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Introduction to non-for-profit accounting

Introduction to non-for-profit accounting

1. General aim of non-for-profit accounting

Unlike businesses that operate for profitable gain, not-for-profit (NFP) entities have no shareholders. They do not have to satisfy investors with regular reports of activities that could eventually lead to future gain. On the other hand, NFP organizations are regularly entrusted with millions of dollars in donations by individuals or entities that want to make sure their gifts are being used wisely. Accounting for these NFP entities is therefore somewhat different than accounting for a profit-oriented company.

2. Net asset categorization

Corporations generally have two categories of assets — short term and long term. Both categories are utilized to create shareholder value. By contrast, most of a NFP’s assets come from donations, although some money can be gained internally by investing donated assets. Donors can sometimes tell the organization how it must use the contributed property, which means that the NFP must account for three different categories of net assets.

The first category is unrestricted net assets. This class of assets can be used in any way and carries no donor-imposed restriction. Expenses are generally deducted from this category of assets. The second category is temporarily restricted net assets. An asset belongs in this category when the donor has specified when it can be used or how it can be used. An asset is not restricted if the organization itself earmarks unrestricted funds for a specific project. The final category is permanently restricted net assets. These are usually investment assets given to the organization under the stipulation that only the funds gained by the asset can be used. The original property itself can never be used. An example would be a donation of real estate property that cannot be sold for cash. Endowments are a common source of permanently restricted assets.

When the temporary restrictions on an asset have been satisfied, the property is transferred to unrestricted assets. Let’s take a look at an example of how a non-for-profit organization accounts for contributions and asset shuffling. XYZ, a fictitious NFP entity involved in cancer research, receives $200,000 in unrestricted cash from donors as well as $50,000 from one donor who stipulates that the money must be used for research lab supplies. Below is the initial journal entry for the contributions. Notice the use of categorization in the entry.

Account NamesDebitsCredits


     Contributions – Unrestricted 


     Contributions – Temporarily Restricted 


The Contribution accounts are similar to revenue accounts for profit-oriented businesses. Now let’s see what happens when XYZ pays for research supplies to satisfy the donation restriction.

Account Names







Reclassification from Temporarily Restricted
Assets – Satisfaction of Restrictions


     Reclassification to Unrestricted Assets –
     Satisfaction of Restrictions


3. Non-for-profit financial statements

NFP’s, like for-profit corporations, produce financial statements for donors and other stakeholders. The statements are similar, but not exactly the same.

The statement of financial position is similar to a balance sheet – it shows the NFP’s assets, liabilities, and net assets (separated into the three categories discussed previously) as of a specific date. The statement of activities is similar to an income statement. A major difference is that each category of assets is tracked separately. A statement of activities, therefore, has three columns, not just one. The statement has a section for gains, a section for re-classifications, and a section for expenses.

An important distinction to make in the statement of activities is between program expenses and administrative expenses. Donors want to know that money is being used more for the organization’s charitable purpose and less for advertising and salaries. This distinction is what is referenced by the common advertising phrase, “X cents of every dollar given is used for charitable purposes.”

The statement of cash flows is the same as the cash flow statement of a corporation. It includes sections for operating, investing, and financing activities.

Introduction to non-for-profit accounting

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