Fund Accounting for Non-Profit Entities
The fund accounting guidelines in recording, monitoring and reporting the funds received and used by non-profit organizations are in accordance with the fundamental principles prescribed by the American Institute of CPAs (AICPA), as well as the standards set forth by the Financial Accounting Standards Board (FASB).
Based on their publications, the following are fund accounting guidelines applicable to private entities operating as non-profit organizations supported by donations received from different private donors:
Accounting for Cash Donations Received
(1) Funds received from donors or grantors will be called Contributions Received and will be classified as Restricted Support or Unrestricted Support.
(2) Contributions Received classified as Restricted Support will be sub-classified as with Permanent Restrictions or Temporary Restrictions.
(3) The contributions to a non-profit organization may be written or verbal but for financial reporting purposes, this should always be in the form of a verifiable document to serve as sufficient evidence. Contributions will be treated as unconditional contribution even if there is no specific statement indicated on the document, to describe it as such.
(4) If the donation received will earn income, such income will inure to the non-profit company and will be recorded as additional Contributions Received. As such, it will conform to any existing conditions of the main donation from whence the income was derived. In carrying out this purpose, proper accruals of such income will be recorded in the non-profit entity’s book of accounts.
Accounting for Donated Assets Received
(1) The composition of contributions received will not be limited to cash but will include other assets like building, land, use of utilities or facilities, securities, intangible assets, supplies, services, including unconditional promises to grant these items. These other assets will be booked at their fair market value.
(2) The company should disclose all its existing policies, on the matter of recording all assets received that do not have specific donor-instructions.
(3) Other assets in the forms of art work, historical artifacts and the likes are not considered as donations if it was added to the non-profit entity’s collections, only for purposes of exhibit, education or research to enhance the entity’s socio-civic services, or if they were entrusted for safekeeping and preservations, or if there is an organizational policy that the transferred collection is saleable wherein the proceeds will be used to purchase additional collections for the non-profit institute.
(4) Other assets not considered as donated contributions but used to carry–out the missions of the non-profit organization shall be capitalized and will not be done on a selective basis. If there are other asset contributions received and found in the premises of the non-profit organization but not recognized in the recipient entity’s books, they will be reported as Contributions Received.
(5) All transactions that increase or decrease the non-profit entity’s collection shall be reported and disclosed in full detail, detailing all circumstances and amounts surrounding the nature and results of such transactions; including reimbursements received from insurance claims. This is regardless, if the asset received was capitalized or not, in the books of the entity concerned.
(6) The non-profit company should institute a policy on how gifts of long-lived assets given without explicit restrictions about the specific time-period for its use, will be recognized in their books. Such policy will prescribe whether it should be classified as Restricted or Unrestricted Support.
Accounting for Donated Services
(1) Services received as contributions are specified by the FASB as those skills and services that will enhance the non-profit entities’ non-financial assets. Specifically, these services are rendered by accountants, lawyers, engineers, doctors, architects, teachers, nurses, carpenters, electricians, plumbers and other professional as well as skilled artisans, who will not require anything in return.
(2) There should be specific descriptions about the nature and extent of programs or services that required the need for donated services. As much as possible, even the fair value of the services rendered should be disclosed.
Accounting for Pledges or Unconditional Promises Received
(1) Pledges or unconditional promises to receive money due in future years shall be reported in the non-profit entity’s books as Restricted Support with Temporary Restrictions. These are considered as Receivable Accounts.
(2) Any transfer of asset accompanied by a conditional promise that it will be owned by the non-profit entity if the conditions are met, will be recognized by the company only as a Refundable Advance and will only be converted as Unconditional Promise if the conditions stipulated have been met.
(3) A promised donation that possesses elements of ambiguity of stipulated conditions, will be presumed as a conditional promise. This is when it cannot be determined if the conditions will apply to receipt of contributions or if the delivery of said assets will depend on the happening of the condition. The pledge will therefore be treated according to the principles of recognizing conditional promises or pledges.
Accounting for Contributions Disbursed
(1) Fund accounting for non-profit organizations require that all disbursements made will be properly labeled according to three categories: Program Services Expenses; Fund Raising Expenses; and Operating Expenses.
- Program Services Expenses- These expenses are directly related to all costs incurred in carrying out the purpose or mission for which the non-profit institution was created. There should be an accounting of expenses related to every program.
- Fund Raising Expenses- Expenses incurred by the non-profit entity for fund-raising events.
- Operating Expenses- In fund accounting, these are the administrative expenses incurred to run the company.
(2) Expenses are accrued and they will be recognized according to the date of incurrence, in relation to program activities that transpired during the accounting year and not on the date of actual payment.
(3) The non-profit entity will include a separate report about the breakdown of operating expenses. These are the salaries, fringe benefits, communication expenses, consultants and contractual services, transportation and travelling expenses, publications, advertising and all other costs common in a traditional corporation but related to the purpose for which the institution or organization was created.
(4) The total operating expenses will be allocated to different programs based on their percentage or the proportion of the program cost over the total expenses of the non-profit entity for the year.
(5) Expenses incurred after the expiration of the donor-imposed time restriction, will still be borne by the donor if such expenses are attributable to the expired project. Recording of the reimbursement received from the donor as funding for said expenses, will be classified separately from the expired time-restricted donation.
Please proceed to the next page for information about the reporting requirements of a non-profit entity.
Reporting Requirements of Non-Profit Organizations
The non-profit organization is required to prepare the following financial reports:
The Statement of Activities- This is known in traditional financial reporting as Income Statement.
This statement presents all Contributions Received presented according to their classifications as to Restricted, Permanently Restricted and Temporarily Restricted.
The Contributions Disbursements will be presented as Program Services Expenses, Fund Raising Expenses and Operating Expenses as a whole.
FASB does not mandate the preparation of reports per individual programs, since its requirement is at the discretion of the donors.
The bottom line figure will reveal the Unrestricted Net Assets. Positive results may mean surplus or unused portion of Contributions Received for the year, which will cause the current balance of Unrestricted Net Assets to increase. A negative balance means a reduction of the previous year’s Unrestricted Net Assets balance, which may indicate that part of the funding was deducted from previous year’s Contributions Received.
The Statement of Financial Position- This is equivalent to the Balance Sheet in traditional reporting.
The statement will present the financial worth of the Assets, Liabilities and Net Assets of the non-profit entity as a whole.
The assets and liabilities will be classified according to their measure of liquidity. In addition, assets will be classified as Unrestricted, Temporarily or Permanently Restricted Net Assets. This classifications include the presentation of each account, where applicable. e.g. Unrestricted Cash, Permanently Restricted Cash or Temporarily Restricted Cash.
There should be accompanying notes to this financial report, to provide information about the restrictions observed by the entity, as well as the policies of the entity in asset valuation.
Statement of Functional Expenses – This will contain the details of expenses that comprise all Contribution Disbursements and will be presented according to Program Services, Fund Raising Activities and Management or Operating Expenses.
Statement of Cash Flows – This requirement is an amendment to FASB 117, which implements the inclusion of a Cash Flow Statement to complete the non-profit entity’s financial reports, the actual flow of funds received and disbursed during the year, and how it will reconcile against the Statement of Activities’ Net Unrestricted Assets for the year.
Information about Fund Accounting Guidelines for Other Sectors:
Fund accounting for the government sector is only a part of the entire government accounting system and readers can find numerous examples of fund accounting guidelines observed by local or state governments, published in the Internet.
Another more complex system of fund accounting pertains to educational institutions, since different policies may be instituted by the Board of Regents. Nevertheless, the National Center for Education Statistics has published information about Financial Accounting for Local and State School systems as reference guide.
Reference Materials and Images Credit Section
Images from Wikimedia Commons:
- Our Lady of Victory sign
- Panther Racing Donation
- Snoop Dog Benefit Concert
- FEMA -Combined Federal Fund Raising Campaign Kick-off
- North Carolina Museum of Natural Sciences