USA How do I make unused funds available to the next year?

[cilla45]

I'm hoping someone can help me. We are a 501-3c I handle several budgets and collect money for each budget separately based off contracts for each. Usually all unspent money rolls into retained earnings at the end of the year. However, I have a special circumstance this year end in that I want to make sure that a specific budget balance is available to one of the programs for this next fiscal year. My first thought was to post the balance as a current liability in 14-15 for that specific program. However, I'm not sure what the entry would be to recognize the additional funds in the 15-16 budget. Is it as simple as posting an entry to DR the revenue source and CR a current liability account and then reverse it in the next year?

 

[Fidget]

It depends on what the "special circumstance" is. If it qualifies as a provision, then it's fine to carry it over into the next period. .

 

[cilla45]

It depends on what the "special circumstance" is. If it qualifies as a provision, then it's fine to carry it over into the next period. .

Thank you. What do you mean by "provision?" The special circumstance is that - the program received additional funds from an outside source and it is intended only for that program. I don't think I should allow it to roll up into our retained earnings. I want to make it clear that the funds are only for this specific program in 15-16.

 

[Fidget]

"Provision" just means earmarking funds for a specific thing that has already been identified in the current accounting period but isn't going to happen until the next (or future) accounting period.

Accounting standards are quite stringent over provisions these days - it's basically to stop 'profit-smoothing'.

That said, if it's purely money from an external source, then it qualifies as a liability on your balance sheet until such times as you deliver whatever the money is for. And just to muddy the waters a bit.. if it's in the form of a Government grant, then it could be messier to account for.

 

[cilla45]

Thank you for your reply. It is not a grant or donation. It is based on a contract that lists it as an administrative stipend. The money was specific as to what program year it was for, but non-specific as far as defining "administrative stipend." So you think it is ok to then list it as a current liability for 14-15 by DR my revenue source and CR the newly created liability account and then reversing that entry in 15-16?

 

[smallbushelp]

In accounting for non-profit entities, there is no net income and therefore, no retained earnings. You should be tracking assets, liabilities and net assets. In addition, your net assets should be broken down into three categories: unrestricted, temporarily restricted, and permanently restricted. In this way, you would allocate the additional funds that the program received as temporarily restricted at the end of the fiscal year. Then your statement of financial position, aka balance sheet, would reflect those temporarily restricted assets not retained earnings.

It sounds like you are using accounting software for general business entities, not non-profits. That’s fine to do but you need to make sure you understand the differences in the accounting procedures. You may want to research accounting for non-profits.

To handle your issue, I suggest you create a new income account and maybe call it “Program A dedicated gift” or something that makes sense to you. Then on the first day of your new fiscal year, you would debit retained earnings for the amount of funds not spent in the prior fiscal year and credit the new income account. This way, your income statement will show this additional revenue has already been received and is available for the new fiscal year. Your statement of financial position would show the funds moving from temporarily restricted assets to unrestricted assets.

 

[Fidget]

Thank you for your reply. It is not a grant or donation. It is based on a contract that lists it as an administrative stipend. The money was specific as to what program year it was for, but non-specific as far as defining "administrative stipend." So you think it is ok to then list it as a current liability for 14-15 by DR my revenue source and CR the newly created liability account and then reversing that entry in 15-16?

Yes. You've basically received money in advance for something that has yet to happen, so you now have a liability insofar as carrying out whatever the money paid to you in advance is for.

 

[Fidget]

In accounting for non-profit entities, there is no net income and therefore, no retained earnings.

You're wrong about that. "Not for profit" just means profit is channelled back into whatever the entity is involved in. It doesn't mean that there isn't any profit or retained earnings. It just means that it all belongs to the organisation rather than to any "owners" of it, unlike as it is with for profit organisations.

 

[smallbushelp]

I'm sorry Fidget, but here in the U.S., accounting for non-profit entities does not recognize net income and retained earnings. I didn't say there isn't any profit. Profit just means that an entity has more cash coming in than it has going out (having revenue that exceeds expenses). And non-profit entities must have that in order to survive.

The issue is in accounting practices and how financial statements are prepared. Non-profit entities are run to address needs in society, while for profit entities are run to generate profits. As a result, non-profits will issue a statement of activities instead of the income statement issued by for-profit companies. A statement of activities does not recognize net income or loss. And, since non-profit entities do not have owners, there is no owner's equity or stockholders' equity. Thus, there is no retained earnings reported.

Cilla45's situation does not create a liability in non-profit accounting.

 

[Fidget]

I see! In that case, thank for the enlightenment!