Not for profit budgeting and financial management 4e

Not for profit budgeting and financial management 4e

NOT-FOR-PROFIT BUDGETING AND FINANCIAL

MANAGEMENT Fourth Edition

John Wiley & Sons, Inc.

Copyright © 2010 by John Wiley & Sons, Inc All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

1 Nonprofit organizations—Finance 2 Nonprofit organizations—Accounting 3 Corporations—Finance

4 Corporations—Accounting 5 Budget in business I Title

To my lovely wife, Nancy

About the Author

Edward J McMillan, CPA, CAE,has spent his entire career in not-for-profit financialmanagement He has served as the controller of the national office of the AssociatedBuilders and Contractors and as the finance and membership director of theAmerican Correctional Association In 1993, McMillan was appointed faculty chairfor finance for the United States Chamber of Commerce’s Institutes for OrganizationManagement program

McMillan has written several books on not-for-profit financial management Hispublishers include the American Society of Association Executives, McGraw-Hill, theU.S Chamber of Commerce, and the American Chamber of Commerce Executives McMillan now concentrates solely on speaking, writing, and consulting on finan-cial management topics for associations and chambers of commerce He lives nearBaltimore, Maryland In his free time, he enjoys coaching youth sports and motocrossracing You may contact McMillan at P.O Box 771, Forest Hill, MD 21050; phone/fax: (410) 893-2308; e-mail: emcmillan@sprintmail.com Also see his Web site at www.nonprofitguru.com

Preface

Typically, not-for-profit organizations view the budget process as an annual exercise

in drudgery, tying up valuable staff time that could be spent on other activities Itdoesn’t have to be that way!

This handbook provides you with a new concept in budgeting that is easy toimplement and monitor, and that significantly reduces staff time spent on budgeting,

while ensuring true fiscal accountability The method is called continuous budgeting.

You should review this handbook in its entirety before you implement yourfinancial management system The processes and forms herein are interdependentand must be understood by management before the advantages of this system can

be realized This handbook is a guide to help managers customize the forms andprocedures described herein for use in their own organizations—it is not a referencemanual on taxes, depreciation, capitalization procedures, and other technical areas.There are other sources for that information Here you will find a discussion andformat that is both nontechnical and understandable The program that this hand-book teaches allows management to direct and control the organization, not becontrolled by an outdated, cumbersome, and often inaccurate budget and financialmanagement system

Edward J McMillan, CPA, CAE June 2010

Disclaimer

C H A P T E R

Important Terminology and Standards

TO PREPARE A BUDGET THAT IS REASONABLE,accurate, and understandable, a workingknowledge of terminology and accounting standards is vital The following listbriefly explains this terminology accordingly

➢ Favorable postal rates

➢ Exemption from Federal Unemployment Tax

➢ Employees can participate in 403(b) plans

➢ Often benefit from state programs such as exemption from sales taxes

Disadvantages:

➢ Severe restrictions regarding lobbying

➢ Lobbying for legislation must be “unsubstantial,” while lobbying regarding elections is prohibited

➢ Contributions are not tax deductible

➢ Lack of grant eligibility

➢ Full postage rates

➢ Not exempted from federal unemployment tax

➢ Employees cannot participate in 403(b) plans

➢ Generally don’t benefit from state programs

Accounting Periods

Accounting periods for not-for-profit organizations include:

➢ Calendar year When a not-for-profit organizations year begins on January 1 and

ends on December 31

Fiscal year Not-for-profit organizations that are not on a calendar year when their

accounting year does not begin on January 1stand does not end on December 31st

➢ Short period A not-for-profit organization uses this accounting period because it

started later than January 1 and changes its accounting year or terminates

In the case of an accounting period change, the not-for-profit organizationmust file Form 3115

Accounts Receivable

Monies owed to the organization are treated as an asset on the Statement of FinancialPosition Most auditors feel that outstanding dues should not be accorded Accounts

Receivable status as the dues outstanding rarely are legally binding Most auditing

CPAs feel that, unless there is a legal obligation to pay, the amounts should not belisted with Accounts Receivable

Accumulated Depreciation

The journal entries crediting Accumulated Depreciation are cumulative, and overtime the cost of the asset less Accumulated Depreciation will result in a book valueequaling scrap value or zero

American Institute of Certified Public Accountants (AICPA)

The AICPA is a professional association whose members are mainly CPAs

Amortization

Amortization is similar to depreciation but typically applies to leasehold ments or reduction of value of goodwill expenditures, such as copyrights purchasedand the like

improve-Typically leasehold improvements are amortized over the remaining time left inthe lease and nonfinancial assets are amortized over the shelf-life of the asset

Board-Designated Funds

There is a lot of confusion concerning such accounts While the Board of Directorscan allocate the use of funds for a specific purpose, these funds are subject to creditoraction However, most accountants agree that properly recorded restricted funds are

protected A term that should be avoided is a Board restricted fund because it implies

the asset was contributed Also, generally stated, the organization is usually less to remove the restriction(s) from a restricted transaction

power-Building and Land

When an organization purchases real property, a distinction of the value of the ing and the land should be computed The value of the building is capitalized as well

build-as the value of the land Only the value of the building will be depreciated (typicallyover 30 years) and the value of the land will not be depreciated, the theory being thatthe land will always exist

It is also important to note that the building must be presented at its historical

cost (plus improvements) on the Statement of Financial Position, even if it is

increas-ing in value.

Capitalization

Capitalization is treating a cash outlay as creating or increasing the value of an asset

on the Statement of Financial Position rather than classifying the cash outlay as anexpense on the Statement of Activity

Every not-for-profit organization should have a policy whereby purchases ofitems greater than the capitalization cut-off amount are capitalized and depreciated

Capitalization Cut-Off Point

This is the dollar amount under which a cash outlay will be treated as an expense andover which it will be treated as creating or enhancing the value of an asset

Certified Public Accountant (CPA)

A designation granted to individuals who have met the education requirements,passed the CPA examination, and have followed the continuing education creditsrequirements

Conflict of Interest Policy

A not-for-profit organization filing Form 990 is required to have a Conflict of InterestPolicy A Conflict of Interest Policy must be imposed on officers, directors, and man-

agers who are in a position to benefit financially due to a decision See also

Disquali-fied Person and Intermediate Sanctions.

Convention Cancellation Insurance

It is very common for not-for-profit organizations to have a substantial financialinterest relating to their convention, festivals, and the like If this is the case, contactyour insurance agent and request a Convention Cancellation Insurance application.Typically this insurance will make the organization whole in the event that a laborstrike, act of God, and the like affects the organization’s meeting

and reclassified as a revenue on the Statement of Activity Common examplesinclude dues and deposits received for exhibit booth deposits in advance.

Note:On first exposure, it may appear that amounts classified as deferred incomeshould be treated as an asset rather than a liability However, the future cannot bepredicted and there is no guarantee that the event will take place For example, what

if a fire resulted in canceling the event? Generally, the deposits from exhibitors wouldhave to be refunded, and that is why it is treated as a liability

Depreciation

Reducing the value of an asset over time and according to established policy

For example, “an organization might utilize the Straight Line Method over thefollowing time periods:

Electronic Equip 3 years

Typically depreciation is accounted for by a journal entry as follows:

Please note that this is a hypothetical scenario

Direct Expenses

Direct expense are expenses that can be allocated to a specific activity or project.For example, the purchase of a single computer that will be specifically used byone activity or project would be a direct expense

Disclosure of Information Policies

This is a not-for-profit organization’s policy on what federal and state forms are openfor inspection by the general public, members, or contributors

Disqualified Person

A disqualified person is any person in a position to exercise substantial influence

over the affairs of the not-for-profit organization See also Intermediate Sanctions.

Dues

There is a disagreement among accountants whether or not uncollected dues qualify

as accounts receivable, as there is rarely a legal obligation for the member to pay It hasbeen the author’s experience that recording outstanding dues as accounts receivable

is the most common reason not-for-profit organizations experience financial ties It is the author’s suggestion not to classify outstanding dues among legitimateaccounts receivable but rather detail this amount on the Executive Summary.

difficul-Excess Benefit Transactions

See Disqualified Person and Intermediate Sanctions.

Executive Summary

An Executive Summary is a written explanation accompanying the internal financialstatements that explains items in the statements that a reader could not pull out ofthe numbers For example, consider a dollar amount for rent in the financial state-ments This may be explained in the Executive Summary as to how much square feet

is leased, the current rent per square feet, lease escalation clauses, and maturity date

Form 990-N is an electronic information IRS filing for very small not-for-profit

orga-nizations that do not regularly have gross receipts over $25,000

This is required to report an unrelated business income tax (UBIT) that must be filed

if the not-for-profit organization has $1,000 or more from an unrelated source, even if

Typically a 501(c)(3) organization formed by a 501(c)(6) organization to be eligible for

contribution deductibility, grant eligibility, and the like See also 501(c)(3),

advan-tages and disadvanadvan-tages

Functional Accounting

When certain revenues and expenses are credited to or charged by policy to variousdepartments, functions, or units, the resulting statements are based on functionalaccounting Most not-for-profit organizations have numerous functions For report-ing purposes, the organization must have two functions: administration and pro-gram services (Program services are the total of all departments with the exception

Generally Accepted Accounting Principles (GAAP)

GAAP are accounting principles promulgated by the Financial Accounting dards Board (FASB) and the AICPA that guide the work of auditing CPAs

Stan-Generally Accepted Auditing Standards (GAAS)

GAAS are rules that auditing CPAs must follow when auditing an organization

Group Returns

A central, parent, or similar not-for-profit organization can file a group return for two

or more subordinate organizations that are:

1 Affiliated with the central organization

2 Subject to the central organization’s supervision or control

3 Included in a Group Exemption Letter that is still in effect

4 Using the same accounting period as the central organization

on Form 990 and include the following:

1 Professional fund raisers

2 Law and accounting firms

IRS Web Site

Any person can go directly to the IRS web site to download forms, schedules, andinstructions, which is at www.irs.ustreas.gov/

Journal Entry

A journal entry is an accounting transaction not triggered by making a deposit orwriting a check Common transactions requiring journal entries include bank servicefees, depreciation, amortization, and the like

2 Manages a segment of the organization of 10 percent or more of the tion’s activities, assets, income or expenses.

organiza-Note:key employee’s compensation is reported on Form 990 if the employee’scompensation is $150,000 or more

Leasehold Improvements

When an organization expends money to improve property over the capitalization

cut-off point that they do not own, the outlay—the leashold improvement—will be

capitalized and classified as an asset on the Statement of Financial Position

The reason behind this is that improvements of non-owned property stay withthe property after the lease expires Common examples are wall-to-wall carpeting,electrical improvements, and the like

sep-Mission Statement

A not-for-profit organization filing Form 990 should have a mission statement that isincluded on Form 990 and communicated to officers, directors, managers, keyemployees, and the like

Ogden, UT

The IRS service center, located in Ogden, Utah, is where forms 990, 990-EZ, and 990-Nare filed for domestic not-for-profit organizations

Optional Proxy Tax

The optional proxy tax is a tax imposed on not-for-profit organizations that spendgreater than $2,000 on lobbying The tax is recorded on Form 990-T

Permanently Restricted Net Assets

This account is used if an organization receives a contribution that has been nently restricted by the donor, meaning that the organization cannot use these fundsand they hold the contribution in perpetuity The use of the earnings of a perma-

perma-nently restricted net asset is dictated by the donor The earnings may be unrestricted or

temporarily restricted It is prudent not to comingle a permanently restricted net

asset cash with unrestricted cash and these assets should be shown in proximity withfixed assets on the Statement of Financial Position Permanently restricted net assetsare usually cash, equity securities, debt securities, or real estate.

Prepaid Expenses

Prepaid expenses are monies that the organization expended for which it will receive

a future benefit and treated as an asset on the Statement of Financial Position A mon example is a deposit made to a hotel for an event to be held in the future Afterthe event is concluded, this amount is taken out of the prepaid expense asset accountand reclassified as hotel expense in the Statement of Activity

com-Private Enurement

See Disqualified Person and Intermediate Sanctions.

Program Service Expenses

These are expenses directly involved in benefitting members, contributors, and thelike Program service expenses must be accounted for separately and are recordedseparately on Form 990 Program services expenses do not include fund-raising ormanagement/general expenses

Records Retention and Destruction Policy

A not-for-profit organization filing Form 990 is required to research federal, state,and local regulations affecting how long records must be kept before destroying Alog should be maintained when records are disposed

Statement of Activity

As part of Statement of Financial Accounting Standards No 117, the terminology formany statements has been changed The Statement of Activity is the new term for theIncome Statement or Profit and Loss Statement

Statement of Financial Position

As a part of Statement of Financial Accounting Standards No 117, the terminologyfor many statements has been changed The Statement of Financial Position is thenew terminology for the Balance Sheet

Temporarily Restricted Net Assets

This account is used if an organization receives contributions for a specific purposethat will eventually be spent A common temporarily restricted contribution is a con-tribution to a scholarship fund

As in the case of permanently restricted net assets, it is prudent not to comingletemporarily restricted cash with unrestricted cash

Unrestricted Net Assets

Unrestricted net assets are comparable to the retain earnings of a commercialorganization in that it is the cumulative profit or loss since the organization wasformed

This account is also the book value net worth of the organization and has almostnothing to do with available unrestricted cash

Whistle Blowers Protection Policy

A not-for-profit organization filing Form 990 is required to have a Whistle BlowerProtection Policy, which prevents retaliation to employees reporting illegal actions,unethical actions, and the like

Wholly Owned Taxable Subsidiaries

Generally, a wholly owned taxable subsidiary is a stock corporation owned by thenot-for-profit organization and formed to reduce unrelated business income tax or toprotect tax-exempt status

Zero-Based Budgeting

This term is commonly used, but rarely are zero-based budgeting principles applied

The essence of zero-based budgeting is that prior transactions are not referred to

when compiling a new budget The vast majority of not-for-profit organizations have

expenditures that will continue into a subsequent year and prior history must be

referred to Examples include member newsletters, magazines, insurance, programservices, and the like

Auditing and Financial Standards

Statement of Auditing Standard No 99 (SAS 99)

SAS 99 directs auditing CPAs on how to consider fraud in a Financial Statement Audit

Highlights:

➢ Requires audit team to have a brainstorming among audit team members beforethe audit commences

➢ Requires a better understanding of the client’s business

➢ Requires inquiries of key personnel

➢ Requires analytical procedures based on professional skepticism

➢ Requires documentation of information gathering

Note: For a detailed explanation of this statement, review Preventing Fraud in

Not-For-Profit Organizations, published by John Wiley & Sons.

Statement of Financial Accounting Standards No 116 (SFAS 116)

SFAS 116 directs auditing CPA on how the accounting for contributions received andmade are to be handled

Highlights:

➢ When and how to recognize contributions in the financial statements

➢ Rules on classifying contributions are unrestricted, temporarily restricted, andpermanently restricted

➢ Rules for the recognition of contributed services into the financial statements

Statement of Financial Accounting Standards No 117 (SFAS 117)

SFAS 117 directs auditing CPAs in the way to prepare financial statements for for-profit organizations

not-Highlights:

➢ Terminology changes

➢ What a complete set of financial statements includes

➢ Explanation of net assets in the Statement of Financial Position

Statement of Financial Accounting Standards No 124 (SFAS 124)

SFAS 124 directs auditing CPAs on how to account for certain investments held bynot-for-profit organizations

Highlights:

➢ Investments include equity securities with determinable fair value

➢ Investments include debt securities with determinable fair values

➢ This statement does not apply to equity securities accounted for under the equity

method or to investments in consolidated subsidiaries

Statement of Financial Accounting Standards No 136 (SFAS 136)

SFAS directs auditing CPAs on how to account for transfer of assets to a not-for-profitorganization or charitable trust that raises or holds contributions for others

Highlights:

➢ Accounting for transactions between a not-for-profit organization or charitabletrust and another entity

➢ Contributions that are not technically contributions

➢ Disclosure of fund-raising expenses

➢ Guidance on situations where one organization has “variance power” over another

Note: For a detailed explanation of this statement, review Preventing Fraud in

Not-For-Profit Organizations, published by John Wiley & Sons.

Also, monies owed to the organization and expenses owed by the organizationare not recorded until the money is received or expended.

We will do a simple accounting exercise of transactions that face not-for-profitorganizations on either the cash or accrual method, do the accounting, complete thefinancial statements, and compare the two methods

Cash Method

In this example, the new not-for-profit organization has received an IRS tion that it is a 501(c)(3) organization on December 31 and opened its doors on Janu-ary 1 The following transactions occurred during January, and we will prepare thefinancial statements for the one-month period ended January 31, ignoring holidays:

determina-1 The Executive Director recruited 50 founding members at $1,000 each 36 paidduring January

The Executive Director opened a bank account and deposited the $36,000 into

an Unrestricted Cash Account

Treat the $36,000 deposit as an increase in cash available in the Unrestricted CashAccount (see Worksheet #1 in Exhibit 2.1) and the $36,000 will be treated as duesrevenue on the Statement of Activity

The $14,000 in unpaid dues is ignored on the cash basis of accounting

2 The Executive Director’s salary is $52,000 per year and the Staff Assistant’s salary

is $26,000 per year Ignore payroll taxes Paydays are biweekly on Fridays.Each employee received two checks The four checks total $6,000

Ignore in cash accounting, as no money went “out the door” until February

4 The following bills were received in January:

Office Supplies $250 Paid in January

Rent $1,000 Paid in February

Postage $500 Paid in January

Utilities $250 Paid in February

Accounting

➢ Supplies: Reduce unrestricted cash by $250 and record $250 office supply expense.

➢ Rent: Ignore as no money went “out the door” until February.

➢ Postage: Reduce unrestricted cash by $500 and record a $500 postage expense on

the Statement of Activity

➢ Utilities: Ignore as no money went “out the door” until February.

5 The organization’s annual meeting will be held in June The following tions occurred in January:

transac-➢ It paid a $1,000 deposit to the facility

➢ It received $15,000 in exhibitor deposits

Accounting

➢ $1,000 deposit Reduce unrestricted cash by $1,000 and record $1,000 in the hotel

deposit expense account on the Statement of Activity

14 Not-for-Profit Budgeting and Financial Management

➢ $15,000 exhibitor deposits Increase unrestricted cash by $15,000 and record a

$15,000 exhibitor deposit revenue on the Statement of Activity

6 The organization ordered $5,000 worth of office furniture The invoice was paid

➢ Purchase of furniture Reduce unrestricted cash by $5,000 and capitalize the $5,000

on the Statement of Financial Position

➢ Create a journal entry charging $42 to depreciation expense on the Statement ofActivity and record accumulated depreciation of $42 on the Statement of Finan-cial Position

Note:The original cost of $5,000 is reduced by $42 The difference, $4,958, isknown as Net Capitalized Assets on the Statement of Financial Position

7 The office insurance premium bill of $2,500 was received and paid in January

➢ It paid the $10,000 in January

➢ 35 orders of the books were received in January for a selling price of $25 per book.The books were sent out with invoices in January

➢ It received payment for 10 of the invoices in the amount of $250 in January, andthis was deposited

Restricted Fund Transactions

Transactions #9 and #10 involve permanently restricted and temporarily restrictedfunds It is important to recognize that these types of transactions almost alwaysapply to 501(c)(3) organizations for contribution tax implications

Permanently restricted funds are briefly defined as situations whereby the value of

the assets contributed (typically cash, equities, and property) that are restricted in

perpetuity The use of the earnings is dictated by the contributor If the earnings can be

used to help fund organization activity, the earnings are unrestricted revenues If the

earnings are to be used for a purpose established by the donor, the earnings aretreated as temporarily restricted net assets

It is very common for not-for-profit organizations to initiate temporarilyrestricted transactions via fund raising The most common temporarily restrictedaccounts are scholarships Typically, members or contributors are marketed viaappeals on dues statements

9 A wealthy member died and left $100,000 to the organization and stipulated thatthe $100,000 was permanently restricted and could not be spent The memberalso stated that the earnings could be used to help fund the organization’s activ-ities $100 in interest was received and deposited into the organizations unre-stricted cash account

Accounting

The organization wisely decided not to comingle the restricted cash with stricted cash The organization opened a new bank account titled PermanentlyRestricted Cash and deposited the $100,000 accordingly The Statement of FinancialPosition indicated a permanently restricted net asset in the Net Assets section of theStatement of Financial Position

unre-The $100 in interest is clearly unrestricted money unre-The organization deposited the

$100 in their unrestricted cash account

See the Statement of Permanently Restricted Net Assets for accounting inExhibit 2.4

10 The organization appealed for contributions to a scholarship account $10,000was received and $4,000 in scholarships were awarded

Accounting

Once again, the organization wisely decided not to comingle this money with stricted cash and opened up their third bank account named Temporarily RestrictedCash It paid the $4,000 in scholarships, leaving a $6,000 balance

unre-See the Statement of Temporarily Restricted Net Assets for Accounting in Exhibit 2.5

16 Not-for-Profit Budgeting and Financial Management

End-of-Month Accounting

For this section in the ongoing example, see Exhibit 2.1 through 2.6

➢ The Unrestricted Cash Account has a balance of $27,400 This amount is recorded

as unrestricted cash on the cash Statement of Financial Position

➢ The Permanently Restricted Cash Account has a balance of $100,000 that isrecorded on the cash Statement of Financial Position

➢ The Temporarily Restricted Cash Account has a balance of $6,000 that is recorded

on the cash Statement of Financial Position

➢ Unrestricted revenues total $51,350 and total unrestricted expenses are $18,992.This results in a profit of $32,358 This profit is titled Increase in Unrestricted NetAssets and is transferred to the Statement of Financial Position

Cash Accounting vs Accrual Accounting 17

18 Not-for-Profit Budgeting and Financial Management

Cash Accounting vs Accrual Accounting 19

20 Not-for-Profit Budgeting and Financial Management

Cash Accounting vs Accrual Accounting 21

EXHIBIT 2.4

Statement of Permanently Restricted Net Assets (endowments):

Cash Basis of Accounting for the One-Month Ended January 31

22 Not-for-Profit Budgeting and Financial Management

EXHIBIT 2.5

Statement of Temporarily Restricted Net Assets Cash Basis

of Accounting for the One-Month Ended January 31

Cash Accounting vs Accrual Accounting 23

EXHIBIT 2.6

Statement of Financial Position (balance sheet):

Cash Basis of Accounting for the One-Month Ended January 31

Cash Basis Summary

Under the cash basis of accounting, the organization had a profit of $32,358 and had

an unrestricted cash balance of $27,400 and appears to be very solvent in that theonly major expenses not paid are the newsletter invoice and January rent

Accrual Basis

We now do the same transactions under the accrual basis of accounting

The rules for accrual accounting are substantially different than the cash basis

Under accrual accounting revenues are recognized if the revenue has been earned and expenses are recorded if the expense has been incurred Also, accrual accounting

states that there is a requirement that revenues and expenses be recorded in the

We will now account for the same transactions on the accrual basis

1 The Executive Director recruited 50 founding members at $1,000 each 36 paidduring January

Accounting

Only $36,000 of the $50,000 dues were received and deposited in the UnrestrictedCash Account (see Worksheet #3 in Exhibit 2.7)

The $14,000 not yet received would not be included in accounts receivable, as

there is no legal requirement for these members to pay It will be ignored until

2 The Executive Director’s salary is $52,000 per year and the Staff Assistant’s salary

is $26,000 per year Ignore payroll taxes Paydays are biweekly on Fridays.Each employee received two checks The four checks total $6,000

Post $6,500 to Accrual Statement of Activity and $500 to Accrual Statement ofFinancial Position Decrease unrestricted cash by $6,000.

3 The bill for the January newsletter was received in the amount of $2,000 on ary 20 but not paid until February 20

Janu-Accounting

The $2,000 printing bill was clearly incurred in January but not paid until ary Post $2,000 to the Accrual Statement of Activity and start an accounts payableschedule (see Worksheet #6 in Exhibit 2.10)

Febru-4 The following bills were incurred in January:

Office Supplies $250 Paid in January

Rent 1,000 Paid in February

Postage 500 Paid in January

Utilities 250 Paid in February

Accounting

➢ Supplies: Reduce unrestricted cash by $250 and record $250 Office Supplies expense.

➢ Rent: Rent expense was clearly incurred in January Post $1,000 as Rent and add

$1,000 to the Accounts Payable Schedule (Worksheet #6 in Exhibit 2.10)

➢ Postage: Reduce unrestricted cash by $500 and record a $500 Postage Expense on

the Statement of Activity

➢ Utilities: Since this expense was incurred in January, put $250 as Utilities Expense

on the Statement of Activity and add $250 to the Accounts Payable Schedule(Worksheet #6 in Exhibit 2.10)

5 The organization’s annual meeting will be held in June The following tions occurred in January

transac-It paid $1,000 deposit to reserve the facility transac-It received $15,000 in exhibitor deposits

Accounting

➢ $1,000 deposit Reduce unrestricted cash by $1,000, but treat it as a prepaid

expense on the prepaid expense schedule (see Worksheet #7 in Exhibit 2.11) paid expenses represent monies paid for which the organization will receive afuture benefit

Pre-➢ $15,000 exhibitor deposits Increase unrestricted cash by $15,000 but treat the

trans-action as a deferred income on the Statement of Financial Position It is treated as

a liability, as in the event that the annual meeting is canceled the money would

have to be refunded to the exhibitors

6 It ordered $5,000 worth of office furniture The invoice was paid in January

Cash Accounting vs Accrual Accounting 25

Same as cash basis Reduce unrestricted cash by $5,000 and capitalize the $5,000

on the Statement of Financial Position

Create a journal entry charging $42 to depreciation expense on the Statement ofActivity and record accumulated depreciation of $42 on the Statement of Finan-cial Position

(See Worksheet #8 in Exhibit 2.12 and transaction #6 on the cash basis ofaccounting for a more detailed explanation.)

7 The office insurance premium bill of $1,200 was received and paid in January.This is another example of a prepaid expense as only 1/12 or $100 was anexpense incurred in January If the organization paid the insurance premiums on

a monthly installment basis, it only would have paid $100

➢ It paid the $10,000 in January

➢ 35 orders of the books were received in January for a selling price of $25 per book.The books were sent out with invoices in January

➢ It received payment for 10 of the invoices in the amount of $250 in January andthis was deposited

Accounting

➢ Create a new asset account titled Inventory and post the $10,000 book purchase

at cost in Worksheet #9 (see Exhibit 2.13) Note that the books cost $10 each and

inventories must be presented at cost and not selling price Decrease unrestricted

cash by $10,000

➢ 35 orders at a selling price of $25 per book equals a gross sales of $875 This is a

legitimate account receivable as the customers do owe the money to the zation Post $875 as publication sales on the accrual Statement of Activity Post

organi-$875 as account receivable in Worksheet #9 (see Exhibit 2.13)

➢ The $250 payments received is a reduction to accounts receivable Increase stricted cash by $250 Reduce accounts receivable by $250 in Worksheet #9 (seeExhibit 2.13)

unre-26 Not-for-Profit Budgeting and Financial Management

➢ The cost of goods sold is 35 books at $10 each, which equals $350 Post $350 ascost of goods sold on the accrual Statement of Activity Calculate the endinginventory value in Worksheet #9 (see Exhibit 2.13).

9 A wealthy member died and left $100,000 to the organization and stipulated thatthe $100,000 was permanently restricted and could not be spent The memberalso stated that the earnings could be used to help fund the organization’s activ-ities $100 in interest was received and deposited into the organization’s Unre-stricted Cash Account

Accounting

The accounting method is the same as the cash method The organization wiselydecided not to comingle the restricted cash with unrestricted cash It opened a newbank account titled Permanently Restricted Cash and deposited the $100,000accordingly The Statement of Financial Position indicated a Permanently RestrictedNet Asset in the Net Assets section of the Statement of Financial Position

The $100 in interest is clearly unrestricted money The organization depositedthe $100 in their Unrestricted Cash Account See the Statement of PermanentlyRestricted Net Assets in Exhibit 2.15 for accounting

10 The organization appealed for contributions to a scholarship account $10,00 wasreceived and $4,000 in scholarships were awarded

Accounting

The accounting method is the same as the cash method Once again, the zation wisely decided not to comingle this money with unrestricted cash andopened up their third bank account named Temporarily Restricted Cash It paidthe $4,000 in scholarships leaving a $6,000 balance

organi-See the Statement of Temporarily Restricted Net Assets for accounting inExhibit 2.16

Cash Accounting vs Accrual Accounting 27

28 Not-for-Profit Budgeting and Financial Management

Cash Accounting vs Accrual Accounting 29

EXHIBIT 2.8

Accrual Basis Accounting, Worksheet #4: Accounting for Dues

30 Not-for-Profit Budgeting and Financial Management

EXHIBIT 2.9

Accrual Basis Accounting, Worksheet #5: Accounting for Salaries