| Definition of Fund; Assets; and Fund Balance | | | | organizations, however, their accounting and |
| According to the "Financial and Accounting Guide | | | | record keeping is handled quite differently from |
| for Not-For-Profit Organizations" written by CPAs | | | | 501(c)(3) organizations. |
| Gross, Larkin, Bruttomesso, and McNalley, (fifth | | | | How are non-profit books organized? |
| edition, pg 25) the definition of a these three | | | | Briefly, the books of an NPO are organized in the |
| terms is as follows: | | | | same way as a profit-making business except for |
| - A fund is any part of an organization for which | | | | a few differences. It's okay for a non-profit to |
| separate account records are kept. | | | | make a profit because there may be many uses |
| - Assets are valuable things owned or controlled | | | | the board has planned for the extra money. But, |
| by the organization. Types of assets include cash, | | | | NPOs traditionally refer to profit as "Excess |
| investments, property, and amounts owed to the | | | | Revenues over Expenses" to avoid being |
| organization. | | | | mischaracterized as a profit-making organization. A |
| - Fund balance is the mathematical number | | | | net loss is called "Excess Expenses over |
| obtained by subtracting total liabilities from total | | | | Revenues". Recall the fundamental equation that |
| assets; it is a numerical representation of the net | | | | makes double-entry accounting work: |
| worth of the organization, but has no other | | | | ASSETS = LIABILITIES EQUITY |
| significance. Fund balances do not exist except on | | | | Instead of the term EQUITY, a non-profit will |
| paper; unlike assets, they have no intrinsic value | | | | substitute the words FUND BALANCE or more |
| and cannot be spent. Both assets and fund | | | | recently NET ASSETS. The concept is still the |
| balances (as well as liabilities, revenues, and | | | | same. After subtracting liabilities from assets the |
| expenses) are part of the accounting records of | | | | difference is what is owned by the organization. |
| a fund. | | | | Where NPOs differ in their financial statement |
| What are non-profit organizations? | | | | presentation from profit-making businesses is |
| A few years ago, a dentist client of mine, who did | | | | what is called Fund Accounting. Obviously, the |
| a lot of work for low-income patients under the | | | | presentation varies depending on the purpose and |
| California medical assistance program called | | | | size of the organization. For instance, a Little |
| "MediCal", asked me a bizarre question. He wanted | | | | League baseball organization may only have one |
| to know if he could be considered a "non-profit | | | | fund for which they have to account. They also |
| organization" since he did so much MediCal work. | | | | may not have any restrictions placed on the |
| At first, I thought he was joking, but he was | | | | usage of contributions they receive. Everything is |
| serious. I told him that just because he charged | | | | straightforward. |
| less for his services did not qualify him to become | | | | Or, a scientific research organization may be |
| exempt from paying taxes. In fact, he made a | | | | working on various projects at the same time |
| very nice profit. However, this is a good example | | | | with funding sources made up of private and |
| of how non-profit organizations (NPO's) are | | | | governmental grants or contracts, private |
| misunderstood by a large segment of the general | | | | donations, sales of research documents, some of |
| public. | | | | it restricted to specific expenditures and the rest |
| Most countries around the world have NPO's, but | | | | unrestricted. The accounting challenge is to report |
| outside the U.S. they are called non-governmental | | | | the revenue and expenses accurately for each |
| organizations (NGOs) or civil society organizations. | | | | fund or project and be able to combine all the |
| These organizations are exempt from paying | | | | funds into one cohesive financial statement. |
| taxes because they provide some sort of public | | | | The problem in the past for the contributors was |
| benefit. They are said to enhance the fabric of | | | | that they could not easily tell from the financial |
| society. They differ from a business organization | | | | documents what funds were restricted and |
| in that there are no owners. A Board of Directors | | | | unrestricted and whether their contributions were |
| oversees operations of the organization. An | | | | being spent properly. The Financial Accounting |
| Executive Director, who reports to the Board, | | | | Standards Board (FASB) decided that all external |
| functions like a CEO of a business. Usually there is | | | | accounting should be done using the "Net Assets" |
| a lengthy application process to establish the | | | | approach as opposed to the "Fund Balance" |
| mission or purpose of the organization before | | | | approach. Essentially, the net assets approach |
| exempt status is granted. | | | | requires that the equity of the organization be |
| According to Independent Sector, an organization | | | | presented with three classes of assets, i.e., |
| that serves as an information resource for | | | | Restricted Assets; Temporarily Restricted Assets; |
| non-profit boards, there are 1.5 million non-profits | | | | Unrestricted Assets. You can still use Fund |
| that, when combined, have general annual | | | | Accounting for internal bookkeeping purposes, but |
| revenues totaling more than $670 billion dollars. | | | | for external reporting purposes you are required |
| They report that six percent of all organizations in | | | | to disclose your restricted and unrestricted funds. |
| the U.S. are non-profits and one in twelve | | | | If you have no restricted funds, then it is not |
| Americans work for a non-profit. That's big | | | | much of a challenge. |
| business and has caused profit-making businesses | | | | One of the key factors in setting up non-profit |
| to become alarmed that some of these NPOs are | | | | books is a well thought out Chart of Accounts. In |
| competing unfairly. Think about a private hospital | | | | other words, this is choosing which general ledger |
| as compared to a non-profit hospital. The profits | | | | accounts are the most appropriate for recording |
| of the private hospital are taxed, but the NPO | | | | revenue and expenses, etc., and organizing them |
| hospital can apply all their profits to higher salaries, | | | | in such a way as to provide meaning. Some U.S. |
| more equipment, etc. Hence, there is high scrutiny | | | | organizations simply follow the same format |
| of NPOs by the Internal Revenue Service, state | | | | found on the 990 IRS form for non-profits. They |
| Attorney General offices, private watchdog | | | | do this so that their financial statements are in |
| organizations, and the press. | | | | conformity with the way that return is organized. |
| There are all types of non-profit organizations. | | | | This makes it easy to transfer information from |
| Public charities are exempt under the Internal | | | | their financial statement to the 990 form. |
| Revenue Service code 501(c)(3). These | | | | Nevertheless, the main thing is to design your |
| organizations, such as hospitals, museums, | | | | accounts so that they tell you exactly where |
| orchestras, private schools, churches, scientific | | | | your revenue came from and what expenses are |
| research organizations, soup kitchens, etc., | | | | related to that revenue. I have worked with NPOs |
| obviously do much more than provide free care | | | | that have not done a very good job of this in the |
| and services to the needy. To qualify for exempt | | | | beginning, and I can testify that it is no fun trying |
| status, these organizations must show broad | | | | to straighten the accounts out later. It may be |
| public support, rather than funding from an | | | | well worth the money to hire a competent |
| individual source. In addition, there are private | | | | accountant to guide you through the set up |
| foundations, colleges, universities, social welfare | | | | phase. Better yet, let your accountant review |
| organizations, professional and trade organizations, | | | | your books a couple of times a year just to |
| and many more. Governmental organizations such | | | | make sure you are on track and save yourself |
| as communities and agencies are also non-profit | | | | some year-end grief. |