Liabilities

Liabilities are any debt or obligation that an organization owes to a third party and must be paid. Organizations have current liabilities and noncurrent or long-term liabilities.

Current liabilities: These are obligations the corporation owes within the next year.

- Accounts payable: These are unpaid bills of an organization. Such accounts should be paid within 30 days.

Accrued salary expenses: Salary owed to staff at the end of an accounting period, possibly because a pay period may not have coincided with an accounting period.

- Grants payable: This item exists mainly for grant-maker agencies and represents grant awards made to grant-seeker agencies that have not been disbursed yet.

- Deferred revenue: This is revenue received for a transaction that is not yet complete. For example, an organization may provide consulting services, and have received money for prepaid expenses in relation to a service that has not been rendered yet. The item is listed as a liability until the service is rendered. After this time, the money is no longer a liability, but becomes revenue.

Noncurrent liabilities: Noncurrent liabilities are obligations, such as mortgages, leases, or long-term debts, that constitute less pressing claims against assets. Noncurrent liabilities are unlikely to be paid off in a year.

- Tax-exempt bond liabilities: Tax-exempt bonds or other obligations issued by an organization on behalf of a state or local governmental unit, or by a state or local governmental unit on behalf of an organization, and for which such an organization has a direct or indirect liability.

- Escrow account liability: A financial instrument (e.g., securities, funds) held by a third party (e.g., escrow service) in a transaction between an organization and another party, until the terms of such transaction are completed.

Loans from officers and directors: Loans that a nonprofit organization receives from one or more officers or directors.

- Mortgages and other notes payable: Mortgages or lines of credit owed to a financial institution.

Fund Balance or Net Assets or Net Worth

The fund balance is the difference between an organization's assets and liabilities. The fund balance represents assets that are owned exclusively by an organization. In for-profit organizations, the fund balance is called "equity" or "owner equity" or "profit." Net assets can be unrestricted, temporarily restricted, or permanently restricted.

- Unrestricted net assets: Money received without restrictions on how to spend it.

- Temporarily restricted funds: Money received for a special purpose that cannot be spent until a specific time. At that time, the money is transferred to an unrestricted account.

- Permanently restricted net assets: Assets donated not to be spent, but to invest in long-term stocks, bonds, or other financial instruments. The principal cannot be spent until the donor gives consent. However, interest income, dividends, and investment income can be spent as the donor wishes.

To illustrate, let us consider the case of Tampa Community Foundation, a nonprofit organization based in Tampa, Florida. As of December 31,2011, the foundation has $8,500 in its

BOX 9.5 SAMPLE BALANCE SHI

Tampa Community Foundation (TCF), Statement of Financial Position or Balance Sheet as of December 31, 2011

Assets

Liabilities and Fund Balance

Cash

$8,500

Accounts payable

$5,000

Accounts receivable

$5,500

Mortgages

$18,000

Land, buildings, equipment

$19,000

Other liabilities

$2,000

Net assets

$8,000

Total assets

$33,000

Total liabilities and fund balance

$33,000

checking account, accounts receivables of $5,500, land, building, and equipment that are worth $19,000. Further, TCF has accounts payable of $5,000, owns an $18,000 mortgage, and other liabilities totaling $2,000. TCF reported net assets of $8,000. Using the above data, you can prepare a simple balance sheet, illustrated in Box 9.5.

 
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