LECTURE NOTES: Accounting for Colleges/Universities - Voluntary Health and

Welfare Organization and Other Not-for-Profit Organizations

Accounting for Colleges and Universities
Colleges and universities are required to use fund accounting due to the large
amount of restricted resources under their control. Accrual accounting is used, but
there are certain similarities to accounting by governmental funds, especially in the
reporting of expenditures rather than expenses.
Types of Funds
There are six different fund groups which may be used by a college or university.
They include the current funds (unrestricted and restricted) loan funds, endowment
and similar funds, annuity and life income funds, plant funds, and agency funds.
Funds are established as needed.
Current Funds
The current funds account for resources of the institution that will be used in
carrying out the primary objectives: instruction, research, extension, and public
service. Unrestricted current funds are not subject to outside restraints on usage
and restricted current funds have been restricted by donors or grantors to specific
purposes. As in the case of hospitals, resources designated by the Board of Trustees
are still considered unrestricted, since they lack externally imposed restrictions.
Loan Funds
Loan funds are established for resources that are to be loaned to students, faculty,
or staff. The loan fund is not for loans, notes, or bonds payable to others. It is
designated to hold assets, not liabilities. Fund balances should be separately report
restricted and unrestricted amounts. Restricted amounts represent resources which
outside parties provided to the university on condition it will be used for loans.
Unrestricted fund balances represent resources which were placed in the loan fund
at the election of the university itself.
Endowment and Similar Funds
Endowment funds are resources which outside parties contributed to the university
on condition they not be spent, but invested to yield earnings which may be spent.
Term endowment funds may be spent after a specific period of time has passed or a
certain event has occurred. Quasi-endowment funds aren’t actually restricted, but
have been designated by the board of the university to be retained and invested.
Occasionally, a donor will establish an endowment fund, but place the fund with an
independent trustee, who will remit earnings to the university on a regular basis.
Since the fund principal is not under the control of the university, it will not account
for it, but simply note the arrangement by memorandum and in the notes to the
financial statements.
Annuity and Life Income Funds
Annuity funds are resources given to the university on condition that regular
payments be made to a specific person
for a certain period of time, after which all principal is available to the institution.
Life income funds require distribution of all earnings to a specified person, upon
whose death the balance becomes expendable by the university.
Plant Funds
All of the assets and liabilities associated with fixed assets of a university are
accounted for in the plant fund. The plant fund balances include
(1) unexpended plant funds, (2) funds for renewals and replacements, (3) funds for
retirement of indebtedness, and (4) investment in plant.
Unexpended plant funds contain liquid assets which are to be used to acquire new
plant assets in the future. Funds for renewals and replacements contain liquid assets
which are to be used to replace existing plant assets as needed.
Funds for retirement of indebtedness contain resources to be used to make principal
and interest payments on debts incurred to acquire plant assets. Investment in plant
consists of the fixed assets themselves and any long-term debt issued in connection
with acquisitions of these assets.
The fund balances of the first three funds should be subdivided further into restricted
and unrestricted balances, based on whether classification in the plant fund is the
result of external requirements or internal designation. The investment in plant fund
balance isn’t subdivided.
Agency Funds
Resources received by the institution which belong to others, such as student body
fees, are held in agency funds, with a liability equal to the assets collected. There is
never any fund balance in agency funds, since all assets held are owed to others.
Revenues include tuition and fees; government appropriations; government grants
and contracts; private gifts, grants, and contracts; endowment income; sales and
services of educational activities; sales and services of auxiliary enterprises (such as
residence halls, food services, intercollegiate athletics, and college stores); sales and
services of hospitals (if operated by the university); other sources (such as expired
term endowments, annuities, and life income agreements); and independent
operations (such as government research laboratories).
Expenditures include educational and general expenditures, auxiliary enterprises,
hospitals, and independent operations.
Accounting for Voluntary Health and Welfare Organization and Other Not-for-
Profit Organizations
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 the organization’s usual programs in exchange for their
contributions. They include the following:
1. Contributions
2. Special Events Support
3. Legacies and Bequests
4. Proceeds from fund raisers
Revenues are inflows of resources resulting from a charge for service from financial
activities or from other exchange transactions.
1. Membership Dues
2. Program Service Fees
3. Sales of Publications and Supplies for proceeds from the sales of these items.
4. 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. Examples of program
services are research, public education, community services and patient services.
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, and
expenses of these items are so classified in the statement of activities.
In reporting expenses in the statement of activities, the functional classifications
might appear as follows:
Expenses
Program Services – it focuses on social services.
Research
Public Education
Professional Education
Community Services
Supporting Services – it focuses on administration and fund-raising activities.
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 the 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 account 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 of a
college or university. The assets do not belong to the organization.
Accounting Principles
Voluntary health and welfare organizations adhere to the accrual basis of
accounting. Revenues are generally recognized when earned and expenses are shown
when the related services of the organization are provided. Sources and uses of funds
are not merely classified as revenues and expenses, however, but are instead broken
down into categories.
 Donations of services should be charged to the appropriate expense with an
offsetting credit to support.
 Donated property should be recorded at fair market value on the date of the gift.
 Pledges should be recognized net of uncollectible amounts, and pledges or cash
donations that will not be spendable until a future period should be shown as a
deferred credit on the balance sheet.
Voluntary Health and Welfare Organization also must provide a Statement of
Functional Expenses. This statement reports expenses by both function (program
and supporting) and by their natural classification (salary expenses,
depreciation expenses, etc)
A conditional promise to give depends on the occurrence of a specified future and
uncertain event to bind the promisor.
An unconditional promise to give depends only on the passage of time or demand
by the promise for performance.
A donor-imposed condition provides that the donor will have his resources returned
(or will be released from the promise to give) if the condition is not met.
A donor-imposed restriction only limits the purpose or timing of use of the
contributed assets.
Gifts in Kind are reported as unrestricted support that increases unrestricted net
assets if the not-for-profit entity has discretion over the disposition of the resources
and a fair value can be reasonably determined. If the fair value cannot be determined,
the items are recorded as sales revenue when they are sold. If the not-for-profit entity
has little or no discretion over disposition of the items, the gifts in kind should be
accounted for as agency transactions.