A not-for-profit organization is aimed at pursuing its objectives and keeping it running but doesn’t earn a profit for its owners. Not-for-profit organizations are mainly charities or public service organizations. These organizations must be designated as non-profit the moment they are created and must act according to the provisions of the statutes governing not-for-profit organizations.
When a not for profit organization receives a gift, it would be recognized immediately; it is received. The type of fund it should recognize as the revenue would, however, depend on the reasons as to why it was restricted. It is recognized as contribution revenue since it involves the transfer of money and other assets to a not for profit organization without any expectation of services being provided to the contributor directly. Examples of contributions can be in the form of government grants, donations of cash and or cancellation of liabilities. The revenue is debited from the cash account, and the restricted fund is credited.
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The related expense is debited in Net Assets from restriction while the cash account is credited. In the statement of activities, revenue is recognized as negative revenue. It is the timing of recognition of contribution revenue that typically creates confusion. The inconsistency between the fund types in which the revenues and expenses are reported comes about as a result of contributions being classified based on whether they are restricted permanently, temporarily or unrestricted.
Permanently restricted contributions may never be spent while temporarily restricted contributions may be spent after the imposed restrictions have been met or after a specific period. Unrestricted contributions, on the other hand, may only be spent after the donor’s restrictions have been met. This is however essential as it helps in ensuring that there is a proper presentation of revenue in the statement of activities and net assets.
