The Basic Principles of Fund Accounting: Explanations Behind the Guidelines

Fund Accounting in a Non-Profit Organization

A non-profit organization is a recipient of unconditional or unreciprocated funds or asset transfers coming from another entity, whether directly or by way of intermediary, in order to perform a mission that is humanitarian in nature and will benefit life in general and the environment or community they serve and protect.

To uphold its integrity and assure its donors, the non-profit organization should observe a fund accounting system prescribed by the Financial Accounting Standards Board (FASB), wherein the not-for-profit entity’s activities are required to be accounted for with definite clarity.

Based on the aforementioned descriptions about a non-profit’s purpose, its sources of funds and fund usage, the following underlying principles serve as foundations for the fund accounting guidelines prescribed, in order to properly maintain a non-profit organization’s books of accounts.

Basic Principles of Fund Accounting in a Non-Profit Organization

(1) The funds received as donations were received and unconditionally given on a non-reciprocal basis.

(2) Any conditional promises to give will be recognized by the non-profit company only if the donor’s conditions have been met, at least substantially, in order to qualify the promise as unconditional.

(3) The term unconditional donation or grant is different from donor-imposed condition or donor-imposed restrictions. The latter terms refer to the donor’s requirements and limitations on how the donated fund will be used, as it narrows down the broad nature of the institution’s charitable or socio-civic purposes as specified in the articles of incorporation and by-laws. The conditions may refer to the time-frame as to when the funds should be applied, how it should be applied, for whose benefit it should be applied and the conditions present for its application. However, not all donations received as contributions have donor-imposed conditions or restrictions.

(4) The donated funds received will be technically treated as revenue of the non-profit organization during the period they were actually acquired and will be booked as Contributions Received.

(5) All Contributions Received will be recorded at their fair value and a reference to fair value will mean the current asking or selling price in the market. In the absence of selling price for the same asset, the non-profit company may make an estimate based on current selling price of similar assets, or based on independent appraisal or other valuation techniques available.

(6) If after exhausting all valuation techniques, there is still significant uncertainty regarding the value of the donated asset, it will be taken as an indication that the object received does not have to be recognized as an asset of the non-profit entity.

(7) Any income recognized from the donation will be recognized as part of the donation granted by the donor.

(8) Contributions received without any record of donor-imposed restrictions will be automatically classified as Contributions Received- Unrestricted Support in the non-profit organization’s financial reports.

(9) The non-profit organization should maintain consistency in recording and in the preparation of their financial reports from period to period.

(10) The non-profit organization who receives pledges or unconditional promises of donations due in future years shall include such pledges in the books as Restricted Support. Receipt of the promised contribution can be used to support the current year’s activities only if the donor will issue explicit instructions or perform actions to clearly show that the donor is allowing said use for the said year.

(11) Any donated assets found in the premises of a non-profit organization but not recorded in their books of account will be automatically considered as Contributions Received and not a capitalized asset.

(12) Gifts of long-lived assets will automatically be recognized as Unrestricted Support, if the donor has no explicit instructions as to how long the asset will stay with the non-profit entity, to be used as support for its activity. If the non-profit company has an existing policy on how such assets will be recognized; then the company’s policy will prevail.

(13) All expirations occurring based on donor-imposed restrictions will be recognized in the same accounting period when such expiration elapsed. However, expenses accrued but paid after the date of expiration will still be borne by the donor, based on the principle that the purpose for which the fund was provided has not yet been fulfilled.

(14) Donated services will apply only to the skills and expertise of professionals specified by the FASB’s Financial Accounting Standards 116, which are based on the principles that such services are usually paid for and cannot be acquired for free unless specifically rendered as a donation.

(15) Disbursements are recognized during the inclusive period they were incurred, and not on the date they were paid; hence, accrual method is a must.

(16) Matching of costs against contributions entails defining the expenses related to the project by adding descriptive labels pertaining to the program they are related to.

(17) Operating costs are proportionately allocated to match such costs against contributions received, when presented as separate reports to donors.

Readers who may be interested in knowing how these underlying principles are provided as Fund Accounting Guidelines in accordance with the Financial Accounting Standard’s Board (FASB), may refer to a separate article bearing the same title.

Reference Materials and Images Credit Section

Reference Materials:

• https://www.1800net.com/nprc/fasb117.html#2.com/accounting/basic-statements.asp
• https://managementhelp.org/finance/np_fnce/np_fnce.htm#anchor1608850

Images by Wikimedia:

• US- FASB Logo
• Mother Theresa’s Calcutta UC
• Medical Donations to Africa
• Fund raising for Hurricane Katrina
• Medical Civic Action Project