Fixed Assets Accounting for a Not-For-Profit Organization

Introduction:

In the accounting world, the asset is defined as an owned resource from which future economic benefits are expected. The carrying amount of all assets is reported on any organization’s balance sheet, be it a not-for-profit or for-profit.

All such assets are divided into two categories on the balance sheet based on how quickly they can be turned into cash; current assets and non-current assets (also known as fixed assets).

Current assets are resources used up within one year, whereas fixed or non-current assets have a useful life of more than one year.

Following are a few examples of fixed assets:

  • Desks
  • Chairs
  • Fixtures
  • Collection items
  • Buildings
  • Land
  • Computer
  • Printer

In this article, we will discuss how fixed assets are reported on the balance sheet of a not-for-profit organization.

Recognition of Fixed Assets:

As per the generally accepted accounting principles (GAAP) used worldwide, every organization should determine a capitalization policy for its assets.

A capitalization policy for each organization defines a certain threshold amount over which any expenditure incurred would be qualified as a capital expenditure and hence, will be reported on the balance sheet.

On the other hand, any expense incurred under the threshold would be categorized as revenue expenditure and hence, expensed out on the income statement.

For small non-profit organizations, the capitalization criterion usually ranges between $500 and $1,000.

The other criterion an asset has to meet to be recognized as a fixed asset is having a useful life of more than one year.

In other words, the asset should be able to provide benefits throughout the period in which it is used, and the specified period must be of more than one year.

Related article  Fixed Assets (IAS 16): Definition, Recognition, Measurement, Depreciation, and Disclosure

Once an asset is classified as a fixed asset, it is recorded in the books of accounts in the year of purchase.

In the situation where the not-for-profit uses the cash basis accounting principle, fixed assets, regardless of amount, are recognized as expenses in the statement of receipt and expenditure in the period it is incurred. The organization might need to have a separate fixed assets control listing to minimize the risks of losing fixed assets.

Cost of Asset:

The fixed asset is recognized at cost plus any expenses incurred to bring it to its current condition of use. Delivering the cost of bringing the fixed asset to the working place might also be capitalized.

However, if the tangible asset is a contribution, then it must be recognized at its fair value on the date of donation except when the fair value cannot be reasonably determined when it is recorded at a nominal amount.

Journal Entry:

The following entry is recorded in the accounting journals if the fixed asset is purchased through cash:

Dr         Fixed Asset        x,xxx

Cr         Cash or Bank                  x,xxx

On the other hand, if the fixed asset is a contribution, then the following journal entry is reported:

Dr Fixed Asset              x,xxx

Cr         Contribution Revenue                    x,xxx

Calculation of Depreciation:

The fixed asset after being recorded is depreciated every period it is used. Non-profit organizations usually use a straight-line method to depreciate their assets.

In other words, the cost of assets less salvage value is evenly distributed throughout the asset’s useful life. The formula to calculate depreciation is:

Related article  Depreciation Expenses: Definition, Methods, and Examples

Depreciation = (Cost – Salvage Value) / Useful Life

Reporting Depreciation:

Depreciation is expensed out each year as a non-cash expense on the statement of activities also known as the statement of operations.

The accumulated depreciation i.e. the sum of depreciation expense up to the reporting date is reported under the amount of the fixed asset on the statement of financial position of the non-profit organization.