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The financial statements required for Non-government, not for profits include a balance sheet, a statement of
activities, and a cash flow statement. Voluntary health and welfare organization also provide a statement of
functional expenses.
Functional Classifications include the following:
Instructions Expenses for the instruction program.
Resource Expenses to produce research outcome.
Public Service Expenses for activities to provide no instructional services to external groups.
Academic Support Expenses to provide support for institutions, research and publications.
Student Services Amounts expended for admissions and register and amount expended for students emotional, social
and physical well-being.
Institutional Support Amounts expended for administration and the long-range planning of the university.
Operation and Maintenance of Plant Expenses of current operating funds for operating and maintaining the physical
plant (net amount to auxiliary enterprises and university hospital)
Student Aid Expenses from restricted or unrestricted funds in the form of grants, scholarships or fellowships to
students.
Classification of Net Assets
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 restrictions) 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.
Accounting for Hospitals
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.
Types of Funds
In general, there are two types of funds used by a hospital:
1.
General (Unrestricted) Fund account for all resources of the hospital which are not subject to outside
restrictions. They are used for day-to-day operations. Note that board-designated funds are unrestricted.
Designation is an internal process which can be altered at the discretion of the Board of Trustees of the
hospital. Restrictions are externally imposed and not subject to alteration by the board. Items in this
category include:
a.
Assets whose use is limited include assets set aside by the governing board for identified purpose.
b.
Agency Funds are included in General Funds as both an asset and a liability. They are used to
account for fees collected as an agent of physicians who have private-practice patients coming to
hospital offices provided to the staff physicians.
c. Property and equipment used for general operations, and the related liabilities.
Property plant and equipment whose use is restricted are reported in the donor-restricted fund.
2.
Donor-Restricted Funds accounts for temporarily restricted and permanently restricted resources. This
class is subdivided into:
a.
Temporary Restricted Fund may be a specific purpose fund, a term endowment fund, or a plant
replacement and expansion fund. An annuity and life income fund may also be included.
a.1
Specific Purpose Fund is a restricted fund used by health care providers to account for
principal and income in accordance with donors specified restrictions.
a.2
Endowment Fund is used by hospital to account for a trust where the principal must be kept
intact and the income be expanded for either current operations or a specific purpose in
accordance with grantors wishes. An endowment may be in perpetuity, or it may be fixed
term or until a specific event occurs.
a.3
Plant Replacement and Expansion Fund is a restricted fund used by hospitals and other
health care providers to account for donors contributions that must be used to acquire
property, plant and equipment.
b. Permanently Restricted Fund is also an endowment fund but differs from a 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.
Not-for-profit Organization Accounting (2 of 6)
Premium Fees also known as subscriber fees or capitation fees, are revenues from agreements which a
hospital provides any necessary patient services (perhaps from a contractually established list of services)
for a specific fee. The fee is usually a specific fee per member per month. The fees are earned whether the
standard charges for services actually rendered are more or less than the amount of the fee-i.e., without
regard to services actually provided in the period. Therefore, they are reported separately from patient
service revenues.
This is a growing portion of hospital revenues in many hospitals.
3.
Other Operating Revenues includes revenues from services to patients other than for health care
and revenues from sales and services provided to nonpatients. This classification might include
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, gift
shops, snack bars, donated medicine, linen and office supplies, etc.
The control account Non-operating Revenues records revenue not related directly to an entitys
principal operations. These items are primarily financial in nature and include unrestricted and donorrestricted pledges, gifts or grants, unrestricted income from endowment funds, maturing term endowment
funds, income and gain from investments, gains on sale or hospital property. Investments are reported at
fair value with both realized and unrealized gains included as part of non-operating revenue.
Note: The Other Operating Revenue and Non-operating Revenue can be a lump as one account and be
called, as Other Revenue and Gains.
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
organizations 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 organizations 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 organizations 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.
3.
4.
Current Fund Restricted. This fund is used for operations, but only in accordance with a donor or
grantors specifications.
Restricted pledges to be used to promote the adoption of handicapped children would be recorded in this
classification.
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.
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.
Not-for-profit Organization Accounting (5 of 6)
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.
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