Understanding the Basics of Understanding the Basics of Nonprofit AccountingNonprofit Accounting

Presented by:Presented by:Fransy Russey, CPAFransy Russey, CPA

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OUTLINEOUTLINE

I. Things You Need to Know

II. Understanding the Financials

III. Quiz

TRIVIA QUESTIONTRIVIA QUESTION

Provide an example of differences between a nonprofit and a for-profit entity.

Things You Need to Know About Nonprofits

PART IPART I

Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue missions that address the needs of society in a variety of sectors, such as:

Education

Religion

Health

Social Services

The Arts, etc.

Purpose

Nonprofits do not have commercial owners and must rely on funds from:

Fundraising Events

Contributions

Public and Private Grants

Membership Dues

Program Revenues

Investment Income

Ownership

Comparison

Nonprofits For-profit

GAAP:Owners:

Yes (FAS 116&117) None

YesStockholders

Primary mission: Provide services needed by society

Earn profits for stockholders

Secondary mission: Ensure that revenues are greater than expenses so that the services provided can be maintained or expanded

Provide services or sell goods

U.S. tax status: Exempt from income taxes if approved by IRS

Corporations (or their owners) are subject to income taxes

FS Comparison

Nonprofit

1. Statement of Financial Position

2. Statement of Activities

3. Changes in Net Assets

4. Statement of Cash Flows

5. Net Assets

6. Statement of Functional Expenses (for some)

For Profit

1. Balance Sheet

2. Income Statement

3. Net Income/Loss

4. Statement of Cash Flows

5. Owner's equity or stockholders' equity

Understanding Nonprofit Understanding Nonprofit FinancialsFinancials

PART IIPART II

Net Assets Review

The net assets section of a nonprofit's statement of financial position reports totals for each of the following classifications:1) Unrestricted net assets 2) Temporarily restricted net assets 3) Permanently restricted net assets These classifications are based on the restrictions made by the donors at the time of their contributions.

Net Assets Review

1. Unrestricted net assetsIf a donor does not specify a restriction on his or her contribution, the amount received by the nonprofit is recorded as an asset and as unrestricted contribution revenues. Unrestricted contribution revenues (reported on the statement of activities) also cause the amount of unrestricted net assets to increase.

Net Assets Review

Assets = Liabilities + Net Assets

Cash + $400 = Unrestricted net assets + $400

1. Unrestricted net assetsFor instance, if Lori gifts an unrestricted contribution of $400 of cash, the effect on the statement of financial position is:

Net Assets Review

1. Unrestricted net assetsIf the nonprofit's board of directors and/or management designates some of the nonprofit's unrestricted assets for a specific purpose, those assets must continue to be reported as unrestricted net assets.

Net Assets Review

2. Temporarily restricted net assetsIf a nonprofit receives a contribution that has a donor-imposed restriction (other than to be held in perpetuity), the amount is usually recorded as an asset and as temporarily restricted contribution revenues. Temporarily restricted contribution revenues (reported on the statement of activities) also cause the amount of temporarily restricted net assets to increase.

Net Assets Review

2. Temporarily restricted net assetsFor example, David donates $20,000 with the requirement that the nonprofit use it to purchase a vehicle that is urgently needed in one of the nonprofit's programs. The effect on the nonprofit's accounting equation at the time the contribution is received is:

Assets = Liabilities + Net Assets

Cash + $20,000 = Temporarily restricted net assets + $20,000

Net Assets Review

2. Temporarily restricted net assetsWhen the nonprofit purchases the vehicle at a cost of say $21,000, the purchase and the release of the restriction will cause the following changes:

Assets = Liabilities + Net Assets

Cash – $21,000 =

Vehicle + $21,000 =

Temporarily restricted net assets – $20,000

Unrestricted net assets + $20,000

Net Assets Review

3. Permanently restricted net assetsIf a donor stipulates that her contribution must be held by the nonprofit in perpetuity (forever, not be used up), the amount is recorded as an asset and as permanently restricted contribution revenues. Permanently restricted contribution revenues (reported on the statement of activities) also cause the amount of permanently restricted net assets to increase.

Net Assets Review

3. Permanently restricted net assetsTo illustrate, let's assume that Melanie contributes $1 million to a nonprofit and stipulates that only the interest on the moneycan be spent. This contribution will have the following effect on the nonprofit's statement of financial position:

Assets = Liabilities + Net Assets

Endowment + $1 Mil = Permanently restricted net assets + $1 Mil

Net Assets Review

3. Permanently restricted net assetsIf Melanie also stipulates that the interest earned must be used for scholarships and $500K is earned on the $1 Mil, the $500K must be reported as temporarily restricted net assets until the restriction is released by the payment for scholarships.

Revenue Review

Under the accrual method of accounting, revenues are reported in the accounting period in which they are earned/pledged. In other words, revenues might be ‘earned’ in an accounting period that is different from the period in which the cash is received.

Functional Expense Review

The caption Expenses could be termed Functional Expenses since expenses are reported according to these functions:1. Program expenses2. Supporting services expenses

Functional Expense Review

1. Program expensesProgram expenses (or program services expenses) are the amounts directly incurred by the nonprofit in carrying out its programs. For instance, if a nonprofit has three main programs, then each of the three programs will be listed along with each program's expenses.

Functional Expense Review

2. Supporting services expensesSupporting services expenses are reported in two subgroups:Management and general Fundraising

Functional Expense Review

In order to accurately report the amount in each of these subgroups, it may be necessary to allocate some management and general salaries to fundraising based on the time spent by employees performing fundraising activities. For example, a management employee might be spending 30% of her time in fundraising activities and so 30% of her salary should be recorded as fundraising expenses.

Questions?Questions?

QuizQuiz

PART IIIPART III

AnswersAnswers

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Happy Accounting!!!Source References: http://www.accountingcoach.com/nonprofit-accounting/