Accounting for Not-for-Profit
Organizations and Governments
1. NFPOs provide goods and/or services to society without the expectation of profit, while profit-oriented organizations provide goods and/or services with the expectation of earning a profit.
Many resources are provided to NFPOs without any expectation of remuneration or repayment, including volunteer services and gifts in cash or in kind. Providers of resources to a profit-oriented organization expect to receive remuneration and/or the eventual repayment of the resources supplied.
NFPOs have no defined ownership, whereas profit-oriented organizations do. People who govern NFPOs generally receive no remuneration, while the directors of profit-oriented organizations usually do.
2. The revenue is called contribution revenue and the characteristic that makes it unique is that it is all one way. The NFPO receives resources and the contributor receives nothing tangible in return (i.e., it is a nonreciprocal transfer).
3. Unrestricted resources are those which can be used to carry out any and all of the activities of the organization, while restricted resources can only be used to carry out certain activities or to purchase certain goods that have been specified by the donor of the resources.
4. Fund accounting provides for self-balancing groups of accounts comprising assets, liabilities, revenues, and expenses as “self-contained” elements within the accounting system of an NFPO. These accounts are used to keep track of the various activities of the NFPO, as well as resources that have restrictions as to how they may be spent.
5. Fund accounting is often used for external reporting as a means of stewardship reporting of resources received, spent, on hand, and available for future spending. It more clearly presents information regarding restrictions that may exist as to how the organization's resources can be spent.
6. Donated capital assets (i.e., equipment) must be recorded at fair value. The recording of donated supplies and services is optional, but they can be recorded at fair value only if they would have otherwise been purchased had they not been donated. The value of services provided by volunteers should not ordinarily be recorded.
7. All capital asset acquisitions must be capitalized and, with the exception of land, must be amortized over their estimated useful lives (no maximum period is specified). This is optional for NFPOs whose revenues are less than $500,000. Capital assets include both tangible and intangible assets but do not include the collections of art galleries and museums. If a capital asset is donated it must be recorded at fair value (if known), with a credit to restricted contribution revenue. If a capital asset no longer contributes to the organization’s ability to provide services it should be written down to an estimated residual value, with the loss reflected in the statement of operations.
If fund reporting is used the assets can appear in the balance sheet of any fund except the endowment fund. Amortization expense does not have to appear in the same fund as the capital asset but must not appear in the endowment fund. Provision must be made for future removal and site restoration costs.
8. Pledges should be accrued if the organization has the ability to estimate their collectibility based on past experience. If the collectibility cannot be estimated, the cash basis should be used.
9. The four sections are:
• Net assets invested in capital assets. This represents net resources (assets less their related liabilities and deferred contribution) that have been spent to acquire capital assets. • Net assets maintained permanently in endowments. This shows the amount of net assets that may not be spent in the future. • Restricted net assets. This amount represents net assets that may only be spent for specific purposes. •