Not-For-Profit Accounting
| Author | Janet Greenlee, G. Smith |
| Pages | 547-550 |
Page 547
Not-for-profit organizations (NPOs) are like governmental organizations because they do not seek to earn a profit from their activities, yet NPOs are considered a separate sector for accounting purposes. An NPO differs from a for-profit entity in that its primary purpose is typically to fulfill a social mission instead of generating profits, and it differs from a governmental organization because in the United States it is not owned or controlled by any level of government. The NPO considered in this article is formally defined in the United States as an organization that has officially registered with the Internal Revenue Service (IRS) as a Section 501, tax-exempt organization.
NPOs are given tax-exempt status because as IRS Code Section 501 states, "no part of the net earnings shall inure to the benefit of, or be distributed to, its members, trustees, officers, or other private persons." The Financial Accounting Standards Board (FASB), which provides accounting guidance for NPOs, has a definition that corresponds to that of the IRS's, which describes an NPO as one that receives a significant amount of resources from providers who do not expect a return on those resources, does not operate to earn a profit, and does not have defined ownership interests that can be redeemed, transferred, or sold. NPOs, as identified by both the IRS and the FASB, therefore, exclude governmental organizations.
NPOs encompass a wide range of organizations, including entities as diverse as social service agencies, museums, cemetery organizations, major teaching hospitals, unions, private schools and universities, country clubs, and public radio stations. The sector is a "hybrid" that provides public goods (which is generally the primary function of government) through private organizations (typical of the commercial sector). Although NPOs do not operate to earn a profit and no ownership interest can ever be redeemed, transferred, or sold, they are similar to business organizations in the following ways: (1) They compete for scarce capital resources (whether in the form of loans, donations, or government contracts) and (2) they lack the coercive taxing power of government.
NPOs in the United States, according to the Independent Sector (an advocacy group for NPOs), are a major industry: NPOs employ 7 percent of all workers, receive $665 billion in annual revenues, and constitute one of the fastest-growing segments of the U.S. economy. More than 1.5 million NPOs were in existence in the United States in 2006 and the IRS estimated that approximately 50,000 new NPOs were formed each year. NPOs tend to have the following characteristics:
They exist to provide services rather than to generate profits. Profits measure effectiveness and efficiency of business organizations. The lack of a profit motive in the NPO sector makes measurement of their effectiveness and efficiency extremely difficult.
They tend to be diverse in both sources of funding and services provided. Some types of NPOs receive a major portion of their funding from governmental sources and provide services that duplicate or supplement governmental services. For example, the government provides a significant portion of the total revenues of NPOs furnishing residential services for the mentally retarded. Others derive a major portion of their funding from fees for services or dues, and may even compete with for-profit organizations. For example, most of the YMCA's revenue is provided by fees or dues from its health-club facilities.
They are subject to a myriad of increasingly complex reporting requirements. Many NPOs are...
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