Professional Documents
Culture Documents
Government Accounting
Government Accounting
Government Accounting
A number of privately organized not-for-profit organizations that possess many of the characteristics of
the governmental unit are found in our society. These organizations include professional organizations, schools,
colleges, and universities, hospitals, churches, charities and social service groups. Services of these units may be
offered only to closed membership groups or they may be offered to the general public. Most hospitals, trade
associations and membership organizations provide a statement of financial position and a statement of
revenues and expenses (activities) that report their financial position and results of operations for the entity as a
whole. Educational institutions, religious organizations and certain other not-for-profit organizations often
provide information on financial position, changes in financial position, and results of operations by fund groups
and not for the entity as a whole and funds flow statement.
Privately organized service organizations differ widely as to size, nature, and diversity of operations.
They may differ in the means they employ to finance their activities. Contributions are generally an important
part of the financing program, but the nature of the contributions and the use of such resources also differ.
Service organizations require books and records to summarize receipts and disbursements as well as
assets, liabilities and equities or net assets. Systems for achieving accounting and administrative control are
required. Budgets that provide for direction and control of proposed activities and financial statements that
summarize past activities are indispensable parts of an accounting program. Instead of emphasis upon
operating at a profit, emphasis centers on exactly how such resources are to be spent or utilized and in meeting
the service objectives for the units being organized.
Fund Accounting has been used to organize and manage resources for various purposes in accordance
with regulations, restrictions or limitations imposed by parties outside the institution, or with discretions issued
by the governing board. A clear distinction of funds that are extremely restricted and those that are internally
designated by action of the governing board has been maintained in the accounts and disclosed on the financial
reports. Fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash
and other financial resources with all related liabilities and residual equities, or balances, and changes therein
which are segregated for the purpose of carrying on specific activities or attaining certain objectives in
accordance with special regulations, restrictions or limitations.
- Unrestricted fund (sometimes called unrestricted current fund, general fund, or current unrestricted fund).
- Restricted fund (sometimes called restricted current fund or current restricted fund)
- Endowment fund (pure or term endowment)
- Agency fund (sometimes called custodian fund)
- Annuity fund and life income fund (sometimes called living trust fund)
- Loan fund
- Plant fund (sometimes called land, building, and equipment fund)
All not-for-profit organizations accounting for revenues and expenses are using the accrual basis of
accounting. It also requires the issued GAAP basis financial statements recognize depreciation expense on long-
lived assets. Depreciation should be recorded if the assets are gifts or it arises because of donations. Works of
art and historical treasures that meet the definition of “collections” need not be capitalized or depreciated.
Financial Statements
Financial statements prepared in accordance with the present GAAP represent a shift away from the
fund reporting to an emphasis on the organization as a whole. The equity account fund balance, has been
replaced with the term net assets. Under the present GAAP, it requires classifications of the organization’s net
assets based on the existence or absence of donor-imposed restrictions.
The financial statements display three classes of net assets: unrestricted, temporarily restricted, and
permanently restricted. Any changes of these three classes of net assets must be reported.
The Financial Statements reporting requirements are based on a 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:
1. 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.
2. Temporarily restricted net assets are the portion of net assets whose use is limited by donor-
imposed stipulations that either expire (time restriction) or can be removed by the organization
fulfilling the stipulations (purpose restrictions).
3. Unrestricted net assets are the portion of net assets that carry no donor-imposed stipulations.
The organization’s net assets, revenues, expenses, gains and losses are classified according to the three
classes of net assets. This division of net assets into permanently restricted, temporarily restricted, and
unrestricted classifications is the focal point in presenting financial statement for not-for-profit entities.
Revenues, gains, and losses can be reported in each net asset class, but expenses are reported only in
unrestricted net assets class.
Hospitals depend its large part on donations and grants, which often come with restrictions, Fund
accounting is required for hospitals in order to maintain accountability over restricted resources. Hospitals will
use normal accrual accounting methods, including the classification of costs as expenses rather than
expenditures, and will not record budgetary accounts or encumbrances on the books.
b. Permanently Restricted Fund is also an endowment fund but differs from a term-endowment
fund is that the principle must be maintained intact in perpetuity and only the income may be
used in accordance with the donor’s wishes.
Charity care services provided free of charge to patients who qualify under a hospital’s charity care
policy – are excluded from both gross and net patient service revenues..
Charity care services should be disclosed in the financial statements in the notes and is measured
based on the provider’s rates, cost units of service or other statistical measure.
Allowance accounts are used to reduce receivables for estimated deductions from revenues, as well
as estimated doubtful accounts. Deductions from revenues include:
a. Courtesy allowances – discounts to doctors and employees
b. Contractual adjustments – discounts arranged with third-party payors (ex. PhilHealth) that
frequently have agreements to reimburse at less-than-established rates.
2. Premium fees also known as subscriber fees, are revenues from agreements which a hospital
provide any necessary patient services for a fee.
3. Other operating revenues includes revenues from services to patients other than for health care
and revenues from sales and services provided to nonpatients. Ex. Proceeds from cafeterias, gift
shops, snacks bar, donated medicine, linen and office supplies.
Nonoperating Revenues records revenue not related directly to an entity’s principal operations.
Both Other Operating Revenue and Nonoperating Revenue can be lump as one account and be
called, as Other Revenue and Gains.
As in the case of hospitals, resources designated by the Board of Trustees are still
considered unrestricted, since they lack externally-imposed restrictions.
2. 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 designed to hold
assets, not liabilities. Restricted amounts represents 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.
3. Endowment and Similar 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.. It may be spent after a specific period of time has passed or a certain event has
occurred.
Quasi-endowment funds are not 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 funds 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.
4. Annuity Funds and Life Income funds. Annuity funds are resources given to the university
on the 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 balances becomes
expendable by the university
5. 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 the following:
(1) unexpended plant funds contain liquid assets which are to be used to acquire new
plant assets in the future.
(2) funds for renewals and replacements contain liquid assets which are to be used to
replace existing plant assets as needed,
(3) funds for retirement of indebtedness contain resources to be used to make principal
and interest payments on debts incurred to acquire plant assets, and
(4) investment in plant consists of the fixed assets themselves and any long-term debt
issued in connection with acquisitions of these assets.
6. 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.
Revenues include tuition and fees; government appropriations; government grants and
contracts; private gifts, grants and contracts.
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 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.
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 – it focus on social services
Research
Public Education
Professional Education
Community Services
Expenses are recorded on 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.
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 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. This fund is similar to agency fund of a college or university. The assets do
not belong to the organization.
Financial Statements
For VHWO – Statement of Functional Expenses. This statement only lists expenses by function.
Statement of Financial Position. Presented for the entire entity. Its purpose is to provide relevant
information about the organization’s assets, liabilities and net assets. Certain principles
followed:
a. Cash or other assets that have restrictions imposed by the donor, limiting the use of those
assets to long-term purposes should be segregated from other assets that are unrestricted.
b. Net assets should be segregated into three classes within the statement. These will include
unrestricted, temporarily restricted, and permanently restricted net assets.
c. The nature and timing of donor restrictions must be disclosed. Voluntary restrictions of
unrestricted net assets by the entity’s governing body, resulting in board-designated funds,
may be disclosed.
Different types of restriction that may be placed on assets.
Statement of Activities
The statement of activities is also presented for the entity as a whole. Its primary focus is to provide
relevant information about:
a. The effects of transactions and other events and circumstances that change the amount and
nature of net assets.
b. The relationships of those transactions and other events and circumstances to each other.
c. How the organization’s resources are used in providing various programs or services.
This statement is similar to that presented by a business enterprise. They may use either direct or
indirect method in presenting the statement from operating activities.
Its primary purpose is to provide relevant information about the cash receipts and cash payments of an
organization during the period.