Association accounting is an area that may be confusing to some because the standards are slightly different than for a typical for-profit business.
Not-for-profit associations can be run similarly to for-profit businesses in that they both have revenue, expenses, clients, directors, employees, etc. Yet, there are some key differences in the way the accounting is done that are important to understand if you are involved with a not-for-profit association.
Many financial items are labelled differently for association accounting; however, they provide essentially the same information as standard items used in business accounting. For example, a balance sheet used in business accounting is called a statement of financial position in the association accounting world. Here are some additional examples:
|Business Accounting||Association Accounting|
|Income Statement||Statement in Changes in Net Assets|
|Retained Earnings||Net Assets – Restricted or Unrestricted|
|Net Income||Excess of Revenue Over Expenditures|
Accounting for Contributions
Associations are required to distinguish between contributions and other revenues. Usually each type of contribution has unique stipulations on its use, so each needs to be tracked and reported separately.
There are two methods for accounting for contributions, the deferral method and the restricted fund method. Typically, the association would choose its method early in its existence when contributions are first received. If a change to the policy were made, this would need to be disclosed in their financial statements. The two different methods are:
1. The Deferral Method
Under this method, the accounting treatment differs depending on the type of contribution and what it was intended for.
A restricted contribution that is for expenditures occurring in the current period is included in the revenues of the current period.
A restricted contribution for a future expenditure is called a deferred contribution. When previously deferred contributions are used in the current period the term used at that time is recognition of deferred contributions and the amount is shown as revenue in that period.
2. The Restricted Fund Method
Under the restricted fund method an association would use fund accounting. Fund accounting is defined as a system for accounting for funds that have been limited by the donor, governing agency or by the law.
With a restricted fund, emphasis is accountability rather than profitability and used by non-profit organizations. In this method, a fund consists of a self-balanced set of accounts that are reported as unrestricted, temporarily restricted or permanently restricted based on the provider-imposed restrictions.
A fund needs to be kept separate and would have its own set of accounts, its own source of income and its own expenses. To account for these funds the not-for-profit organization follows the standards set out by the Accounting Standards Board (AcSB).
Fund accounting allows a not-for-profit association to properly manage its income or donations in a transparent and efficient manner. Funds can come from a wide variety of sources and it is important to keep track of each one to ensure they are used appropriately.
In Canada, not-for-profit associations are divided into two groups: registered charities and non-profit associations. Both do not operate to earn a profit; however registered charities are able to issue tax receipts to donors for donations received so the individuals are able to claim the charitable tax credit on their tax returns. Other non-profit associations are not able to do so.
Registered charities are required to go through a registration process with the Canada Revenue Agency (CRA) and follow specific rules, such as a disbursement quota.
Non-profit associations, which do not issue donation receipts, may need to register as a non-profit association in their province or with Corporations Canada.
Both types of not-for-profit associations must file tax returns with CRA. The returns are due six months after the organization’s year end.
Registered charities are required to file Form T3010 (Registered Charity Information Return), while other not-for-profit associations need to file Form 1044 (NPO Information Return). However, if the not-for-profit association is incorporated, then it must file a T2 (Corporation Income Tax Return).
Registered charities do not have to pay income tax, but not-for-profit associations may have to pay income tax on property income or capital gains and both types of associations must pay sales tax. To read more about sales tax paid by associations see our blog on GST/HST: What Your Association or Registered Charity Needs to Know. https://strauss.ca/gsthst-association-registered-charity-needs-know/
As an association management company and as event managers, we present the above article for information purposes only. It constitutes general information and does not constitute financial or other professional advice.