Banka: Accounting for a not-for-profit organization
Let’s start by defining a not-for-profit organization. It is a business venture that is formed for purposes other than generating a profit and if there is a profit, it is only used to further the goals of the organization.
In an unincorporated organization, there is simply an agreement between individuals and the members may be personally liable to the creditors for the full amount of any debts and the members can be sued personally. If there are any capital assets, the assets need to be registered in all the members’ names.
If the organization is incorporated, it is considered to be a separate legal entity and is recognized by the legal system as having rights and responsibilities and can enter into contracts, buy land, borrow money and have bank accounts in its own name. The characteristics of incorporation of a profit corporation also apply to a not-for-profit corporation. Examples of incorporated not-for-profit organizations are churches, schools, charity, medical providers, activity clubs, research institutes, museums, sports associations, volunteer services organizations or professional associations.
The not-for-profit organization can be incorporated in one or several provinces or can be federally incorporated. Not-for-profit organizations must apply to the CRA for charitable status to benefit from tax-exempt status and to issue tax deductible receipts to donors.
The BC Society’s Act sets out the rules for the incorporated not-for-profit organization that must be complied with in BC. Section 36 requires that proper accounting records be kept and sets out the minimum requirements. Section 38 defines the difference between a reporting society and a non reporting society. Section 39 and 40 provide some guidelines with respect to financial statements.
Part 5 of the act deals with the audit of the financial statements and lists the qualifications of the auditor. It indicates that a reporting society must have an auditor, but a society that is not a reporting society, does not need to have an auditor. Finally sections 64 and 65 indicate what is required as content in the financial statements and more detail can be found in the Society Act Regulations.
The Chartered Professionals Accountants (CPA) Handbook Part III – contains the accounting standards for Not-For-Profit Organizations. These standards should be followed by the bookkeeper/treasurer of the not-for-profit organization in order to have audit ready books and records. Part III of the Handbook explains those issues that are specific to not-for-profit organizations. The standard issues that pertain to both profit orientated and not-for-profit organizations can be found in Part II of the Handbook.
There are a number of items that are unique to the accounting process for not-for-profit organizations. One of them is the use of fund accounting. Some not-for-profit organizations receive funds from donors, will endowments and government grants that are earmarked for a specific purpose. Also, there may be situations whereby funds are required for a future purpose and are reserved or restricted for that future purpose. Examples of this could be a roof replacement on a building that the not-for-profit owns.
Fund accounting is the tracking of the funds and expenditures relating to a specific purpose. It is a self balancing set of accounts for each fund established by legal, contractual or voluntary actions of the organization.
Then there is the distinction between a restricted fund or deferral method of accounting for contributions. In using the restricted fund method the organization would report total general funds, one or more restricted funds and an endowment fund. In using the deferral method any contributions that are to be used in a future period are not recorded as income until the related expense has been incurred. If there are a number of funds, finding an accounting program to handle the accounting issues for the different funds can be a challenge.
Instead of an Income Statement there is usually a Statement of Operations which can also be called a Statement of Revenues and Expenses that provides the details of the transactions that occurred within the various funds. In addition, instead of a Statement of Retained Earnings there is a Statement of Changes in Net Assets, or if fund accounting is used, it can be called a Statement of Changes in Fund Balances and indicates the amount of net funding available to carry out future services.
Whether or not the restricted fund method or deferral method is used also affects how revenues are recognized and may require the set up, tracking and reconciliation of several deferral accounts. Capital Assets can be contributed to the organization making the determination of cost difficult.
Accounting for not-for-profit operations can be very challenging and assistance should be sought to have the records set up correctly upon inception.