Accounting for Non-Profit Organizations

Saint Louis University School of Accountancy and Business Management Mary Height Campus, Baguio City

Accounting for Non- Profit Organizations (Outline of research with BBCCC Financial Statements Attached)

Accounting 303 MWF 2:30-3:30 D801

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ACCOUNTING FOR NON-PROFIT ORGANIZATION This chapter will focus upon for four types of not-for-profit / service organizations, namely: 1. The professional organization 2. The privately organized education institutions – school, college, university 3. The private organized hospital; and 4. The cooperative What is a non-profit organization? A non-profit organization is an entity that is operated for the benefit of society as a whole rather than for the benefit of an individual proprietor or a group of partners or shareholders. A non-profit organization strives only to obtain revenue sufficient to cover its expenses. Thus, the concept of income is not meaningful. Non-profit organizations constitute a significant segment of our society. Some examples are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Voluntary health and welfare organizations: Schools, colleges and universities Hospitals Cooperatives Labor unions Performing arts organizations Foundations Religious organizations Country Clubs Professional associations

Purpose of Financial Statements The primary purpose of financial statements is to provide relevant information to meet the common interests of donors, members, creditors and others who provide resources to not-for-profit organizations. Those external users of financial statements have common interests in assessing a. The services an organization provides and its ability to continue to provide those services and b. How managers discharge their stewardship responsibilities and other aspects of their performance. More specifically, the purpose of financial statements, including accompanying notes, is to provide information about: a. The amount and nature of an organization’s assets, liabilities and net assets b. The effects of transactions and other events and circumstances that change the amount and nature of net assets c. The amount and kinds of inflows and outflows of economic resources during a period and the relation between inflow and outflow d. How an organization obtains and spends cash, its borrowing and repayment of borrowing and other factors that may affects its liquidity e. The service efforts of an organization

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STATEMENT OF FINANCIAL POSITION This statement provides relevant information about the liquidity, financial flexibility and interrelationship of an organization’s asset and liabilities in order to let the external users of such be able to assess the organization’s ability to continue providing the services, to meet obligations, and needs for external financing. Information about the nature and amounts of different types of permanent restrictions or temporary restrictions shall be provided either by reporting their amounts on the face of the statement or by including relevant details in notes to financial statements. Separate line items maybe reported within permanent restrictions for holding of : a. b.

assets, such as land or works of art, donated with stipulations that they be used for a specified purpose, be preserved and not be sold or; assets donated with stipulations that they be invested to provide permanent source of income such as gifts that create permanent endowment funds.

Separate line items may be reported within temporarily restricted net assets or in notes to financial statements to distinguish between temporary restrictions for: a. b. c. d.

support of particular operating activities, investment for a specified terms, use in specified future period, or acquisition of long-lived assets. Donors’ temporary restrictions may require that resources be used for specified purpose as purpose restrictions or both. Gifts called term endowments such as gifts of cash or other assets with stipulation that they be invested to provide source of income for a specified term and that the income be used for a specified purpose are both time and purpose restricted.

STATEMENTS OF ACTIVITIES This statement shows the revenues, gains, expenses and losses. The primary purpose of this statement is to provide relevant information about: a. b. c.

the effects of transactions and other events and circumstances that change the amount and nature of net asset, the relationships of those transactions and other events and circumstances to each other, and how the organization’s resources are used in providing various programs or services.

The information in this statement used with related disclosures and information in other financial statements, helps donors, creditors and others to a. b. c.

evaluate the organizations performance during a period, assess an organization’s service efforts and its ability to continue provide services, and assess how an organization’s managers have discharged their stewardship responsibilities and other aspects of their performance. This statement use the descriptive term - change in net assets or change in equity of the entity as a whole.

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STATEMENT OF CASH FLOW This statement provides relevant information about the cash receipts and cash payments of an organization during a period. Although this statement may be using either of the two methods, direct and indirect, only the direct method is illustrated below. PROFESSIONAL ORGANIZATION There are more than 40 professional organizations accredited by the Professional Regulation Commission. These associations or institutions have their head offices in Metro Manila, but their chapters are found all over the country. Their operations are generally financed by membership dues that are paid annually. Sharing of these membership fees among the different chapters, regional councils and head office are provided for in their by-laws. Bigger organizations have established regional councils which oversee the chapters. Each organization has its own mission and vision and its activities shall be towards the attainment of these goals. Their operations are characterized by having a board of directors establishing the policies and guidelines based in the by-laws whish are implemented by means of a set of officers elected from among the members of the board. Every year elections are conducted nationwide. Various committees are created with a chairman and members who give their time and effort voluntarily to achieve the objectives of the organizations. Full accrual basis is used whenever practicable, depreciation is provided but is not considered in determining the excess of receipts over disbursements. Two kinds of net assets are commonly accounted for, unrestricted or general and restricted or special net assets. The spreadsheet is used to summarize daily transactions in these two types of assets. An updated list of members is a requirement for the sure accounting of annual dues in arrears to support the receivable accounts. Collections are normally done by the chapters and monthly reports are prepared to account for the remittances due to the head office and the regional councils. Restricted net asset are created every time collections would include receipts for subscription to the periodic journal or for the additions or betterment of the building. EDUCATIONAL INSTITUTIONS The activities of an educational institution may be classified as : a. b. c.

Instructional - include both resident and extension instruction, public service, organized researched and the operation of libraries. Administrative - auxiliary include staffing and promotion, registration and enrollment, operation of the business office, and operation and maintenance of the educational plant Auxiliary services include the operation of the residence halls, dining rooms, college unions and bookstores, health centers, and athletic and cultural programs.

Revenues in support of these different activities are provided by such varied sources as contributions, government appropriations, student fees, endowment income, and revenues from the sale of goods and services. There are six major fund groupings for educational institutions, namely: 1.

Current funds

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2. 3. 4. 5. 6.

Loan funds Endowment and other nonexpendable funds Annuity funds Plant funds, divided into unexpended plant funds, retirement of indebtedness funds and an investment in plant section Agency fund

Explain the accounting for non-profit organizations. Accounting for non-profit organizations is essentially “fund accounting”. This means that the internal accounting for many non-profit organizations is the fund which is an accounting entity with a self-balancing set of accounts recording cash and other financial resources together with related liabilities and changes therein. Accounting is based on FASB SFAS 116, SFAS 117, SFAS 124 and AICPA Audit and Accounting Guide for health care organizations. Funds commonly used by non-profit organizations include the following: 1. 2. 3. 4. 5. 6. 7.

Unrestricted fund Restricted fund Endowment funds Agency fund Annuity fund and life income fund Loan fund Plant fund

Unrestricted Fund/ General Fund/ Current Fund This is also known as the general fun which includes all the assets of a non-profit organization that are available for use as authorized by the governing board and are not restricted for specific purposes. The revenue and gains of unrestricted funds are derived from a number of sources. It is used in fund accounting. Restricted Fund/ Restricted Current Fund/ General Fund These are the receipts of resources that are to be used in special activities such as publication of a periodic journal or construction of a building for the unit. Accounting for cash contributions or donations Cash contributions or donations are reported as revenue in the year received even though there are donor-imposed uses or time restrictions on the donation. The entry for the cash contribution or donation is: Cash Contributions revenue

xxx xxx

If the donor imposes use or time restriction, the cash contribution or donation is reported as “temporary restricted revenue” on the statement of activities.

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Accounting for “contributed materials” 

recorded at fair value i.e. if a hospital receives free drugs or a university receives free operating supplies, the entry is Inventory Contributions revenue

xxx xxx

Accounting for “contributed services” Contributed services are recognized in the statement of activities if either of the following conditions is met: a.

The services create or enhance a non financial asset.

b.

The services require specialized skills, are provided by individuals possessing those skills and would typically need to be purchase if not provided by donations.

Contributed services rendered by skilled individuals are recognized at the going rate for comparable employees or contractors of the entity less any meals or other living costs absorbed by the nonprofit organization. To increase expense and increase unrestricted revenue, contributed services is recorded as follows: Salaries expense Contributions revenue

xxx xxx

Accounting for Contributed facilities Contributed facilities are recognized at fair value either to an asset or expense account. For example, if a university receives a new building from a generous benefactor to be used as one of its colleges, the entry is: Building Contributions revenue

xxx xxx

Another example, a building is used by a university on a rental basis. However, the owner waives rental payment. This is recorded at the fair value of the rental as follows: Rental expense Contributions revenue

xxx xxx

Classifications of Expense of a nonprofit Organization 1.

Program services – these are the organizations activities that result in the distribution of goods and services to beneficiaries, customers or members that fulfill the purposes or mission of the organization.

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2.

Supporting Services – these are other expenses that include all activities of the organization other than program services, i.e. management and general expenses, fund raising and membership development activities.

All expense of a non profit organization is reported as unrestricted in the statement of activities. This means that expenses are deducted only from unrestricted revenue. What is a restricted fund? This is used to account for assets available for current use but expandable only as authorized by the donor of the assets. The donor may impose either “use” restriction or “time restriction” or both. Assets of the restricted fund are not derived from the operations of the nonprofit organization. Explain endowment of fund. A “permanent endowment fund” is one for which the principal must be maintained indefinitely in revenue producing investment. Only the revenue from the investments may be expended. A permanent endowment fund is also known as “regular endowment”. A permanent endowment fund or “permanently restricted” but the revenue from the fund is “temporarily restricted”. A term “endowment fund” is one for which the principal may be expended after the passage of certain period or the occurrence of an event specified by the donor. The term is “temporarily restricted”. A “quasi-endowment fund” is a fund established by the governing board of the nonprofit organization. At the option of the board, the principal may later be expended. Accordingly, a quasi-endowment fund is included on “unrestricted net assets” because this is established using unrestricted net assets. Agency Fund 

Used to account for assets held by the nonprofit organization as custodian.



Example: A university may act as custodian of cash of a student organization. The university disburses cash as directed by the officers of the student organization.



Undistributed cash of the student organizations is reported as liability of the university's agency fund because the university has no equity in the fund.

Annuity Fund 

Established when assets are contributed to the nonprofit organization with the stipulation that the organization shall pay specified fixed amount to a designated beneficiary periodically during a specified period of time.



At the end of the specified period for the specified payments, the unexpended assets of the annuity fund are transferred to the unrestricted fund, restricted fund or endowment fund as instructed by the donor.

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Life income Fund 

Used to account for stipulated payments to a named beneficiary during the beneficiary’s lifetime.



Only the income on the fund is paid to the beneficiary’s payment from a life income fund varies form period to period comparing to annuity fund that is fixed.

Loan Fund 

Established by colleges and university for the purpose of granting loans to students to satisfy their school needs.



Students loans funds are generally revolving – as old loans are repaid, new loans are made for the receipts.

Plant Fund 

established for land, building, and equipment



It may also include cash and investments earmarked for additions to plant or payments of liabilities collateralized by the plant assets.



Sinking fund assets set aside for retirement of debt incurred to acquire plant assets is also included.

Components of Financial Statements of Non-Profit Organizations 1.

Statement of Financial Position – reports that “ assets should equal liabilities and net assets”

2.

Statement of Activities – reports the “changes in net assets” and their revenue, gains, expenses and losses. This is equivalent to income statement in commercial accounting. - It reports gross amount of revenue and expenses, except that investment revenue may be reported net of expenses, and gains and losses on disposals of plant assets may be reported net. - It reports expenses by functional classification such as program services and supporting services.

3.

Statement of Cash Flows

4.

Notes to Financial Statements

5.

Statement of Functional Expenses – required only to voluntary health and welfare organizations – this reports expenses both by function (program and supporting ) and natural classification (salaries, depreciation etc. )

Classifications of Net Assets 

reported in the statement of Financial Position 1. Unrestricted net assets – assets in the “unrestricted fund”. 2. Temporarily restricted net asset – assets in the restricted fund, loan fund, term endowment fund, annuity fund, life income fund and plant fund.

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3. Permanently restricted net assets – “permanently endowment fund” Unconditional Promises Treatment 

Reported in the period pledges are made not in the period of cash collection.



Contribution will not be received until next year, the contribution will be reported as increase in temporarily restricted net assets for the current year because of time restriction.



Conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote.

Treatment of Re classifications of Net assets Example: In prior year, a benefactor made a contribution to a private nonprofit university with the stipulation that the donation be used for faculty travel during the current year. 

This contribution is reported under temporarily restricted net assets in the prior year.



When the contribution is used for faculty travel in the current year, it is reported as “reclassification” in the current year's statement of activities. Re-classifications are reported in the statement of activities as “net assets released from restrictions”.



This reclassification is reported in the current year as negative amount for temporarily restricted net assets and positive amount for restricted net assets.



The travel expense is reported in the current year's statement of activities as deduction from unrestricted net assets. All expenses are decrease in unrestricted net assets.



The use of the contribution for faculty travel has no effect on unrestricted net assets at the current year end because the effect is offsetting, meaning, increase in unrestricted net assets upon reclassification from “temporarily restricted to unrestricted” and decrease in unrestricted net assets when the contribution is used or expended.

Classifications of Cash flow or Non Profit Organizations in the Cash Flow Statements 1.

Operating Activities – includes “unrestricted” cash contributions, unrestricted revenues and expenses.

2.

Investing activities – includes cash flows from acquisition and disposal of property, plant and equipment, investments, and other long-term assets.

3.

Financing activities – includes temporarily or permanently “restricted” cash contributions and cash flows from borrowings and repayment of borrowings.

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Financial Statements Pro- Forma Forms STATEMENT OF FINANCIAL POSITION

XXX Organization Statement of Financial Position December 31, 20x1 and 20x2 (In thousands) ASSETS Cash and cash equivalent Receivables Inventories and prepaid expenses Assets restricted to investment in building and equipment Land, building and equipment TOTAL ASSETS LIABILITIES AND NET ASSETS Vouchers payable Refundable advances Long-term debt TOTAL LIABILITIES Net assets: Unrestricted Temporarily restricted Permanent restarted TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS

20X1 P xxx xxx xxx xxx xxx P XXX

20X2 P xxx xxx xxx xxx xxx P XXX

P xxx xxx xxx P XXX

P xxx xxx xxx P XXX

P xxx xxx xxx P XXX P XXX

P xxx xxx xxx P XXX PXXX

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STATEMENT OF ACTIVITIES XXX Organization Statement of Activities For the year ended December 31, 2ox1 Temporarily Unrestricted Restricted Revenues, gains and other support: Contributions Fees Total Expenses and losses Program A Program B Management and General Fund Raising Total Change in net assets Net assets at beginning of year Net assets at end of year

P xxx xxx P xxx P xxx xxx xxx xxx P xxx P xxx xxx P xxx

P xxx

P xxx xxx P xxx

Permanently Restricted P xxx

P xxx xxx P xxx

Accounting For Non Profit organizations – Group 10

Total P xxx xxx P xxx P xxx xxx xxx xxx P xxx P xxx xxx P xxx

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Statement of Cash Flows

XXX Organization Statement of Cash Flow For the year ended December 31, 20X1 Cash flows from operating activities: Cash received from members and contributors Cash received from service recipients Cash paid for: Program A Program B Fund raising Cash paid to employees and suppliers Net cash from operating activities Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

P xxx xxx xxx xxx xxx

(xxx) (xxx) P xxx xxx P xxx

Reconciliation of change in net assets to net received from operating activities: Change in net assets P xxx Adjustments to reconcile change in net asset to net cash from Operating activities: Depreciation xxx Decrease in refundable advance (xxx) Increase in vouchers payable xxx Increase in receivable xxx Increase in inventories and prepaid expenses xxx Net cash flow from operating activities P xxx

LOAN FUNDS    

Consist of resources that are available for loans to students. Originate from gifts, they may be built up over a period of years from student fees for such purpose or for transfers from endowment fund whose income is available for such purpose. Can be made with or without interest depending upon the conditions established by those providing loan the loan fund. Nonexpendable uncollectible loans, fund administrative expenses, and losses on the sale of fund investments, and as a result of credits arising from interest on loans, income from fund investments , and gains on sale of fun investment.

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Transactions related to loan of NPO universities: 1. Receipt of cash gift to be used for loans to students, P50,000. Cash Loan Fund net assets 2.

3.

4.

5.

6.

Purchase of securities for P25,000 which includes accrued interest of P600. Investment Accrued Interest Cash Loans to students, P20,000. Notes Receivables Cash Collections of interest on investments, P1,500. Cash Accrued Interest Loan Fund net assets Collection of loans with interest of P150, P7,650. Cash Notes Receivable Loan Fund net assets Uncollectible loans written off, P300. Loan Fund net assets Notes Receivable

50,000 50,000 25,000 600 25,600 20,000 20,00 1,500 600 900 7,650 7,500 150 300 300

Resources are balanced by the account Loan Fund Balance/ Loan Fund Net Assets. Note: The Accounts are hypothetical In nature to illustrate the entries. NPO University Loan Fund Statement of Financial Position June 30, 20B ASSETS Cash Investments Notes Receivable TOTAL ASSETS

P13,550 25,000 12,200 P 50,750 LIABILITIES AND NET ASSETS

TOTAL NET ASSETS

P 50,750

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NPO University Loan Fund Statement of Activities For the year ended June 30, 20B Revenues: Interest on investments Interest on loans Less: Expenses/ losses: Uncollectible loans written off Excess of revenue over expenses

P900 150

1,050 300 P 750

NPO University Loan Fund Statement of Cash Flows For the year ended June 30, 20B Cash from operating activities: Receipts of gifts Excess of receipts over expenses Net cash from operating activities or net assets

P 50,000 750 P50,750

ENDOWMENT AND OTHER NONEXPENDABLE FUNDS  Formed when cash or other properties are transferred to the institution provided that only income produced by such resources can be used for the benefit of the institution.  Unrestricted endowment is undependable; although it may change as a result of the sale of restrictions are placed on the use of fund income by the institution. Income becomes available to the unrestricted current fund.  Restricted endowment is when the use of the fund income is limited to certain objectives. Income is transferred to the appropriate restricted current fund or to the plant fund.  Endowments are created by transfer of assets directly to the institution.  Funds temporarily functioning as an endowment are resources not currently required by unrestricted current fund may be transferred out of this fund to be administered as an endowment until the resources are required for alternative use.  In maintaining a single set of books for the endowment fund group, investments and other property items should be identified with specific endowments, and separate endowment fund balances should be reported for each endowment.  Earnings don’t need to be reflected on the books for the endowment funds that may be entered directly on the books of the funds receiving the earnings.

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Transactions related to endowment fund: 1. Receipt of cash from donor in establishment of Endowment Fund A, P1,000,000. No restrictions are made as to use of endowment income. Cash 1,000,000 Endowment Fund A balance 1,000,000 2. Receipt of securities from 2 donors in establishment of Endowment Funds B and C. Endowment Fund B10,000 shares of X Co. ordinary shares, value on date of transfer is P715,000. Endowment Fund C-2,500 shares of Y Co. preference shares, value on date of transfer P245,000. No restrictions are made as to use of endowment income. Investments-ordinary shares 715,000 Investments-preference shares 245,000 Endowment Fund B balance 715,000 Endowment Fund C balance 245,000 3. Pooling of Endowment Funds A, B, C. Endowment fund balances were restated in terms of market values of securities as date of pooling as follows: Ordinary shares market value, P750,000 and Preference shares market value-P250,000.

4.

5.

6.

7.

8.

Pooled Cash 1,000,000 Pooled investments- ordinary shares 750,000 Pooled investments- preference shares 250,000 Cash 1,000,000 Investments-ordinary shares 715,000 Investments-preference shares 245,000 Endowment Fund B balance 35,000 Endowment Fund C balance 5,000 Purchases of P900,000 of Z Co. bonds at a price of 105. Pooled investments- bonds 900,000 Pooled investments- unamortized bond premium 45,000 Pooled Cash 945,000 Collection of interest and dividends on pooled investments, P107,500. Pooled Cash 107,500 Undistributed pooled income 107,500 Premium amortization on pooled investments, P2,250. Undistributed pooled income 2,500 Pooled investments- unamortized bond premium 2,500 Distribution of income on pooled endowments to unrestricted and restricted current funds: Endowment Fund A: 1,000,000/2,000,000 x 105,000 or P52,500. Endowment Fund B: 750,000/2,000,000 x 105,000 or P30,375. Endowment Fund C: 250,000/2,000,000 x 105,000 or P13,125. Undistributed pooled income 105,000 Pooled Cash 105,000 Sale of Y Co. preference shares for P260,000. Pooled Cash 260,000 Pooled investments- preference shares 250,000 Gains and losses on pooled investments 10,000

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9.

Receipt of gift of properties to be used as a dormitory. Net income after recognizing an annual charge for depreciation of P10,000 is to be used for certain restricted purposes. Appraised values of properties on the date of gift: Land- P125,000, Buildings- P175,000. Land 125,000 Buildings 175,000 Endowment Fund D balance 300,000 10. Receipt of cash from unrestricted current fund to be used as an endowment fund until alternative use is authorized, P50,000. Cash 50,000 Principal temporarily functioning as Endowment Fund E balance 50,000 11. To recognize resources of P400,000 held by trustee as an endowment. No restrictions are made as to use of endowment income. Fund held by trustee 400,000 Endowment Fund F balance 400,000 12. Amount receivable from restricted current fund representing recovery of depreciation on endowment properties (dormitory), P10,000. Due from restricted current fund 10,000 Accumulated depreciation- buildings 10,000 Revenues and expenses relating to operations of the properties are reported in the restricted current funds. PLANT FUNDS  Formed when cash or other properties are transferred to the institution subject to the requirement that specified payments be made to a designated beneficiary during his lifetime. sometimes included with endowment funds for accounting and reporting purposes.  Balances are increased by gifts subject to annuity agreements, gains on the sale of annuity fund assets, payments to annuitants, and asset transfers.

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NPO University Endowment and Other Nonexpendable Funds Statement of Financial Position June 30, 20B ASSETS Cash Due from restricted current funds Pooled cash Pooled investments: Ordinary shares Bonds Unamortized bond premium Land Buildings Less: Accumulated depreciation Fund held by trustee TOTAL ASSETS

P 50,000 10,000 317,500 P 750,000 900,000 2,500 P 175,000 10,000

1,692,500 125,000 165,000 400,000 P 2,760,000

LIABILITIES AND NET ASSETS Gains and losses on pooled investments Net Assets: Unrestricted Endowment Fund A Endowment Fund B Endowment Fund C Endowment Fund F Total Restricted: Endowment Fund D Principal temporarily functioning as Endowment Fund E Total TOTAL LIABILITIES AND NET ASSETS

P 10,000

P 1,000,000 750,000 250,000 400,000 P2,400,000 300,000 50,000 2,750,000 P2,760,000

Transactions related to annuity fund of NPO University: 1. Receipt of cash of P125,000 subject to condition that P5,000 per year be paid to the donor during his lifetime, any balance available for educational and general purposes. Account Titles Debit Credit Cash 125,000 Annuity net assets 125,000

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2.

3.

4.

5.

Purchase of securities for P120,000 that includes accrued interest of P2,000. Account Titles Investments Accrued interest Cash Collections of income for the year ended June 30, 20B, P9,500. Account Titles Cash Accrued interest Annuity net assets

Recognition of amount payable to annuitant, P5,000. Account Titles Annuity net assets Due to annuitant

Debit 118,000 2,000

Credit

120,000

Debit 9,500

Credit 2,000 7,500

Debit 5,000

Credit 5,000

Amount becoming available for educational and general purposes according to annuity agreement, P2,500. Account Titles Debit Credit Annuity net assets 2,500 Due to Unrestricted Current Fund 2,500

NPO University Annuity Fund Statement of Financial Position June 30, 20B ASSETS Cash Investments TOTAL ASSETS LIABILITIES AND NET ASSETS Due to annuitant Due to unrestricted current fund Annuity net assets TOTAL LIABILITIES AND NET ASSETS

P 14,500 118,000 P132,500 P5,000 2,500 125,000 P 50,750

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NPO University Annuity Fund Statement of Charges in Equity For the year ended June 30, 20B Net assets, beg. Add: Increase from gift subject to annuity Increase from income for year Total Less: Amount payable to annuitant for year Amount payable to unrestricted current fund Net assets, end

P-0P125,000 7,050 P 5,000 2,500

132,500 P132,500 7,500 P 125,000

PLANT FUNDS Three groups: 1. Resources that are held for plant expansion and replacement 2. Resources that are held for retirement of long-term debt incurred in the acquisition of the plant 3. The specific physical resources comprising the plant. Three balancing groups of accounts for plant resources: 1. Unexpended plant funds- consist of cash, securities, receivables and other assets that are used for the acquisition of new plant or replacement of existing plant. The difference between the assets and liabilities. This balance is commonly divided into (1) the portion to be applied to plant additions and (2) the portion to be applied to renewals and replacements. 2. Retirement of indebtedness funds- consist of cash, securities, and other assets that are to be used for the retirement of plant indebtedness. Fund accounts are balanced by a single fund balance reporting total resources available for retirement of indebtedness. 3. Invested in plant- consist of the individual property items that compose the educational plant. Carries any long-term indebtedness relating to plant acquisitions. The difference between plant assets and related liabilities. This balance is commonly divided to show the different sources of plant financing- gifts, current funds, and endowment funds. Transactions related to that Unrestricted Plant Funds of NPO University: 1. Receipt of cash gift to be used for plant acquisitions, P100,000. Cash Unexpended plant funds balance- plant addition 2. Payment of additions to buildings, P85,000. Unexpended plant funds balance- plant addition Cash 3. Issue of bonds to raise funds for construction of buildings, aP1,500,000. Cash Unexpended plant funds balance- plant additions 4. Completion of buildings at contract price of 1,500,000. Unexpended plant funds balance- plant additions

100,000 100,000 85,000 85,000 1,500,000 1,500,000 1,500,000

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5.

6.

7.

8.

Contracts payable 1,500,000 Payment of contract, 1,500,000. Contracts payable 1,500,000 Cash 1,500,000 Receipt of cash from unrestricted current fund plant renewals and replacements in subsequent periods, P30,000. Cash 30,000 Unexpended plant funds balance- renewals and replacements 30,000 Purchase of securities, P30,000. Investments 30,000 Cash 30,000 Collection of interest on investments, P750. Cash 750 Unexpended plant funds balance- plant additions 750

Transactions related to that Retirement on Indebtedness Plant Funds of NPO University: 1. Receipt of cash from unrestricted current for payment of mortgage installment due, P25,000. Cash 25,000 Retirement of indebtedness funds balance 25,000 2. Payment of mortgage installment due, P25,000 Retirement of indebtedness funds balance 25,000 Cash 25,000 3. Receipt of cash gift to be used for payment of installments due on mortgage in 20C-20E, P75,000. Cash 75,000 Retirement of indebtedness funds balance 75,000 Transactions related to that Investment In Plant Funds of NPO University: 1. Receipt of gift of land, buildings, and equipment for educational and general purposes valued at P4,000,000; properties are subject to mortgage for P1,000,000. Land 850,000 Improvements other than buildings 150,000 Buildings 2,500,000 Equipment 500,000 Mortgage payable 1,000,000 Investment in plant- from gifts 3,000,000 2. Addition to buildings financed by gifts reported in unexpected plant funds, P85,000. Buildings 85,000 Investment in plant- from gifts 85,000 3. Issue of bonds to be used for construction of buildings, P1,500,000 Buildings to be acquired 1,500,000 Bonds payable 1,500,000 4. Completion of buildings financed by bond issue Buildings 1,500,000 Buildings to be acquired 1,500,000

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5. Payment by retirement of indebtedness funds of current installment due on mortgage, P25,000 Mortgage payable 25,000 Investment in plant- from current funds 6. Acquisition by general current fund of equipment, P15,000 Equipment 15,000 Investment in plant- from current funds 7. Acquisition by endowment fund of a dormitory valued at P300,000 Land 125,000 Buildings 175,000 Investment in plant- from endowments 8. To record depreciation on buildings represented by endowment, P10,000 Investment in plant- endowments 10,000 Accumulated depreciation 9. Retirement of equipment carried at P5,000 Investment in plant- from gifts 5,000 Equipment

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25,000

15,000

300,000

10,000

5,000

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NPO University Plant Funds Statement of Financial Position June 30, 20B ASSETS Unexpended Plant Funds: Cash Investments Retirement of indebtedness funds: Cash Invested in Plant: Land Improvements other than Buildings Buildings Less: Accum. Depreciation Equipment Total Less: Items carried in Endowment funds TOTAL ASSETS

P 15,750 30,000

P 45,750 75,000

P975,000 150,000 P4,260,000 10,000

4,250,000 510,000 P5,885,000 290,000

5,595,000 P 5,715,750

LIABILITIES AND NET ASSETS Unexpended plant funds: Balance- plant additions Balance- renewals and replacements Retirement of indebtedness funds: Balance Investment in plant: Mortgage payable Bonds payable Investment in plantFrom gifts From current funds TOTAL LIABILITIES AND NET ASSETS

7. -

P 15,000 30,750

P 45,750 75,000

P 975,000 1,500,000

P2,475,000

P3,080,000 40,000

3,120,000

5,595,000 P5,715,750

Agency Educational institution acts as an agent or trustee, holding certain assets on behalf of others. when agency operations are: simple and limited duration=both asset accounts and accounts expressing the institution’s accountability to others may be carried in the general or current fund. involved and continuing=an agency fund may be recognized and special agency books established for the properties subject to agency control agency funds may be established for pension and retirement resources, special organization resources, student deposits, and tax withholding amounts.

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-

accounting for the agency is the same as it would be for a private business.

HOSPITALS *Functions: -

Provide for reception, care and medical and surgical treatment of the sick or injured rooms are provided and foods are supplied major activities center about inpatients, but frequently render outpatient care and emergency services carry on special activities such as research and nurses training operate number of auxiliary enterprises such as pharmacies for outpatients and cafeterias for staff members and visitors its operations call for important administrative activities like:  hospital staffing  registration of patients  operation of the physical plant  food  laundry and housekeeping management and budgeting  accounting  billing and collecting

The major source of hospital support is normally charges that that are made to patients for services. However, such charges frequently fail to cover the full cost of hospital operations, and significant sums must be sought from contributions and grants from private, public and charitable sources. Funds for Hospital -

Accounting for hospitals are similar to educational institutions that acquires a revenues that must be applied to specific objectives. There’s also certain accounting differences that should be pointed out Hospital generally does not require variety of funds required by the educational institution. Differences of the two units are found to their operating summaries.

Educational Institution  

revenues were compared with expenditures a “modified accrual basis” was employed and depreciation of the educational plant was generally ignored.

Hospitals     

analysis and a summary of operations that comes closer to that of private business is normally warranted sell specific services expectation by patients, group purchasers of insurance protection, and insurance companies selling hospital protection that charges for services will bear a close relationship to the costs of these services. although contributions may be available suggest that hospital revenues should be set at levels that will provide for the ultimate replacements of properties these factors suggest that revenues, be compared with expenses, that a “full accrual basis” be employed, and that depreciation of hospital properties be recognized in arriving at total operating costs.

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Four Major Fund Groupings of Hospital A.GENERAL OR CURRENT FUNDS  summarized the current resources that are to be used in meeting the obligations arising from general operations  resources that can be applied without restriction are reported here  Expenditures for which specific funds have not been provided are financed from these resources.  This is the same in nature and function as the general or current fund of the educational institution. *To illustrate the accounting for the general fund transactions affecting the general fund of NPO Hospital and entries to record these transactions are listed below. 1. Charges for services to patients for year ended December 31,20B,P580000 of which P45000 is still due: adjustments and allowances of P60000 apply to charges. Cash

P475000

Accounts Receivable

45000

Free service and adjustment-contractual patients

40000

Free service and adjustment-general patients

16500

Courtesy and miscellaneous allowances

3500

Earnings from routine services-inpatients

P320000

Earnings from routine services-outpatients

50000

Earnings from special services

210000

2. Other hospital revenues, P420000 of which P10000 is still due from temporary fund in reimbursement of research expenses. Cash Due from temporary fund General contribution, donations, legacies and bequests Grants from community chests, foundations Donated services and commodities Income transfers from temporary funds Miscellaneous revenues

P410000 10000 P180000 122000 10,000 57,500 50,000

3. Collections of interest and dividends on endowment funds securities, P85000 of which P5000 is due from endowment fund #1 representing bond premium amortization. Cash Due from Endowment Fund #1 Income from investments

P85, 000 P5, 000 80,000

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4.

Expenditures for hospital supplies, P200000 of which P25 has not been paid.

Inventory supplies Cash

P200, 000 P175, 000

Vouchers payable

25,000

5. Hospital supplies charged put, P170000 Administrative and general Household and property Professional care of patients Dietery Outpatient and emergency Other expenses Inventory of supplies 6. Payment of hospital salaries and wages, P490000

P5000 10000 15000 120000 5000 15000

Administrative and general Household and property Professional care of patients Dietery Outpatient and emergency Other expenses Cash 7. Payment of hospital expenses other than salaries and wages

P85000 45000 220000 60000 30000 50000

P170000

P490000

Administrative and general P20000 Household and property 10000 Professional care of patients 25000 Dietery 7500 Outpatient and emergency 2500 Other expenses 10000 Cash P75000 8. Payments of interest on mortgage, P60000 and of installment due on mortgage carried as liability in the plant funds, P50000. Interest expense

P60000

General fund balance Cash

50000 P110000

9. Adjustments required on December 31,20B;    

allowance for uncollectible accounts, P2500 accrued salaries and wages, P5000 charges for depreciation on properties carried as assets by plant funds, P85000 to recognize amount to be paid to plant funds equal to depreciation on properties.

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Bad debts Allowance for doubtful accounts

P2500

Administrative and general Household and property Professional care of patients Dietery Outpatient and emergency Other expenses Cash

P1000 250 1250 750 250 1500

Depreciation General or current fund balance

P85000

P2500

P5000

P85000

General or current fund balance P85000 Due to plant funds P85000 *The transfer of cash to plant funds to finance the ultimate replacement of properties is recorded by a debit to general fund balance and a credit to cash. In the example, recognition of reimbursement due to plant funds is reported by a credit to a payable, the payable would be closed when the cash is transferred. 10. To close general operating revenue and expenses accounts at the end of the period. Earnings from routine services-inpatients Earnings from routine services-outpatients Earnings from special services General or current fund balance Free service and adjustment-contractual patients Free service and adjustment-general patients Courtesy and miscellaneous allowances Bad debts Administrative and general Household and property Professional care of patients Dietery Outpatient and emergency Other expenses

P320000 50000 210000 P222500 40000 16500 3500 2500 111000 35250 261250 188250 37750 76500

11. To close other revenue and expenses accounts at the end of the period. General contribution, donations, legacies and bequests Grants from community chests, foundations Donated services and commodities Income transfers from temporary funds Income from investments Miscellaneous revenues Interest expense Depreciation General or current fund balance

P180000 122500 10000 57500 80000 50000 P60000 85000 355000

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*In considering the presentation of hospital revenues for statement purposes, the following classifications are used;   

gross revenues from patients deductions from revenues and revenue sources

*In considering operating expenses, it recognizes the following classifications;      

administrative and general dietery household and property professional care of patients outpatient and emergency other expenses

B.TEMPORARY FUNDS  Composed of current resources that, while available for current purposes, are subject to certain limitations in their use  For example, resources from gifts on grants and income from endowment funds that can be spent only for specified purposes, such as research, a medical library, or nurses training, would be reported as temporary funds  Temporary funds are identical in nature and functions to the restricted current funds of the educational institution.  Temporary fund transactions of NPO Hospital and the entries to summarize these are listed below: 1. Receipt of cash gift to be used for medical research, P10000 Cash Temporary fund A balance 2. Purchase of securities, P85000

P100000 P100000

Temporary investment -fund A P85000 Cash 3. Receipts of cash gifts to be used for books and journals for hospital patients, P10000

P85000

Cash Temporary fund balance 4. Sale of securities, book value, P25000, for P23500

P10000 P10000

Cash Temporary fund A balance Temporary investment -fund A 5. Collections of interest and dividends

P23500 1500 P25000

Cash P5000 Temporary fund A balance P5000 6. Expenditures during year by general fund for research chargeable to temporary fund A, P50000; cash transferred to general fund, P40000.

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Temporary investment -fund A P50000 Cash P40000 Due to general fund 10000 7. Payment of general fund for books and journals chargeable to temporary fund B balance, P7500. Temporary fund A balance P7500 Cash 8. Adjustments required on December 31,20B; accrued interest on securities, P250 Accrued interest in temporary fund Temporary fund A balance

P7500

P250 P250

In the example, the temporary fund books summarize two temporary fund, and a separate fund balances are maintained to report the respective fund equities. It should be observed that changes in temporary fund balances arising from revenues, expenses and distributions are recorded directly in the fund balances; when there are many changes and these are to be reported in special operating statements, nominal accounts would be established to accumulate profit and loss derail. C.ENDOWMENT FUNDS      

represent resources that have been transferred under conditions that limit expenditures to the income that is produced by such resources. Assets may be transferred directly to the hospital, or they may be transferred to a trustee who administers them for the benefit of the institution May also be created by the action of the governing board of the hospital. Terms of it may place no restrictions on the use of the endowment income, or they may specify a particular purpose for which the income is to be used. In the absence of restrictions, its income becomes available to the general fund; when there are restrictions; income is in a temporary fund. Endowment fund transactions of NPO Hospital and the entries to summarize these are listed below.

1. Receipt of bonds in establishment of Endowment fund #1 as follows: Co.S bonds Face value, P500000, market value on date of transfer, P470000. Investments in bonds at fair value(Endowment fund #1) Investments-unamortized bond premium(Endowment fund #1) Investments-unamortized bond discount (Endowment fund #1) Endowment fund #1 balance

P1000000 50000 P30000 1020000

2. Receipt of cash in establishment of Endowment fund # 2, P250000.Endowment income is to be used for specified research projects. Cash Endowment fund #1 balance 3. Purchase of 1000 shares of Co.T preference shares, P240000.

P250000

Investment in preference shares(Endowment fund #2) Cash

P240000

P250000

P240000

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4. Collection of interest by general or current fund that includes P5000 reimbursable to Endowment fund #1 for bond premium amortization. Due from general or current fund Investments-unamortized bond premium(Endowment fund #1) 5. Sale of Co.S bonds at fair value, P250000 Cash Investments-unamortized bond discount (Endowment fund #1) Investments-at bonds at fair value(Endowment fund #1) Endowment fund #1 balance

P5000 P5000

P250000 15000 P250000 15000

In the example, Endowment fund books summarize to endowment and separate endowment fund balances summarize their respective fund equities. It should be observed in the example that endowment fund income is reported directly in the fund that in entitled to such income. When revenue and expense are involved in a determination of net income, revenue and expense can be summarized in the Endowment funds books; the fund net income, when determined is then transferred to the appropriate fund. D.PLANT FUNDS Two Groups of Plant Resources 1. 2.

Physical resources comprising the hospital properties Cash and other assets that is available for the improvement and the replacement of the hospital properties.

Although the two asset of groups are recognized, hospitals would nevertheless combined these within a single plant funds category When there are claims against plant fund resources in connection with original financing of properties, construction in progress, or current property acquisitions, such obligations would be recognized in the plant funds. Funds are balanced by two plant fund balances: 1. Investment in plant 2. Reserve for plant improvement and expansion Transactions affecting the plant funds of NPO Hospital and the entries to record these transactions are shown below: 1. Acquisition of land construction of hospital financed by gifts of cash, P1500000 and cash raised through a mortgage, P1000000. Land Building Equipment Mortgage Payable Investment in Plant

P250000 1750000 500000 1000000 1500000

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2. Receipt of gifts of cash of P50000 and securities valued at P100000 for plant improvement and replacements Cash Investments Reserve for plant improvement and replacements 3. Acquisition of equipment, P30000 mortgage, P1000000.

P50000 100000

Reserve for plant improvement and replacements Cash

P30000

Equipment Investment in Plant 4. Payment by general fund of mortgage installment, P50000.

P30000

P150000

P30000

P30000

Mortgage Payable P50000 Investment in Plant 5. Adjustments required on December 31,20B: a) accrued investments on investment,P1500; b) depreciation for plant assets for year,P85000; c) amount recoverable from general fund equal to depreciation on plant assets. Accrued interest on investments P1500 Reserve for plant improvements and replacements Investment in plant Accumulated Depreciation-building Accumulated Depreciation-equipment

P85000

Due from general fund Reserve for plant improvements and replacements

P85000

P50000

P1500

P35000 50000

P85000

Alternative approaches have been suggested for analyzing and recording plant funds transactions of the hospital. Probably the best approach would recognize two self-balancing sets of accounts, one summarizing the existing physical plant and the other summarizing resources that are held for plant improvement and replacement. With such an approach, the analysis of transactions affecting hospital plant assets, liabilities, and fund balances or net assets is the same as that employed for the educational unit. However, the entries relating to existing plant and to improvement and replacement resources are made in self-balancing from within a single set of books instead of in separate sets of books as in the case of the educational unit. COOPERATIVES A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit. Cooperatives are defined by the International Co-operative Alliance's Statement on the Co-operative Identity as autonomous associations of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through jointly owned and democratically controlled enterprises. A cooperative may also be defined

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as a business owned and controlled equally by the people who use its services or by the people who work there. Cooperative enterprises are the focus of study in the field of cooperative A credit cooperative is financial organization owned and operated by its member with the following objectives:   

to encourage saving among its members to create pool of such savings from which loan for productive purpose may be granted to its member to provide related services to its members to maximize the benefit from such loan.

Current accounting policies and procedures adopted by credit cooperatives were used as basis in development of this manual. Key officers of cooperatives were interviewed and financial statements and relevant reference materials were gathered from organizations during capacity building for cooperatives. As a general rule, a good accounting system includes the following: 1. 2. 3. 4. 5. 6.

A well-conceived chart of accounts and general ledger system. Clearly laid out procedures for keeping accounting records accurate and up to date. Skilled personnel whose primary responsibility is to track, update and report financial information A sound system for monitoring loan disbursements, collection and Deposit transaction. Appropriate accounting safeguard and control to provide reasonable assurance that accounting books are complete and accurate.

CONCEPTS AND GENERAL PRINCIPLE 1. Separate Enterprise Each cooperative is a separate business enterprise requiring the maintenance of comprehensive accounting records and financial reporting practices to provide meaningful information to members, officers, directors and audit committee of cooperative, government agencies, the apex organization and other interested third parties. 2. "Going Concern" Concept Each credit cooperative should normally maintain its account s as "going concern: on the basis that its operation will continue definitely. Therefore , Assets and liabilities should be presented in the financial statement at historical cost and not as liquidation value. 3. Monetary Basis of Accounting Financial Statements in the Philippines are expressed in terms of Philippine Peso (Php), hence, accounts of credit cooperative should be stated in peso amounts involve at the time the transaction occur 4. Consistency in Accounting Practice From Period to Period. Consistent accounting practices should be followed by each cooperative from one accounting period to the next. 5. Timely Recognition in Accounting Records Accounting record should be recorded on a timely basis so that all material information applicable to each accounting period will be shown in the record. To properly recognize in accounting record and financial reports the reasonable value of assets, liabilities, equity revenues and expenses, each credit cooperative should make provision for losses that may be sustained I the collection or conversion of loans and other assets by charge against current operation. 6. Materiality Material fact relating to the credit cooperative's activity must be recognize in the accounts of said cooperative and reports in its financial statements. A statement, fact or item is material if, fiving full consideration to the surrounding circumstances as they exist at the time, it is of such a nature that its disclosure would likely influence or "make a difference" in the judgment and conduct of a reasonable person. 7. Principle of Disclosure

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This accounting principle requires that the members of the cooperative and other users of the financial statements should be informed of material and relevant information about economic and financial affair of the cooperative. This can be done either in the financial statements or in the notes that company the statements of supplementary schedules and other presentation. Full disclosure requires reporting of all facts that can make a difference in the decision of the users and that the accounting information reported must be understandable and not susceptible to misinterpretation. Such disclosure makes the financial statements more relevant and useful and less subject to misinterpretation. Adequate information to be disclosed in the financial statements may not be presented in detail provided that important and relevant facts are revealed and made clear. The full-disclosure principle requires the financial report to give more emphasis to substance over form. This means that the substance should not be made less clear or hidden. There are, however, limits to the amount of disclosure that can be made in financial statements or in accompanying notes. As minimum information, the following should generally be disclosed. a. b. c. d. e. f. g. h.

Accounting method used I preparing financial statements Changes in the use of accounting method during current period Term of major borrowing arrangements Existence of large contingent liabilities Major proposed asset acquisition Contractual provision relating to leasing arrangements and employee pension and bonus plan Significant events affecting financial position, including major contracts for sale of services and pending legislation which mat affect significantly the operations of the cooperative i. Other materials and significant events which will occur after the end of accounting period and before the financial statements are released and which are relevant to users. 8. Principle of Conservatism Each credit cooperative should maintain its accounting records on a conservative basis. It should make reasonable provision in the accounts for probable losses on assets and for the settlement of liabilities. It should not materially overstate nor understate its asset, liabilities, revenues or expenses. 9. Accounting Basis Modified Cash Basis is the prescribed accounting basis for a cooperative. This is a combination of cash basis of accounting and accrual basis of accounting. Under the modified cash basis, the accounting is based on actual receipt s and disbursements of the credit cooperative except that provision should be made to reflect: a. Liabilities which are not paid when due; b. Unpaid interest on share capital and patronage refund applicable to the accounting period; c. Deferred credits and charges that are applicable to future periods; d. Estimated losses on loans outstanding and other risk assets; and e. The depreciation of property and equipment Other two accounting bases are; a. Cash Basis - Revenue is recorded and accounted for when actually collected and expenses are accounted for when actually paid. b. Accrual Basis - It provides the most complete and informative record of the financial activities of the cooperative. Under accrual basis of accounting, the credit cooperatives record revenue when earned and expenses and liabilities as incurred regardless of the timing of the actual receipt or payment. 10. Accounting Safeguard and Control Each credit cooperative should adopt appropriate accounting safeguard and control to provide its members and the general public reasonable assurance that accounting records are complete and accurate. 11. Accounting period

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The accounting period shall be 12-month period starting January 1 and ending December 31, as common practiced. FINANCIAL STATEMENTS Financial statements are the means by which the information accumulated and processed in financial accounting is periodically communicated to those who use it. They are designed to serve the needs of a variety of users, particularly owners and creditors. Trough the financial accounting process, the myriad and complex effect of the economic activities of a cooperative are accumulated, analyzed, quantified, recorded, summarized and reported as information of two basic types; a. financial condition, which relates to a point in time b. financial operations, which relates to a period of time Notes to financial statement, which may explain headings, captions or amounts in the statements or present information that cannot be expressed in terms of money and those descriptions of accounting policies are integral part of the statements. A. Statement of Financial Condition (Balance Sheet) The statement of financial condition presents the difference between the total assets and total liabilities. The statement at any date present s an indication in conformity with generally accepted accounting principles of the financial status on the cooperative at a particular point of time. B. Statement of Operation (Statement of Net Surplus) Presents the revenues, expenses, gain, losses and net surplus (net loss) recognized during the period and thereby presents an indication in conformity with GAAP of the result of the cooperative's service directed activities during the period. The information presented in the statement of operation is usually considered as the most important information provided by financial accounting because the net surplus is paramount concern to those interested in economic activities of cooperative. C. Statement of Cash Flow is a formal statement summarizing all operating, investing and financiang activities of a cooperative. D. Other Schedules such as: a. Bank Reconciliation b. Aging of Loans receivables d. Property and equipment e. Members loans receivable, saving/time deposit, subscribed and paid-up share capital. f. Investment g. Accounts Payable h. Loans Payable i. Use of: i. Reserve refund ii Optional refund iii Education and training Fund Apex Local

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Attachments: Comparable Financial Statements of Baguio- Benguet Community Credit Cooperative for the year ended 2008- 2009

1. Statements of Financial position 2. Statement of Changes in Equity 3. Statement of Financial Operations 4. Statements of Cash Flows

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Reference:

 Accounting for Government and Non-Profit organizations by Josephine Antonio – Ocampo, CPA, MPA 2010 Edition  Theory of Accounts by Conrado Valix, 2009 edition  BBCCC Financial Statements published magazine courtesy of BBCCC.

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