allocation of investment revenues, gains, and losses among the participating funds. The allocation is made on the basis of the current fair value of assets invested by each fund and subsequently is revised when funds enter or withdraw from the investment pool.
The expenses and losses of unrestricted funds of a nonprofit organization are similar to those of a business enterprise. Depreciation must be recognized by nonprofit organizations as required by the Financial Accounting Standards Board.
Expenses unique to some nonprofit organizations include fund-raising expense, grants, and income taxes on certain unrelated business income. Fund-raising costs generally are recognized as expenses when incurred.
Some nonprofit organizations make grants to individuals or other organizations. Generally, such grants are recognized as expenses when approved by the governing board of the nonprofit organizations. However, conditional grants are not recognized as expenses until they become unconditional.
Income taxes expense incurred on unrelated business income by some nonprofit organizations is subject to the interperiod tax allocation requirements for business enterprises.
Most assets and liabilities of a nonprofit organization's unrestricted fund are similar to the current assets and liabilities of a business enterprise. Health care entities account for plant assets in the general fund, but most other nonprofit organizations have separate plant funds. Collections of some nonprofit organizations such as museums are not recognized as assets; they are disclosed in a note to the organizations' financial statements.
The net assets of a nonprofit organization's unrestricted fund are represented by a fund balance. The board of directors of a nonprofit organization may designate a portion of an unrestricted fund's resources for a specific purpose. This portion of the fund is a designated portion of the unrestricted fund, rather than a restricted fund. The designation is recorded by a journal entry as follows:
Undesignated Fund Balance
XXX
Designated Fund Balance
XXX
Restricted funds are established by nonprofit organizations to account for resources available for current use but expendable only as authorized by donors. Resources of restricted funds are not obtained from the operations of the nonprofit organization. For example, the restricted funds for a hospital include funds for specific operating purposes, funds for additions to plant assets, and endowment funds.
Resources of a restricted fund are transferred to the unrestricted fund as net assets released from restrictions of that fund at the time the designated expenditure authorized by the donor is made.
An endowment fund of a nonprofit organization is similar to a nonexpendable private-purpose trust fund of a governmental entity, as described in Chapter 19. The three types of endowment funds are as follows:
Permanent endowment fund, in which the principal must be maintained indefinitely in revenue-producing investments, and only the revenues may be spent.
Term endowment fund, in which the principal may be spent after a specified number of years or after the occurrence of an event specified by the donor.
Quasi-endowment fund, which is created by the board of directors of a nonprofit organization. The principal of the quasi-endowment fund may be expended at a later date.
An agency fund of a nonprofit organization is established to account for resources belonging to other parties. The nonprofit organization acts as a custodian, and resources are expended pursuant to the instructions of the owner. The net assets of an agency fund are offset by a liability of the nonprofit organization.
An annuity fund is established by a nonprofit organization to receive resources and pay periodic fixed amounts to named recipients for a fixed period of time. At the end of the fixed time period, the remaining assets of the annuity fund are transferred to the unrestricted fund, or to another fund specified by the donor.
A life income fund is used to account for specified payments of income to a named beneficiary during his or her lifetime. The principal of a life income fund remains intact.
A loan fund may be established by nonprofit organizations, particularly colleges and universities. Loan funds usually are revolving because new loans are made as outstanding loans are repaid. Ordinarily, provisions for doubtful loans and other expenses are debited directly to the Fund Balance ledger account, and interest received on loans is credited to the Fund Balance ledger account.
Plant funds serve varying functions in different nonprofit organizations. In addition to plant assets, plant funds may include cash and investments earmarked for additions to plant assets, mortgage notes payable and other liabilities collateralized by the plant assets, and sinking fund assets set aside for retirement of debt incurred to acquire plant assets.
In FASB Statement No. 117, "Financial Statements of Not-for-Profit Organizations," the Financial Accounting Standards Board established guidelines for the following financial statements of nonprofit organizations: statement of financial position, statement of activities, and statement of cash flows.
