ACCOUNTING PRINCIPLES

APPLICABLE TO NOT FOR

PROFIT ORGANIZATIONS
CLASSIFICATION:
3 CLASSES OF NET ASSETS

1. Unrestricted Core of the Financial Revenues and expenses are

2. Temporarily Restricted Statements presentation for accounted using ACCRUAL
3. Permanently Restricted not-for-profit entities BASIS OF ACCOUNTING

2 MAJOR SOURCES OF REVENUES:

4. Contributions
5. Regular Type of revenue
Such as:
a. Tuition fee for schools and universities
b. patient service revenue for hospitals
c. membership dues
d. sales of publications and supplies
e. program service fees for voluntary health and welfare organization
DIFFERENCES:

A. Only CONTRIBUTIONS ARE SUBJECT TO RESTRICTION while REGULAR TYPE OF REVENUE IS

UNRESTRICTED OR EVEN THOUGH RESTRICTED BUT MADE BY THE BOT.

B. CONTRIBUTIONS- considered as non-exchange transactions. It also includes non cash items or gifts in kind

EXCEPTIONS TO THE RULE:

if made for contributions of services and donated works of art.

DONATED SERVICES recognize only if:

1. Create or enhance nonfinancial assets
2. Require Special skills that are provided by individuals possessing those abilities.

NOTE:
 All of these items are recorded AT FAIR VALUE AT THE DATEOF THE GIFT OR DONATIONS were made. In
case of NON-CASH GIFT, corresponding expense is recorded.

 Revenues, gains and losses can be reported in each NET ASSET CLASS, but expenses are reported only in the
UNRESTRICTED NET ASSETS CLASS
RESTRICTION VERSUS CONDITION

 Restricted – it should be imposed by the donor.

• may either be PERMANENT OR TEMPORARY
 TEMPORARY RESTRICTION EXPIRES WHEN:
1. Stipulated time has elapsed
2. Stipulated purpose has been fulfilled
3. Useful life of the asset has ended

 Reclassifications of net assets that result from expiration of donor-imposed temporary restrictions.
Permanent restriction does not result to RECLASSIFICATION.

 Condition – necessary whether to recognize such donation as

• revenue, or
• Liability

 Donor-imposed conditions do not result reclassification. The promise to give assets becomes unconditional.
The effect is to INCREASE the classification of the net assets (whether unrestricted, temporary or permanent)

 Unconditional promise to give is reported in the period the pledges were made receive.
FINANCIAL STATEMENTS

Complete set of FS includes:

1. Statement of Financial Position (BS)
2. Statement of Activities
3. Statement of cash flows
4. Accompanying Notes.

In AICPA Audit and Accounting Guide for Health Care Organization, the basic FS for
HOSPITAL includes;
5. Statement of Financial Position (BS)
6. Statement of Operations (or Statement of Activities)
7. Statement of Changes in Net Assets, and
8. Statement of Cash Flows
Classification of Net Asets
These classes of net assets are TOTALLY DEPENDENT on the existence or absence of DONOR-IMPOSED
RESTRICTIONS.

 PERMANENTLY RESTRICTED NET ASSETS – 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.

 TEMPORARY RESTRICTED NET ASSETS – portion of net assets whose use is limited by donor-
imposed:
Stipulations that either expire (time restrictions)
Can be removed by the organizations fulfilling the stipulations (purpose restriction)

 UNRESTRICTED NET ASSETS – portion of net assets that carry no donor-imposed stipulations or
even though restricted but imposed by the BOARD OF TRUSTEES.
ACCOUNTING FOR NOT FOR PROFIT PRIVATE UNIVERSITIES/ COLLEGES

Accounting for revenues:

Private Universities and Colleges had 3 major groups revenues:

1. Educational and general revenues group, with accounts for

 student tuition fees
 Government appropriations
 Government grants and contracts
 Gifts and private grants
 Endowment income
 Other sources

2. Auxiliary enterprise revenues – revenues that nothing to do w/ education or aid support.

3. Expired Term Endowments – arising from reclassification of temporary restricted to unrestricted.

Accounting for Expenses:

1. Educational and general revenues group such as

 Accounts for instructions
 Research
 Public Support
 Academic Support
 Student Services
 Institutional support
 Operation and maintenance of plant
 Student aid expenditures

2. Auxiliary Enterprises expenses – these are related to auxiliary enterprise revenue

(e.g. salaries of employees @ canteen)
Fund Groups – universities/colleges use these fund groups and major fund groups subdivision.

FUND GROUPS MAJOR SUBDIVISION

1. Current Funds a. Current fund – unrestricted
b. Current fund – restricted
2. Loan funds
3. Endowment and Similar Funds a. Endowment Funds (“pure)
b. Term Endowment funds
c. Quasi-endowment funds
4. Annuity and Life Income a. Annuity funds
b. Life Income funds
5. Plant Funds a. Unexpended plant funds
b. Funds for renewals and replacement
c. Funds for Retirement and indebtedness
6. Agency Funds
ILLUSTRATIV
E EXAMPLE
ACCOUNTING FOR NOT FOR PROFIT PRIVATE HOSPITALS / HEALTH CARE
PROVIDERS
The funds used by hospitals and other health care providers for accounting purposes are slightly different from those used by
colleges and universities

GENERAL FUND – unrestricted fund used to account for day to day operations of health care provider and it
may be used by the governing board for any designated purpose other than restricted resources imposed by
grantors and donors.

1. Assets whose use is limited – assets set aside by governing board for identified purposes

2. Agency fund – may be used by hospitals account for fees collected as an agent for physicians who have
private practice patients coming to hospital offices provided to the staff physicians

3. Property and equipment used for general operations, and the related liabilities.
Property and equipment whose use is restricted are reported in the appropriate donor-
restricted fund.
DONOR-RESTRICTED FUNDS
1. Temporary restricted fund

a. Specific Purpose fund – used to account for principal and income in accordance with donors specified
restrictions\

b. Endowment fund – used by hospital to account for a trust where principal must be kept intact and
the income be expended for either current operations or a specific purpose in
accordance with the grantors wishes.
- may be in perpetuity or it may be a fixed term or until a specific event occurs.
- endowment fund that is for FIXED TERM is known as term endowment fund.

c. Plant replacement and expansion fund – restricted fund to account for a donors contribution that must
be used to acquire property, plant and equipment (PPE).

2. Permanently Restricted Fund – also known as endowment fund, but differs in term endowment fund is that the
PRINCIPAL must be maintained intact in perpetuity and only the income may be
used in accordance with the DONORS WISHES.
REVENUES AND GAINS

Revenue – reported in the period in which services are rendered.

Operating revenues consist of:
1. Patient Service revenues – includes room and board, nursing services, and other professional services.

 Charity care services provided free of charge to patients who qualify under a hospital’s charity
care policy – excluded from both gross and net patient service revenue

 Allowance accounts are used to reduce receivables for estimated deductions from revenues, as
well as estimated doubtful accounts.

DEDUCTIONS FROM REVENUES:

a. Courtesy allowances/ staff discounts – discounts to doctors and employees
b. Contractual Adjustments – discounts arranged with third party payors that frequently have
agreements to reimburse at less-than established rates

2. Premium fees revenues – also known as subscriber fee or capitation fees

• revenues from agreements which hospital provides any necessary patient services for a specific fee
• The fees are earned whether the standard charges for services actually rendered are more or less than the
amount of the fee.
• Reported Separately from patient service revenues
Continuation….

3. Other Revenue and Gains

a. Other Operating Revenues

 Includes revenue from services other than health care provided to patients as well as from sales and services
to persons other than patients.
Examples are:
•Tuition from schools operated by the hospital
•Rentals of hospital space
•Charges for preparing and reproducing medical records
•Room charges for telephone calls and television
•Proceeds from cafeterias
•Gifts shops, snack bars, donated medicine, linen and office supplies etc.

b. Non Operating Revenues – revenue not related directly to an entity's principal operations
 These items are primarily financial in nature and include unrestricted and donor-restricted pledges.
Examples are:
• gifts or grants,
• unrestricted income from endowment funds and maturing term endowment fund,
• income and gain from investments
• gains on sale of hospital property
 Investments are reported at FAIR VALUE with both realized and unrealized gains are included as part of
non-operating revenues.
CLASSIFICATION OF OPERATING EXPENSES
Operating expenses – reported on accrual basis and normally include functional categories for:
1. Nursing services
2. Other professional services
3. General Services
4. Fiscal Services
5. Administrative Services
6. Interest and Depreciation provisions

Provision for bad debts is an expense

Difference of Charity care and bad debt expense

Charity care – results from hospital’s policy of providing health care to individuals who meet certain financial
criteria

Bad debts – results from extending credit.

SEATWOR
K
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ACCOUNTING FOR NOT FOR PROFIT VOLUNTARY HEALTH AND WELFARE ORGANIZATIONS

- Organizations that fall into this group are those deriving their principal funding from general public in the form of Voluntary
contributions, From governments and from grants, which are then used to support health, welfare and community service
projects.

FUNDS USED BY VHWO

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 FULL ACCRUAL BASIS.

Distinction between Public Support and Revenues

 PUBLIC SUPPORT – inflow of resources from voluntary donors who receive no direct personal benefit from the
organization’s usual program in exchange for their contributions.
This includes the ff:
•Contributions
•Special events support
•Legacies and bequest
•Proceeds from fund raisers
Continuation….

 REVENUES – inflows of resources resulting from a charge for service from financial activities or from other exchange
transactions. This includes the ff:
• Membership Dues
• Program Service fees
• Sales of publications and supplies for proceeds from the sales of these items
• investments income e.g. interest dividends and other earnings
EXPENSES – classified as program services and supporting services are reported on a functional basis under these
classifications:
• Program services- expenses incurred in providing the organization’s social service activities
• Supporting Services – consist of administrative expenses and fund raising costs.

 Expenses are recorded at FULL ACCRUAL BASIS in a manner similar to that used by business organizations.
 In reporting expenses in statement of activities, the functional classification might appear as follows:
Expenses
Program Services
Research
Public Education
Professional Education
Community Services
Supporting Services
Management and general
Fund raising
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 is used to account for:

a. Land, Buildings, and Equipment acquired by the organizations;
b. Liabilities arising from acquisition or improvement of plant assets;
c. Current Assets restricted by donors or grantors for future disposition.

4. Endowment Fund – 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 – 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.