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Not for profit accounting, formation & reporting
4-COLOR GLOSSY THE SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING THE SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING LAURENCE SCOT, MBA, CPA SCOT Not-for-Profi t Organizations & Charities Praise for THE SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING “There are numerous publications about the NFP industry, but not many that give a good fundamental understanding of the accounting principles. The material in this book will be of great help to new employees as well as a good commonsense reference for those with experience. It clearly explains some of the more diffi cult accounting concepts particular to Not-for-Profi ts.” —Richard Tierney, Director of Finance, North Shore Animal League America “This book is a concise, complete review of the fundamentals of Not-for-Profi t accounting and governance. Every topic is covered with a directness and honesty that builds confi dence in those who need to learn how to do their jobs well. This is just what we need in today’s choppy Not-for-Profi t waters.” —Rev. Luke L. Travers, OSB, Business Offi cer, Delbarton School/St. Mary’s Abbey “Larry Scot’s book is a clearly written step-by-step guide on how to set up and maintain accounting records. Every Not-for-Profi t fi nancial executive should have this book on their shelf for reference. I highly recommend this book.” —Gail Rizick, CPA/ABV/CFF, CVA, Cr.FA, ASA YOUR A-TO-Z GUIDE TO NOT-FOR-PROFIT FORMATION, ACCOUNTING, AND REPORTING I f you need basic, easy-to-understand information on how Not-for-Profi t organizations are formed, how they’re structured, and the unique accounting and reporting issues they face, The Simplifi ed Guide to Not-for-Profi t Accounting, Formation, and Reporting is the only resource you need. This comprehensive guide provides you with expert advice on how to maintain the fi nancial “books” of a typical Not-for-Profi t entity and what is needed to comply with most reporting requirements. Plus, it lays out what a Not-for-Profi t organization is, the rules it must follow, the role and responsibilities of its board of directors, and the various regulatory agencies that Not-for-Profi ts must report to. Straightforward and hands-on, this effective reference will help you navigate through all of the key accounting and reporting issues unique to the Not-for-Profi t world, including: ■ Step-by-step instructions for forming a Not-for-Profi t ■ Not-for-Profi t internal controls and fi nancial statements ■ Developing a “chart of accounts” and operating budgets ■ Not-for-Profi t accounting rules and GAAP ■ Everything you need to know about the new Form 990 ■ Accounting for unrestricted and restricted contributions, grants, and other revenue ■ Plus much more! Whether you are performing accounting functions, responsible for fi nancial management, or simply want to understand Not-for-Profi t accounting, operations, and reporting, The Simplifi ed Guide to Not-for-Profi t Accounting, Formation, and Reporting is a great and handy book to have around for easy reference. LAURENCE SCOT is the cofounder and comanaging partner of Skody Scot & Company, a midtown CPA fi rm formed in 1990 that specializes in servicing the Not-for-Profi t community. Scot has taught undergraduate and graduate classes at several colleges; been lecturing and giving seminars to CPAs, bankers, NFP D&Os (directors and offi cers), managers, and entrepreneurs for over twenty years on a variety of subjects; and is the creator of the fi rst in-class certifi cate program in Not-for-Profi t accounting and governmental reporting. ISBN: 978-0-470-57544-4 $49.95 USA/$59.95 CAN E1FFIRS 04/09/2010 21:56:28 Page 2 E1FFIRS 04/09/2010 21:56:28 Page - Additional Praise for The Simplified Guide to Not-for-Profit Accounting, Formation, and Reporting ‘‘This book is fantastic! Not-for-profit accounting can be quite complex at times, but this book cuts right to the point and provides easy-to-understand answers to difficult questions. I would recommend it to anyone and everyone who works in a financial capacity at a not-for-profit organization.’’ —Alina Yavorovskaya, EVP of Finance and Administration and CFO, Seeds of Peace ‘‘Laurence Scot has created an extremely practical, useful, and easy-to-use guide that is a must read for anyone and everyone who is interested in not-for-profits. Whether you are starting a not-for-profit or are a board member, an officer, or a current or future staff accountant, you will greatly benefit from this valuable and comprehensive book.’’ —Ece A.J. Yilmaz, MBA, CMA, CBM, PMP, Executive Director, American College Nutrition ‘‘This is a definite read for anyone involved in the not-for-profit industry, regardless of your level of prior knowledge. The not-for-profit world has its own rules, and it is your responsibility to know them. Thankfully, Laurence Scot has managed to explain all the basic need-to-knows in very clear words.’’ —Filip Johansson, Director of Finance and Operations, Swedish-American Chamber of Commerce, Inc. ‘‘Accounting can’t be made too simple for me. If you want to start a not-for-profit company or serve on a board, Laurence Scot’s simplified guide will bring the mystifying world of not-for-profit accounting into focus. Clear and straightforward, this guide is the best answer to all my questions.’’ —Pia Lindstro ¨ m, TV and radio broadcasting ‘‘As a trustee and treasurer of a private day school, this book equipped me with all of the concepts associated with not-for-profit accounting to allow me to excel at performing my responsibilities as a fiduciary.’’ —Susan Levitt, private school trustee and treasurer ‘‘While there is nothing particularly simple about not-for-profit accounting, this book provides a veritable to-do list for organizations of any size. Larry Scot’s book is an excellent resource.’’ —Eric Jorgensen, Finance Associate, Me´decins Sans Frontie`res/Doctors Without Borders USA E1FFIRS 04/09/2010 21:56:28 Page 0 ‘‘Laurence Scot successfully integrates extensive professional, educational, and practical experience to produce a highly relevant, clearly written, and insightful book. In my opinion, The Simplified Guide to Not-for-Profit Accounting, Formation, and Reporting is the most concise, complete, and important resource for everyone considering and practicing not-for-profit accounting.’’ —Mark Carmichael, Finance Director, World Monuments Fund ‘‘The only not-for-profit accounting guide of its kind, this book provides a comprehensive guide to starting up a not-for-profit organization, as well the accounting requirements necessary for producing GAAP financial statements for an NFP organization. I’m recommending this book to those looking for a user-friendly desktop reference to answer all your industry-related questions.’’ —Kim Chadourne, Director of Management Reporting, Columbia University ‘‘A marvelous introduction to NFP accounting—it’s like having the great teacher there in the office with me! Mr. Scot’s book is a must read for anyone working in the not-for-profit sector.’’ —Joshua Powers, Director of Administration, Association of Black Foundation Executives ‘‘Scot’s book is the Baedeker of not-for-profit accounting and reporting practices—guiding the reader through the organization of a NFP— responsibilities of its board of directors and critical government reports to file. It succeeds admirably in its goal to steer readers around the hazards of organizing, managing and overseeing a not-for-profit organization.’’ —Karen Rockey, Treasurer, Financial Women’s Association of New York E1FFIRS 04/09/2010 21:56:28 Page 1 The Simplified Guide to Not-for-Profit Account ing, Formation, and Reporting E1FFIRS 04/09/2010 21:56:28 Page 2 E1FFIRS 04/09/2010 21:56:28 Page 3 The Simplified Guide to Not-for-Profit Account ing, Formation, and Reporting Laurence Scot John Wiley & Sons, Inc. E1FFIRS 04/09/2010 21:56:32 Page 4 Copyright # 2010 by Laurence Scot. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Scot, Laurence. The simplified guide to not-for-profit accounting, formation & reporting/Laurence Scot. p. cm. Includes index. ISBN 978-0-470-57544-4 (pbk.) 1. Nonprofit organizationsÀAccounting. 2. Nonprofit organizationsÀFinance. I. Title. HF5686.N56S36 2010 657 0 .98Àdc22 2009048436 Printed in the United States of America 10987654321 E1FTOC 04/07/2010 12:19:47 Page 5 Contents Preface vii CHAPTER 1 INTRODUCTION 1 CHAPTER 2 NFP ORGANIZATION FORMATION 7 CHAPTER 3 NFP ORGANIZATIONAL STRUCTURE 29 CHAPTER 4 INTRODUCTION TO NFP ACCOUNTING AND REPORTING 41 CHAPTER 5 NFP ACCOUNTING SYSTEM AND FINANCIAL STATEMENTS 63 CHAPTER 6 ASSETS—CONCEPTS AND DATA FLOW 87 CHAPTER 7 LIABILITIES AND NET ASSETS— CONCEPTS AND DATA FLOW 123 CHAPTER 8 ACCOUNTING FOR SUPPORT AND REVENUE 139 CHAPTER 9 ACCOUNTING FOR PERSONNEL COSTS, AND OTHER EXPENSES 155 CHAPTER 10 INVESTMENTS, POOLING, AND SPLIT-INTEREST AGREEMENTS 173 CHAPTER 11 SUBSIDIARIES AND INTERRELATED ENTITIES 183 CHAPTER 12 BUDGET DEVELOPMENT AND APPLICATIONS 189 CHAPTER 13 SPECIAL TYPES OF NFP ORGANIZATIONS 199 CHAPTER 14 REGULATORY REPORTING (990, 990-T, AND 990-PF) 205 CHAPTER 15 CONTRIBUTION/GRANT APPLICATIONS AND REPORTING 227 CHAPTER 16 AUDITS—PREPARATION AND RESPONSE 235 CHAPTER 17 CONCLUSION 243 v E1FTOC 04/07/2010 12:19:47 Page 6 APPENDIX A TAX-EXEMPT ORGANIZATION REFERENCE CHART 245 APPENDIX B SAMPLE NFP CHART OF ACCOUNTS 253 APPENDIX C ABBREVIATIONS 257 Glossary 259 About the Author 269 Index 271 vi Contents [...]... where this information exists in the document A sample of an appropriate answer to this question is as follows: NFP Organization Formation Figure 2.2 15 Form 1023, Parts II, III, and IV The ORGANIZATION shall be a not- for- profit corporation organized for charitable, educational, and scientific purposes, within the meaning of section 501(c)(3) of the Internal Revenue Code, as amended, including, for such... entity and complying with most reporting requirements The author wishes to point out that information in this book does NOT apply to each and every organization or situation, nor will it contain every conceivable transaction, activity, or disclosure Rather, the goal is to provide enough fundamental information to be useful in a practical way and act as a desk reference for future questions Because the... programs, events, activities, and so forth Imagine a bank asking people to work as bank tellers for free! Accounting and Reporting Related Tracking contributions by restrictions (unrestricted, temporarily re- stricted, and permanently restricted) 4 The Simplified Guide to Not- for- Profit Accounting Tracking and reporting contributed services and facilities Tracking and reporting expenses by function... the next step? Answer: creating the actual NFP entity Registration A not- for- profit organization is created by registering the NFP name as a legal entity or unincorporated association The registration process takes NFP Organization Formation 9 place at the state level because not- for- profit status is a state law concept An NFP can form as any legal structure such as a partnership, limited liability company... organization must be organized for one or more purposes specifically designated in the code Most organizations seeking recognition of exemption from federal income taxes must use one of two specific application forms prescribed by the IRS The two forms are Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and Form 1024, Application for Recognition of Exemption... of religion (establishment clause) or that prohibit the free exercise of religion (free exercise clause) In addition to not being required to file for tax exemption, churches are also not required to file an annual information return (Form 990) They can, however, voluntarily file the form if they desire to show that they are being compliant with all required rules and regulations Other Registrations and... Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a) Form 1024 would be used by various NFP organizations such as civic leagues, membership organizations, chambers of commerce, economic development corporations, labor, fraternities, and others Form 1023 Form 1023 is used by any organization organized and operated exclusively for religious, charitable, scientific, testing for. .. quantitative basis, computer algorithms cannot be used for NFP Organization Formation 13 acceptance or rejection This means more scrutiny by a real person and, consequently, more questions Fortunately, at the end of the process, most applications are approved Form 1023 is quite lengthy and consists of 26 pages (12 core and 14 pages of schedules), so a complete review of the form is beyond the scope of this book... for this book vii viii Preface Accounting Is More Than Numbers In order to account for something, one must first understand what they are accounting for Unfortunately, many financial staff hired at NFPs do not have a good understanding of what an NFP organization is, the rules they must follow, and who they have to report to There are also a lot of misconceptions about what an NFP can and cannot do For. .. However, simply stating that the organization will be substantially supported by the general public is not enough The organization will be required to substantiate this fact through the information provided on their information returns (Form 990) filed each year This will be covered later in this book For years up through 2008, if Line 5, box g, h, or i were checked, the applicant was required to request . SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING THE SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING LAURENCE. CPA SCOT Not-for-Profi t Organizations & Charities Praise for THE SIMPLIFIED GUIDE TO NOT-FOR-PROFIT ACCOUNTING, FORMATION & REPORTING “There are numerous