CHAPTER ONE

Over view of Governmental and Not for Profit organization

Introduction
Dear student, this chapter is an introductory for the entire course. Here you are supposed to
clearly understand the difference and similarity between Not for profit and profit making
organizations giving due emphasis for the particular characteristics of NFP organizations. In
addition to this you will able to have the chance to be well aware of the main objectives of
government and NFPs accounting and reporting of profit making organizations.
Governmental and non-profit organizations are vast in number and diverse. States,
countries municipalities (for example, cities and villages) and townships are general purpose
governments that provide many categories of services to their residents (such as police and fire
protection; sanitation; construction, and maintenance of streets, roads, and bridges; and health
and welfare). Independent school districts, public colleges and universities, and special districts
are limited or special purpose government organizations that provide only a single function, or
limited number of functions (such as education, drainage and flood control, irrigation, soil and
water conservation, fire protection, and water supply).

Non-profit organizations also exist in many forms and serve many different functions.
These include various kinds of health care entities, libraries, museums, professional and trade
associations, fraternal and social organizations, and religious organization.

Based on the general guidelines this module give accounting students an understanding of
the many features of non-profit organizations that differentiate them from other business
organizations. These features include the necessity to use several accounting entities termed
fund for a single non-profit (NFP) organization and the issuance of a statement of activity
rather than an income statement and reporting for NFP organization, and the role of accounting
as part of the budgeting process.

1.1 What is NFP

For all similarities in the principles of accounting and management resources, there are
very significant differences in what the two types of organizations do and how they operate. First
consider three distinctions noted by the Financial Accounting Standards Board (FASB) which
characterized NFP organizations.
Receipts of significant amounts of resources from resource providers who do not
expect to receive either repayment or economic benefits proportionate to the
resources provided.
Operating purposes that are other than to provide goods or services at a profit or
profit equivalent.
 Absence of defined ownership interest that can be sold, transferred, or redeemed, or
that convey entitlement to a share of a residual distribution of resources in the events
of liquidation of the organization.
In summary, we might say that a NFP:
Gets money from people who do not necessarily expect anything in return (e.g.,
taxpayers, donors to NGOs).
Is not trying to make money.
Does not have ownership shares that can be bought and sold
1.2 Classification of Not for profit Organization
We can note six classes of NFP organizations that fit the three distinguishing
characteristics noted by FASB stated in the above.
1. Governmental - includes all levels national, regional, wereda, city, etc.,
2. Educational - schools, kindergartens, colleges,
3. Health and welfare - hospitals, orphanages, the Red Cross and Red Crescent, etc.,
4. Religious churches, mosques, missions,
5. Charitable includes many NGOs,
6. Foundations private organizations for educational, religious or charitable purpose.
There is of course, an overlap among NFPs, and many are involved in more than one of
the above activities. Here in Ethiopia, we generally speak of two broad classes of NFP
organizations governmental and non-governmental organizations, (NGOs). Many, if not all,
NGOs in Ethiopia are regulated in some way by the DPPC (Disaster Prevention and
Preparedness Commission).
1.3 Why do NFPs exist?
NFP usually arise to meet a need that society feels is vital, or essential. However, it is
considered that the particular need could not, should not, cant or will not be met by profit
seeking organizations.
Consider the provision of a town water supply. It might be thought that allowing a profit
making entity to fill that need would give the profit making entity too much control over the
residents of the town. Water, after all, is necessary to life, and who every controls its supply
could charge excessive prices for it. Therefore, many governments have taken water supply
as own responsibility. Or consider a religious group that wants to spread its beliefs. Since
 many people consider profiting form religion to be unseemly, the religious group might start
an NFP that makes its materials available for free.
It should be clear that an NFP will usually have a specific purpose for its existence, other
than simply to increase the wealth of its owners. NFPs also have sub-purpose within its main
purpose. For example, the NGO, REST, has as its purpose, to promote the social well being
of the people of Tigray. Within it, to fulfill that purpose, it may choose to drill wells at
different weredas, or build clinics. It follows then, that the resources obtained by an NFP will
be used only for its specific purpose.
1.4. Distinguishing Characteristics of Governmental and NFP Organizations
From the stand point of management of resources, for profit (FP) and not-for-profit (NFP)
organizations are similar in many ways. For example, both use types of resources cash, fixed
assets, personnel, etc. Both are faced with the problem of trying to acquire scarce resources. Both
need good information for decision-making, and both need to exercise careful control of the
resources that they have. The mechanics of providing information and of control systems are
similar. Both should use double entry accounting, employing journals and ledgers, and then use
those ledgers to produce periodic financial reports.
1.5. Similarities between NFPs and profit organization
NFPs are similar in many ways to profit seeking enterprise. These includes
Both are the integral part of an economic system and use financial, capital and human
resources to accomplish their purpose.
Both must acquire and convert scarce resources in to their respective goods and services
As their resources are scarce, cost analysis and other control and evaluation techniques are
essential to ensure that resources are utilized economically, effectively and efficiently.
Both employ journals and ledgers, and then use those journals and ledgers as a basis to
produce financial reports which summarize the information in a meaningful way to guide
decisions.
 1.6. Distinct Accounting practices and principles
1.6.1 Practices
In practical matters, two other distinctions between NFPs and FPs will be noted here. The first
concerns sources of revenue. As will be recalled from Principles of Accounting, an FP makes a
distinction between the money received from sales of goods, disposal of fixed assets, and gifts.
For NFP, there is no distinction between these, all are considered revenue.
The second distinction concerns costing and pricing: The NFP prices of goods and services,
if applicable, are according to their costs, of providing them. What the market will bear has
less relevance to NFPs. Indeed, NFP often operate as a monopoly, and there is no market to
guide its pricing decision. In fact, in many cases, the activities of the NFP are subsidized by
the government or private donors, so its goods and services are priced below the cost of
providing them.
1.6.2 Principles
This purposeful nature of NFPs gives rise to two accounting principles that are unique to
NFPs. One of these is the use of fund accounting. It is very important to understand the
meaning of fund in this context. In normal conversation, fund means simply, a resource of
money. That is not the meaning fund has in fund accounting. In fund accounting, fund
means a distinct entity within a large entity. A separate journal, ledger, will be kept, and
separate financial statements will be kept for each fund.
The second relates to budgets. The budget of an NFP, especially of a government branch is far
more important than in an FP, because the money allocated for a specific purpose is frequently
determined in advance, while NFP budgets are often fixed by law and cannot be charged. On the
other hand, an FP budget can be flexible as conditions merit. In order to ensure that a fixed
budget is not exceeded, the budget of government branches and some other NFPs actually
recorded in a ledger account. This is not normally the case with FPs. (for profit organizations)
1.7. Objectives of Governmental and NFP Accounting and Financial Reporting
In considering the objectives of governmental and NFP financial reporting, we should
again mention the reason of an NFPs existence. A NFP organization exists to provide a service
not being met by profit making businesses. An NFPs goal then will be to provide its clientele as
many goods and services as it can, given the limitations of its resources. It does not exist to
increase the wealth of its owners, as FPs do.
 The evaluation of the performance of an NFP, especially of a government organization,
therefore, is difficult. Firms which strive for profit are easily measured by their profitability. If
the FP firm is profitable, it is likely producing the products that its customer wants at a price they
can afford. Governments, specially, have the ability to force its customers to pay for goods and
services that they may or may not want, so the fact that its revenue may equal or exceed its
expenditures tells us nothing about its success. Similarly, an NGOs activities might be a
removed from its donors, and the donors may not really know how successful the program that
they support is in aiding its beneficiaries.
Generally every organization wants to be successful of courses, in order to know if it is
successful success must be defined in terms of goal. And then the organization should
measure its results against its goals. Measuring success is often through of an terms of
effectiveness achieving the goal at the highest level and efficiency (achieving the goal
through using the against amount of resources)
For profit-seeking organizations, both efficiency and effectiveness can easily be measured with
financial statements. The financial statements will give answers to questions like what were the
revenues and expenses was that revenue sufficient to maximize profit if the revenues are
sufficient, and then we can say that the organization has merits goals:
1.7.1 Accountability
If the bottom line is not very useful in evaluating a NFP, what then are the objectives of
financial reporting? The first objective is accountability. The guiding principle is that the
management of the NFP is obligated to the taxpaying or giving public, who provide the resources
to the NFP. That obligation is fundamentally two folds.
1. To use the resource appropriately and
2. To provide information showing how the resources have been used.
The information provided in financial reports should show economic resources,
obligations, net resource, and changes in them. The information will then be useful: in marketing
resource allocation decisions, in assessing services and ability to provide services, in assessing
management stewardship and performance, all of which are necessary to promote accountability.
Expressed as simple questions, the information found in government financial reports
ought to help give answers to:
1. How should we spend our money?
 2. Can and are we giving our clientele what they need?
3. Are we administering our funds well?
4. How much do we have, how much do we owe, and are we able to pay what we owe?
1.7.2 Legal obligations
The second objectives which is arguably more important from a practical point of view,
is fulfillment of legal obligations. This objective cannot really be divorced from the first, since
legal obligation regarding financed are usually an attempt to force accountability through states.
These legal obligations are felt necessary in a large part because the profit motive, which
controls the activities of NFPs, is lacking in NFP activities. A number of legal standards have
been enacted to control both governmental activities and NGOs. For government reporting, the
Ministry of Finance has set down certain standards. For most NGOs, the legal standards come
through the DPPC, those standards weigh heavily in the design of accounting systems for NFPs.
Legal standards are of great importance in both the activities and reports of NFPs, even
though they may or may not contribute to good resource management. However, failure to
adhere to the legal standards can result in loss of job, confiscation of assets, payments of fines,
and even time jail. Managers of NFP resources are usually very careful to follow the legal
standards first and foremost.