NFP Acctg.

Concepts - 1

Chapter-One
Not-for-Profit Accounting
Basic Concepts

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NOT-FOR-PROFIT ACCOUNTING
 Governmental units (state & local)
 Colleges and Universities
 Hospitals
 Voluntary Health and Welfare Organizations
 Others
 Trade & Professional associations
 Performing arts associations
 Religious organizations
 Museums and art districts
 Research & Scientific organizations
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Why study NFP Accounting?

 Emphasis on CPA Exam
 May audit an NFP Entity
 Employment by NFP Entity
 Voluntary service to an NFP Entity

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Importance of Governmental Accounting

 Absence of profit removes an important internal control
 Allocation of limited resources to unlimited needs creates
public debate
 Focus on methods used to generate financial sources and
the uses made of those funds
 Need to keep public informed (Stewardship)
 Massive
 Federal government
 50 State governments
 Thousands of local governmental units

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GOVERNMENTAL VS FOR-PROFIT ENTITIES

1. Governmental entities collect resources and make

expenditures to fulfill societal needs.
2. Generally, governmental entities do not have a
profit motive.
3. Government entities have legal authority for their
existence, revenue raising powers through taxation,
and mandated expenditures to provide services.

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GOVERNMENTAL VS FOR-PROFIT ENTITIES

4. Governmental entities use comprehensive
budgetary accounting and fund accounting
(significant control mechanisms).
5. Primary emphasis in governmental accounting is to
measure and report on management’s stewardship.
6. Governmental entities typically are required to
establish separate funds to carry out their various
missions.
7. Many fund entities do not record fixed assets or
long-term debt in their funds. yabib F. 2011
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GOVERNMENT ACCOUNTING STANDARDS
 Municipal Finance Officers Association (1951)
 National Committee on Governmental Accounting
 (1968) “Governmental Accounting, Auditing, and Financial Reporting,” GAAFR
 Periodic updates - latest in 1994

 AICPA
 (1974) Industry Audit Guide - “Audits of State and Local Government Units”
 (1979) National Council on Governmental Accounting (NCGA) - Statement No. 1
 (1986) Audit and Accounting Guide - “Audits of State and Local Government
Units”

 GASB (1984)
 Created by FASB
 Responsible for maintaining and developing accounting and reporting standards
for state and local governmental entities
 Issues GASB Statements which are authoritative source of GAAP
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FINANCIAL REPORTING BY GOVERNMENT
ENTITIES
Definition of government entity (GASB
No. 14 - 1991)
 Appoints majority of organization’s governing
body
 Ability to impose its will on an organization
 Possesses financial benefit or assumes financial
burden from organization

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FINANCIAL REPORTING BY GOVERNMENT ENTITIES

(GASB NO. 34 1999-2003)

 Management’s Discussion and Analysis

 Basic financial statements
• Government-wide financial statements
• Fund financial statements
• Notes to financial statements
 Other supplementary information

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GOVERNMENT-WIDE
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FINANCIAL STATEMENTS

1) Statement of Net Assets

2) Statement of Activities
3) Reconciliation Schedules
4) Budgetary Comparison Schedules
5) Other Required Supplementary Information (RSI)

a) Management’s Discussion and Analysis (MDA)

b) Information about Infrastructure Assets
c) Footnotes yabib F. 2011
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FUND ACCOUNTING CONCEPTS
Fund = “A fiscal and accounting entity with a self-balancing
set of accounts”

 Unique nature of operations

 Legal requirements or limitations

 Distinct funding sources and/or activities or objectives

 Emphasis on financial controls

 Records cash and other resources, related liabilities, and

residual balances
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Fund-Based Financial Statements

Seek to Answer Three Questions
How did the
government
generate its
current financial
resources?

Where did What amount of

those financial financial resources
resources go? is presently held?
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FUNDS & ACCOUNT GROUPS

Governmental Funds
Fiduciary Funds and
1. General fund Similar Component Units
2. Special revenue funds 8. Pension funds and
3. Capital projects funds other employee
4. Debt service funds benefit trust funds
5. Permanent funds 9. Investment trust
funds
Proprietary Funds 10. Private-purpose
6. Enterprise funds trust funds
7. Internal service funds 11. Agency funds
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Coverage of Fund Accounting

Procedures

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GOVERNMENTAL FUNDS
15

 General Fund
 Routine operations
 Not accounted for elsewhere

 Special Revenue Funds

 Specific revenue sources
 Expenditures restricted to a purpose

Restricted activities
such as maintenance of
public parks

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GOVERNMENTAL FUNDS
 Capital Projects Funds

Account for the acquisition

or construction of major
capital facilities or
improvements that benefit
the public.

 Debt Service Funds

 Accumulation of resources for, and payment of principal
and interest on long-term general obligation debt

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GOVERNMENTAL FUNDS
Permanent Funds

Established in those cases in which the fund principal

must be preserved but that the income from the
permanent funds is required to be used for the benefit
of the government’s programs or its general citizenry.

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PROPRIETARY FUNDS Concepts -

18
ENTERPRISE FUNDS

Governments sometimes offer goods or services

for sale to the public. Such operations are
accounted for in an enterprise fund.

busses
airports

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sports utilities –Same GAAP as
arenas –commercial entities
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PROPRIETARY FUNDS 19

INTERNAL SERVICE FUNDS

Internal service funds account for the financing

of goods or services provided by one department
or agency to other departments or agencies, on a
cost reimbursement basis.

centralized vehicle supplies

purchasing pools inventory
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FINANCIAL STATEMENTS 20

Government Funds

1. Balance sheet
2. Statement of revenue,
expenditures and changes
in fund balance
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Statement of Net Assets

Note that we
keep the
Governmental
Activities
separate from
the Business-
Type Activities.
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Statement
Also note that of Net Assets
this statement
does not give
information
about
Fiduciary This is consistent with the
economic resources
Funds management focus which only
includes assets and liabilities
that are available to use for
governmental purposes.
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Statement of Activities

The net for a given

function is determined
horizontally, while the
totals for expenses
and revenues are
determined vertically.
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BASIS OF ACCOUNTING GOVERNMENTAL FUNDS

 Modified Accrual
 Applications of modified accrual
 Revenues recorded when measurable and
available to finance expenditures in current
period
 Expenditures recorded in period when liabilities
are measurable and incurred

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BUDGETARY ACCOUNTING
Formally recorded in accounts
 Operating budget
 Capital budget

Legal basis for action

Emphasis on control
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EXPENDITURE PROCESS
 Appropriation
 Legal authority to expend resources
 Recorded as part of budget
 Encumbrance
 Recorded when order is placed for goods or services
 Control function
 Expenditure
 Recorded when goods or services are received
 Voucher system
 Disbursement
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ENCUMBRANCES
Reservation of appropriations
Outstanding at fiscal year end
 Lapsing = authority expires and must be
re-established in following year
 Non-lapsing = spending authority carries
over to the following year

Final result of either method is identical

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REVENUE CATEGORIES
 Derived tax revenues
 Imposed non-change revenues
 Government-mandated non-exchange
transactions
 Voluntary non-exchange transactions

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RECOGNITION OF REVENUE
 Property taxes
 Accrued when levied and available (often basis for ST financing)
 Current year and collected within 60 days
 Net of estimated uncollectable
 Maintain current/ delinquent classification
 Interest on investments & delinquent taxes
 Accrued when earned available
 Income and sales taxes
 When subject to accrual (measurable and available)

 Miscellaneous revenues (fees, fines, licenses)

 Cash receipt
 Grants, entitlements, shared revenue
 When local government has the right to receive (meets eligibility
requirements
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RECOGNITION OF EXPENDITURES
 Personal services & normal operating items
 Cash payment

 Goods & services

 When received

 Capital outlays for long-term facilities

 In the period of acquisition

 Interest on long-term debt

 Period when payable
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INVENTORY EXPENDITURES
 Purchase method
 Acquisition = Expenditure
 Consumption method
 Use of inventory = Expenditure

Material amount of inventory

 Recognition as an asset
 Reservation of fund balance

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INTERFUND TRANSFERS & TRANSACTIONS
 Inter-fund loans
 Usually short-term (rec. or pay. on balance sheet)
 Inter-fund services provided and used
 Formally called “quasi-external transactions
 Would be revenue or expenditure with external parties
 Inter-fund transfers
 To be used by receiving fund for operations
 Not expected to be repaid
 Not revenue for receiving fund (already shown in transferring
fund) – avoids “double counting”
 Inter-fund reimbursements
 Initially made from fund
 Properly chargeable to another fund yabib F. 2011