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Accounting InformationNon-Profit Organizations - What Are They?
by:
John Day
Definition of Fund; Assets; and Fund Balance
According to the “Financial and Accounting Manual for Not-For-Profit Organizations” written by CPAs Gross, Larkin, Bruttomesso, and McNalley, (fifth edition, pg 25) the definition of a these three terms is as follows:
- A fund is any part of an organization for which separate account records are kept.
- Assets are valuable things closely-held or controlled by the organization. Types of assets include cash, investments, property, and amounts owed to the organization.
- Fund balance is the mathematical number obtained by subtracting total liabilities from total assets; it is a numerical representation of the net worth of the organization, but has no another significance. Fund balances do not exist except on paper; unlike assets, they have no intrinsic value and cannot be spent. Several assets and fund balances (as well as liabilities, revenues, and expenses) are part of the accounting records of a fund.
What are non-profit organizations?
A few years ago, a tooth doctor client of mine, who did a lot of activity for low-income patients under the American state medical assistance program called “MediCal”, asked me a eccentric question. He wanted to cognize if he could be considered a “non-profit organization” since he did so more MediCal work. At first, I thought he was joking, but he was serious. I told him that just because he charged less for his services did not qualify him to become exempt from paying taxes. In fact, he ready-made a really good profit. However, this is a good example of how non-profit organizations (NPO’s) are misunderstood by a large segment of the general public.
Most countries about the earth have NPO’s, but outside the U.S. they are called non-governmental organizations (NGOs) or civil society organizations. These organizations are exempt from paying taxes because they provide several sort of public benefit. They are aforesaid to enhance the fabric of society. They disagree from a business organization in that there are no owners. A Board of Directors oversees operations of the organization. An Executive Director, who reports to the Board, functions like a CEO of a business. Normally there is a drawn-out application process to establish the mission or intention of the organization before exempt status is granted.
According to Independent Sector, an organization that serves as an information resource for non-profit boards, there are 1.5 million non-profits that, once
combined, have general annual revenues totaling more than $670 billion dollars. They report that six percentage of all organizations in the U.S. are non-profits and one in twelve Americans activity for a non-profit. That’s big business and has caused profit-making businesses to become afraid
that several of these NPOs are competitive unfairly. Think just about a private hospital as compared to a non-profit hospital. The profits of the private hospital are taxed, but the NPO hospital can apply all their profits to higher salaries, more equipment, etc. Hence, there is high scrutiny of NPOs by the Internal Revenue Service, state Lawyer General offices, private watchdog organizations, and the press.
There are all types of non-profit organizations. Public charities are exempt under the Internal Revenue Service code 501(c)(3). These organizations, such as hospitals, museums, orchestras, private schools, churches, scientific research organizations, soup kitchens, etc., evidently do more much than provide free care and services to the needy. To qualify for exempt status, these organizations must show broad public support, rather than funding from an individual source. In addition, there are private foundations, colleges, universities, societal welfare organizations, professional and trade organizations, and galore more. Governmental organizations such as communities and agencies are besides non-profit organizations, however, their accounting and record keeping is handled quite otherwise
from 501(c)(3) organizations.
How are non-profit books organized?
Briefly, the books of an NPO are organized in the same way as a profit-making business except for a few differences. It’s okay for a non-profit to do a profit because there may be galore uses the board has planned for the extra money. But, NPOs traditionally refer to profit as “Excess Revenues over Expenses” to avoid being mischaracterized as a profit-making organization. A net loss is called “Excess Expenses over Revenues”. Recall the fundamental equation that does double-entry accounting work:
ASSETS = LIABILITIES EQUITY
Instead of the term EQUITY, a non-profit wish substitute the words FUND BALANCE or more recently NET ASSETS. The conception is still the same. After subtracting liabilities from assets the difference is what is closely-held by the organization. Wherever
NPOs disagree in their fiscal statement presentation from profit-making businesses is what is called Fund Accounting. Obviously, the presentation varies depending on the intention and size of the organization. For instance, a Little League baseball organization may only have one fund for which they have to account. They besides may not have any restrictions placed on the usage of contributions they receive. Everything is straightforward.
Or, a scientific research organization may be working on various projects at the same time with funding sources ready-made up of private and governmental grants or contracts, private donations, sales of research documents, several of it restricted to specific expenditures and the rest unrestricted. The accounting challenge is to report the revenue and expenses accurately for each fund or project and be able to combine all the funds into one cohesive fiscal statement.
The problem in the past for the contributors was that they could not easily tell from the fiscal documents what funds were restricted and unrestricted and whether their contributions were being spent properly. The Fiscal Accounting Standards Board (FASB) distinct that all external accounting should be done exploitation the “Net Assets” approach as opposed to the “Fund Balance” approach. Essentially, the net assets approach requires that the equity of the organization be bestowed with three classes of assets, i.e., Restricted Assets; Temporarily Restricted Assets; Unrestricted Assets. You can still use Fund Accounting for internal clerking purposes, but for external coverage purposes you are required to disclose your restricted and unrestricted funds. If you have no restricted funds, then it is not more of a challenge.
One of the key factors in setting up non-profit books is a well thought out Chart of Accounts. In another words, this is choosing which general ledger accounts are the most appropriate for recording revenue and expenses, etc., and organizing them in such a way as to provide meaning. Several U.S. organizations just follow the same format found on the 990 IRS form for non-profits. They do this so that their fiscal statements are in conformity with the way that return is organized. This does it easy to remove information from their fiscal statement to the 990 form.
Nevertheless, the main thing is to design your accounts so that they tell you exactly wherever
your revenue came from and what expenses are related to that revenue. I have worked with NPOs that have not done a really good job of this in the beginning, and I can testify that it is no fun trying to straighten the accounts out later. It may be well worth the money to hire a competent comptroller to manual you through the set up phase. Better yet, let your comptroller review your books a couple of times a year just to do sure you are on track and save yourself several year-end grief.
Just just about the author:
John W. Day, MBA is the author of two courses in accounting basics for non-accountants. Visit his website at http://www.reallifeaccounting.comto remove for FREE his 3 e-books pertaining to small business accounting and his monthly news-sheet on accounting issues. Ask John questions directly on his Accounting for Non-Accountants blog.
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