5. Purpose
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.
6. Ownership
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
7. Comparison
Nonprofits For-profit
GAAP: Yes (FAS 116&117) Yes
Owners: None Stockholders
Primary mission: Provide services needed by Earn profits for
stockholders
society
Secondary mission: Ensure that revenues are Provide services or sell
goods
greater than expenses so
that the services provided
can be maintained or
expanded
U.S. tax status: Exempt from income taxes Corporations (or their
if approved by IRS owners) are subject to
income taxes
8. FS Comparison
Nonprofit For Profit
1. Statement of Financial 1. Balance Sheet
Position
2. Statement of Activities 2. Income Statement
3. Changes in Net Assets 3. Net Income/Loss
4. Statement of Cash 4. Statement of Cash
Flows Flows
5. Net Assets 5. Owner's equity or
6. Statement of Functional stockholders' equity
Expenses (for some)
10. 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.
11. Net Assets Review
1. Unrestricted net assets
If 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.
12. Net Assets Review
1. Unrestricted net assets
For instance, if Lori gifts an unrestricted contribution of $400
of cash, the effect on the statement of financial position is:
Assets = Liabilities + Net Assets
Unrestricted net
Cash + $400 =
assets + $400
13. Net Assets Review
1. Unrestricted net assets
If 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.
14. Net Assets Review
2. Temporarily restricted net assets
If 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.
15. Net Assets Review
2. Temporarily restricted net assets
For 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
Temporarily restricted
Cash + $20,000 =
net assets + $20,000
16. Net Assets Review
2. Temporarily restricted net assets
When 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
17. Net Assets Review
3. Permanently restricted net assets
If 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.
18. Net Assets Review
3. Permanently restricted net assets
To 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
Permanently
Endowment + $1 Mil = restricted net assets
+ $1 Mil
19. Net Assets Review
3. Permanently restricted net assets
If 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.
20. 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.
21. Functional Expense Review
The caption Expenses could be termed Functional
Expenses since expenses are reported according to
these functions:
1. Program expenses
2. Supporting services expenses
22. Functional Expense Review
1. Program expenses
Program 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.
23. Functional Expense Review
2. Supporting services expenses
Supporting services expenses are reported in two
subgroups:
Management and general
Fundraising
24. 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.