Accounting Principles Applicable to Not-for-Profit Organizations

Not-for-Profit organizations account for revenues and expenses using accrual basis of accounting.

Classification
The organization’s net assets, revenue, expenses, gains, and losses are classified according to the three classes of
net assets. This division of net assets into unrestricted, temporarily restricted, and permanently restricted classifications
is the core of the financial statement presentations for not-for-profit entities.

Two Major Sources of Revenues

1. Contributions, and
2. Regular type of revenues such as tuition fee for schools and universities, patient service revenue for hospitals,
membership dues, sales of publications and supplies and program service fees such as advising for voluntary
health and welfare organization.
 Only contributions are subject to RESTRICTION since they are imposed by the donor, while the
regular type of revenue is unrestricted or even though restricted but made by the board of trustees
is still classified as unrestricted since the board can lift anytime such restriction.
 Contributions are considered as nonexchange transactions which may include cash, securities, land
and buildings. It also includes noncash items or gifts in kind such as free discount use of facilities,
donated materials and supplies, intangible assets, and services of unpaid workers.
 Exceptions to the general recognition provision are made for contributions of services and donated
works on art.
 Donated Services are recognized only if they:
1. Create or enhance nonfinancial assets, or
2. Require specialize skills, are provided by individuals possessing those abilities and typically would
have to be purchased if not provided by donation.
All of these items are recorded at fair value at the date of the gift or donations were made.
In the case of non cash gifts, a corresponding expense is recorded.
Revenues, gains and losses can be reported in each net asset class, but expenses are reported only
in the UNTRESTRICTED NET ASSETS CLASS.

Restriction VS. Condition

 To be considered as restricted, it should be imposed by the donor.
 Condition on the other hand, is necessary whether to recognize such donation as:
 Revenue, or
 Liability
 Restrictions made by donor may either be:
1. Permanent, or
2. Temporary
 Reclassifications of net assets results from expiration of donor-imposed (temporary) restrictions.
Permanent restriction does not result to reclassification.
 A temporary restricted expires when:
1. The stipulated time has elapsed (TIME restriction)
2. The stipulated purpose has been fulfilled (PURPOSE restriction)
3. The useful life of the asset has ended.
 Donor-imposed conditions do not result to reclassification. The moment the donor-imposed condition is
satisfied, and the promise to give assets becomes unconditional the only effect is to increase the
classification of the NET ASSETS depending on the restriction placed (whether unrestricted, temporary, or
permanent)
 An unconditional promise to give is reported in the period the pledges were made or received, not in the
period of cash collections.
 A conditional gift of cash or other assets that may have to be returned to the donor if the condition is not
met, should be accounted for as refundable advance (liability).

Financial Statements
Not-for-Profit Organizations provides as a set of financial statements that includes:
a) Statement of Financial Position (balance sheet)
b) Statement of Activities
c) Statement of Cash Flows
d) Accompanying notes

Voluntary and Health Welfare Organization also must provide a Statement of Functional Expenses. This
statements reports expenses by both function (program and supporting) and by their Natural Classification
(salaries expense, depreciation expenses, etc.)
 However, AICPA Auditing and Accounting Guide for Health Care Organization, the basic financial statements for
HOSPITAL includes:
a. Statement of Financial Position (balance sheet)
b. Statement of Operations or (Statement of Activities)
c. Statement of Changes in Net Assets, and
d. Statement of Cash Flows
The goal of the reporting requirements is to establish consistent standards for reporting basis information
for the organization as a whole.

Classification of Net Assets

The reporting requirement are based on the division of net assets into three classifications. These classes of net assets are
totally dependent on the existence or absence of donor-imposed restrictions. The three classes of net assets are:
 Permanently restricted net assets are the portion of net assets whose use is limited by donor-imposed
stipulations that do not expire and cannot be removed by action of the not-for-profit entity.
 Temporarily restricted net assets are the portion of net assets whose use is limited by donor-imposed:
o Stipulations that either expire (TIME restrictions) or
o Can be removed by the organization fulfilling the stipulations (PURPOSE restrictions)
 Unrestricted net assets are the portion of net assets that carry no donor-imposed stipulations or even though
restricted but imposed by the board of trustees.

Private Universities/Colleges
Accounting for Revenues:
Private Universities and Colleges had three major groups or revenues:
Educational and general revenues group, with accounts for:
 Student tuition fees
 Government appropriations
 Government grants and contracts
 Gifts and private grants
 Endowment income
 Other Sources
Auxiliary enterprises revenues – includes amounts earned in providing facilities and services to faculty,
staff, and students, charges for residence halls, food services, intercollegiate, student unions, dormitories,
as well as sales and receipts from college stores, barber shops, movie houses, etc.
Expired term endowments – arising from reclassification of temporary restricted to unrestricted.
Accounting for Expenses:
Educational and general expenses group with accounts for instructions, research, public support,
support, student services, institutional support, operation and maintenance of plant and student aid
expenditures.
Auxiliary enterprise expenses – these are related to auxiliary enterprise revenues.

Fund Groups – universities/colleges use these fund “groups” and major fund “subdivisions”;
Fund Groups Major Subdivisions
1. Current Funds a. Current Fund – unrestricted
b. Current Fund – restricted
2. Loan Funds
3. Endowment and Similar Funds a. Endowment Funds “pure”
b. Term Endowment Funds
c. Quasi-Endowment Funds
4. Annuity and Life Income a. Annuity Funds
b. Life Income Funds
5. Plant Funds a. Unexpended Plant Funds
b. Funds for Renewals and Replacement
c. Funds for Retirement and Indebtedness
d. Investment in Plant Fund
6. Agency Funds
Current Funds/Operating Funds:
1. Current Fund – unrestricted is the main operating fund of a college and is used of the day-to-day operations
of the college/university without restrictions.
2. Current Fund – restricted may also be used for day-to-day operations, but it must be used within the
framework of the specified purposes imposed by a grantor or donor.
Loan Funds – is used for making loans to students, faculty, and staff. Generally, this fund consists of grants from donors
and income from endowment funds. These funds are loaned to recipients with the expectation that the loans will be
repaid in the future.
1. Unrestricted Loan Funds – when the board of trustees sets the policies of the loan funds.
2. Restricted Loan Funds – if grants or donations have restrictions imposed by the donors or grantors.

Endowment Funds and Similar Funds

a. Pure or Regular Endowment Fund are funds whose:
 Principal (corpus) has been specified by the donor as nonexpendable or to be held in perpetuity or kept
in tact.
 Income (dividend or interest) normally permits to be expended for current operations.
b. Term Endowment Fund – it is similar to an endowment fund except that the:
 Principal (corpus) is expendable after a specified time period or specified event (after which the principal
becomes available)
 Income (dividend or interest) normally permits to be expended for current operations.
c. Quasi-Endowment Fund – differs from endowment fund is that the restriction are imposed by the
institution’s board of trustees and not an outside grantor or donor.
Thus, quasi- endowment funds are unrestricted because any restrictions are imposed by the board of trustees:
 Principal (corpus) is expendable
 Income (dividend or interest) is expendable for current operations.

Annuity and Life Income Funds

1. Annuity Funds – to account for resources acquired under the condition that the college or university make
stipulated periodic payments to individuals as provided by the agreement with the donor.
2. Life Income Funds – to account for funds contributed to the college or university under the requirement that
the income (interest or dividend) be paid (usually until death) to a designated beneficiary.

Plant Funds
1. Unexpended Plant Fund contains assets set aside for the future acquisition of a college’s/ universities plant
assets.
2. Fund for Renewals and Replacement contains assets set aside for the renewals and replacements of a
college’s/ universities plant assets.
3. Fund for Retirement of Indebtedness contains assets set aside for the retirement of college’s/ universities
plant assets.
4. Investment in Plant Fund accounts for the funds already spent and thus represents the investment in plant
assets except for the investments in plant assets held in endowment and annuity and life income funds. This
fund contain liabilities related to the plant assets carried in this fund, namely, accounts payable, notes
payable, and mortgages payable.

Illustrative Example:
Transactions Journal Entries
1. Received cash arising from:
Tuition fee, ₱100,000, Cash ₱200,000
Contribution- Revenue – TF – Unrestricted ₱100,000
Unrestricted, ₱30,000 Contribution – Unrestricted ₱30,000
Temporary restricted – time, ₱20,000 Contribution – TR – time
Temporary restricted – purpose, ₱40,000 ₱20,000
Permanently restricted, ₱10,000 Contribution – TR – purpose ₱40,000
Contribution – PR ₱10,000
2. Payment of expenses of ₱35,000, of which Expenses – Unrestricted ₱35,000
₱7,000 is from restricted (purpose) Cash ₱35,000
Reclassification – Out – TR – purpose ₱7,000
Reclassification In – Unrestricted ₱7,000
3. Purchase equipment amounting to ₱25,000 and Equipment ₱25,000
is financed with donor restricted cash Cash ₱25,000
Reclassification – Out – TR – purpose ₱25,000
Reclassification In – Unrestricted ₱25,000
 Closing Entries
a. Closing entries are prepared for Unrestricted Net
Assets:

b. Closing entries are prepared for Temporarily

Restricted Net Assets:

c. Closing entries are prepared for Permanently

Restricted Net Assets:

Statement of Activities
Unrestricted Temporary Permanently Total
Revenue – Tuition Fee
Contribution
Total
Net Assets Released from Restriction – Satisfaction of
Purpose
Total
Less: Expenses
Increase in Net Assets
Net Assets, beginning
Net Assets, ending
------------------ ---------------- ------------------ --------------
Balance Sheet
Assets Liabilities and Net Assets
Cash ₱ Liabilities ₱
Equipment ₱ Net Assets:
Unrestricted ₱
Temp. Rest. ₱
_________ Per. Rest. ₱__________________
Total Assets ₱ _________ Total Liabilities and NA ₱_________

Hospitals / Health Care Providers

The funds used by hospitals and other health care providers for accounting purposes are slightly different from
those used by colleges and universities.

General Fund is an unrestricted fund used to account for the day-to-day operations of a health care provider and it
may be used by the governing board for any designated purpose other than restricted resources imposed by grantors and
donors. The general fund used by a hospital or other health care provider is similar to the current fund – unrestricted
used by a college or university.
1. Assets whose use is limited include assets set aside by the governing board for identified purpose.
2. Agency Funds are included in General Funds as a both an asset and a liability. Although not prescribed as a fund
for hospital accounting, an agency fund may be used by hospitals to account for fees collected as an agent for
physicians who have private-practice patients coming to hospital offices provided to the staff physicians. The
hospital would remit the fees collected to the physicians less charges for rental and administrative costs.
3. Property and equipment used for general operations, and the related liabilities, are reported in General Funds.
Property and equipment whose use is restricted (e.g., real estate investments of Endowment Funds) are reported
in the appropriate donor-restricted fund.

Donor-Restricted Funds
1. Temporary Restricted Fund may be a specific purpose fund, a term-endowment fund, or a plant replacement and
expansion fund. An annuity and life income fund similar to that of colleges and universities may also be included
as a temporarily restricted fund.
1. Specific Purpose Fund is restricted fund used by health care providers to account for principal and income in
accordance with donor’s specified restrictions. A specific purpose fund is very similar to the current fund –
restricted used by colleges and universities.
2. Endowment Fund is used by hospital to account for a trust where the principal must be kept intact and the
income be expended for either current operations or a specific purpose in accordance with the grantor’s
wishes. An endowment fund for hospital is very similar to endowment fund for colleges and universities.
 The endowment may be in perpetuity, or it may be a fixed term or until a specific event occurs.

An endowment fund that is for fixed term is known as term endowment fund. At the end of its life, the
principal in the term endowment fund is transferred to another restricted fund – a specific purpose fund, a
plant replacement fund and expansion fund, or the general fund – in accordance with the donor’s wishes.
3. Plant Replacement and Expansion Fund is a restricted fund used by hospitals and other health care providers
to account for a donor’s contributions that must be used to acquire property, plant and equipment (PPE).
2. Permanently Restricted Fund is also an endowment fund, but differs from a term-endowment fund is that the
principal must be maintained intact in perpetuity and only the income may be used in accordance with the donor’s
wishes.
Revenues and Gains
Revenue is reported in the period in which services are rendered. Operating revenues consists of patient service revenues,
premium fees revenues, and other operating revenues.
1. Patient Service Revenues include room and board, nursing services, and other professional services. Patient
service revenues typically are recorded established (gross) rates as the services are provided but are reported net
of amounts that are considered deductions from revenues. The objective is to report the amount that the hospital
is entitled to collect as patient service revenues.

Charity care services, provided free of charge to patients who qualify under hospital’s charity care policy – are
excluded from both gross and net patient service revenues.

Allowance accounts are used receivables for estimated deductions from revenues, as well as estimated doubtful
accounts.
Deductions from revenues include:
1. Courtesy allowances/staff discounts – discounts to doctors and employees
2. Contractual adjustments – discounts arranged with third-party payors (PhilHealth for example) that
frequently have agreements to reimburse at less than established rates.
2. Premium Fees also known as subscriber fee or capitation fees, are revenues from agreements which a hospital
provides any necessary patient services (perhaps from a contractually established list of services) for a specific
fee. The fee is usually a specific fee per member per month. The fees are earned whether the standard charges
for services actually rendered are more or less than the amount of the fee – i.e without regard to services actually
provided in the period. Therefore, they are reported separately from patient service revenues. This is a growing
portion of hospital revenues in many hospitals.
3. Other Revenue and Gains
a. Other Operating Revenues include revenue from services other than the health care provided to patients as
well as from sales and services to persons other than patients. This classification might include tuition from schools
operated by the hospital space, charges for preparing and reproducing medical records, room charges for
telephone calls and television, proceeds from cafeterias, gift shops, snack bars, donated medicine, linen and office
supplies, etc.
b. Non Operating Revenues records revenue not related directly to an entity’s principal operations. These items
are primarily financial in nature and include unrestricted and donor-restricted pledges, gifts or grants,
unrestricted income from endowment funds, maturing term endowment funds, income and gain from investments,
gains on sale of hospital property. Investments are reported at fair value with both realized and unrealized gains
included as part of nonoperating revenues.

Classification of Non Operating Expenses

Operating expenses of hospitals are reported on an ACCRUAL BASIS and normally include functional categories for nursing
services (medical and surgical intensive care, nurseries, operating rooms), other professional services (laboratory ,
radiology, anesthesiology, pharmacy), general services (housekeeping, maintenance, laundry), fiscal services (accounting,
cashier, credit and collection, data processing), administrative services (personnel, purchasing, insurance, governing
board), interest, and depreciation provisions.

Provision for bad debts is an expense. The difference between charity care and bad debts expense is that charity care
results from hospital’s policy of providing health care to individuals who meet certain financial criteria, whereas bad debts
results from extending credit. Health care services provided as charity care were never intended to provide cash flows.

Voluntary Health and Welfare Organization

Organizations that fall into this grouping are those deriving their principal funding from the general public in the form of
voluntary contributions, from governments, and from grants, which are used to support health, welfare, and community
service projects.
The FUNDS used by the VHWO include:
1. Current Fund – Unrestricted. This fund is used for operations that require only the discretion of the
organization’s board of directors, and include assets designated by the board for specific purposes.

Revenues are recorded using the FULL ACCRUAL BASIS. A distinction should be made between Public Support
and Revenues.

Public Support is the inflow of resources from voluntary donors who receive no direct, personal benefit
from organization’s usual programs in exchange for their contributions. They include the following:
a. Contributions
b. Special Events Support
c. Legacies and Bequests
d. Proceeds from fund raisers

Revenues are inflows of resources resulting from charge for service from financial activities or from other
exchange transactions.
a. Membership Dues
b. Program Fees Services
c. Sales of Publications and Supplies for proceeds from the sales of these items
d. Investment Income e.g., interest dividends, and other earnings

Expenses are classified as program services and supporting services and are reported on a functional basis
under these classifications.

Program services relate to the expenses incurred in providing the organization’s social service activities.
Supporting services consist of administrative expenses and fund-raising costs.

In reporting expenses in the statement of activities, the functional classifications might appear as follows:

Expenses
Program Services
Research
Public Education
Professional Education
Community Services
Supporting Services
Management and general
Fund-raising

Expenses are recorded on a FULL ACCRUAL BASIS in a manner similar to that used by business
organizations. Expenses are recorded in each fund that incurs the expenses.

2. Current Fund – Restricted. This fund is used for operations, but only in accordance with a donor or grantor’s
specifications.
Restricted pledges to be used to promote the adoption of handicapped children would be recorded in this
classification.

3. Land, Building, and Equipment Fund. This fund is used to account for:
a. Land, buildings, and equipment acquired by the organization;
b. Liabilities arising from acquisition or improvement of plant assets;
c. Current assets restricted by donors or grantors for future disposition.

4. Endowment Fund. This fund is used to accounts for permanently restricted endowment principal to be
maintained intact either in perpetuity or until a specific event occurs and temporary restricted term
endowments.

5. Custodian Fund. A fund “established to account for assets received by an organization to be held or disbursed
only on instructions of the person or organization from whom they were received.” This fund is similar to agency
fund in college or university. The assets do not belong to the organization.