PurposeUnlike for-profit businesses that exist to generate profits for theirowners, nonprofit organizations exist to pursue missions thataddress the needs of society in a variety of sectors, such as:EducationReligionHealthSocial ServicesThe Arts, etc.
OwnershipNonprofits do not have commercial owners and must rely on fundsfrom:Fundraising EventsContributionsPublic and Private GrantsMembership DuesProgram RevenuesInvestment Income
Comparison Nonprofits For-profit GAAP: Yes (FAS 116&117) Yes Owners: None Stockholders Primary mission: Provide services needed by Earn profits for stockholders societySecondary 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
FS ComparisonNonprofit For Profit1. Statement of Financial 1. Balance Sheet Position2. Statement of Activities 2. Income Statement3. Changes in Net Assets 3. Net Income/Loss4. Statement of Cash 4. Statement of Cash Flows Flows5. Net Assets 5. Owners equity or6. Statement of Functional stockholders equity Expenses (for some)
Net Assets ReviewThe net assets section of a nonprofits statement offinancial position reports totals for each of thefollowing classifications:1) Unrestricted net assets2) Temporarily restricted net assets3) Permanently restricted net assetsThese classifications are based on the restrictionsmade by the donors at the time of their contributions.
Net Assets Review1. Unrestricted net assetsIf a donor does not specify a restriction on his or hercontribution, the amount received by the nonprofit isrecorded as an asset and as unrestricted contributionrevenues. Unrestricted contribution revenues (reportedon the statement of activities) also cause the amount ofunrestricted net assets to increase.
Net Assets Review1. Unrestricted net assetsFor instance, if Lori gifts an unrestricted contribution of $400of cash, the effect on the statement of financial position is: Assets = Liabilities + Net Assets Unrestricted net Cash + $400 = assets + $400
Net Assets Review1. Unrestricted net assetsIf the nonprofits board of directors and/ormanagement designates some of the nonprofitsunrestricted assets for a specific purpose, those assetsmust continue to be reported as unrestricted net assets.
Net Assets Review2. Temporarily restricted net assetsIf a nonprofit receives a contribution that has a donor-imposed restriction (other than to be held inperpetuity), the amount is usually recorded as an assetand as temporarily restricted contribution revenues.Temporarily restricted contribution revenues (reportedon the statement of activities) also cause the amount oftemporarily restricted net assets to increase.
Net Assets Review2. Temporarily restricted net assetsFor example, David donates $20,000 with the requirement thatthe nonprofit use it to purchase a vehicle that is urgently neededin one of the nonprofits programs. The effect on the nonprofitsaccounting equation at the time the contribution is received is: Assets = Liabilities + Net Assets Temporarily restricted Cash + $20,000 = net assets + $20,000
Net Assets Review2. Temporarily restricted net assetsWhen the nonprofit purchases the vehicle at a cost of say$21,000, the purchase and the release of the restriction willcause 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 Review3. Permanently restricted net assetsIf a donor stipulates that her contribution must be heldby the nonprofit in perpetuity (forever, not be usedup), the amount is recorded as an asset and aspermanently restricted contribution revenues.Permanently restricted contribution revenues (reportedon the statement of activities) also cause the amount ofpermanently restricted net assets to increase.
Net Assets Review3. Permanently restricted net assetsTo illustrate, lets assume that Melanie contributes $1 million toa nonprofit and stipulates that only the interest on themoneycan be spent. This contribution will have the followingeffect on the nonprofits statement of financial position: Assets = Liabilities + Net Assets Permanently Endowment + $1 Mil = restricted net assets + $1 Mil
Net Assets Review3. Permanently restricted net assetsIf Melanie also stipulates that the interest earned mustbe used for scholarships and $500K is earned on the$1 Mil, the $500K must be reported as temporarilyrestricted net assets until the restriction is released bythe payment for scholarships.
Revenue ReviewUnder the accrual method of accounting, revenues arereported in the accounting period in which they areearned/pledged. In other words, revenues might be‘earned’ in an accounting period that is different fromthe period in which the cash is received.
Functional Expense ReviewThe caption Expenses could be termed FunctionalExpenses since expenses are reported according tothese functions:1. Program expenses2. Supporting services expenses
Functional Expense Review1. Program expensesProgram expenses (or program services expenses) arethe amounts directly incurred by the nonprofit incarrying out its programs. For instance, if a nonprofithas three main programs, then each of the threeprograms will be listed along with each programsexpenses.
Functional Expense Review2. Supporting services expensesSupporting services expenses are reported in twosubgroups:Management and generalFundraising
Functional Expense ReviewIn order to accurately report the amount in each ofthese subgroups, it may be necessary to allocate somemanagement and general salaries to fundraising basedon the time spent by employees performingfundraising activities. For example, a managementemployee might be spending 30% of her time infundraising activities and so 30% of her salary shouldbe recorded as fundraising expenses.