Chapter-Five

ACCOUNTING AND FINANCIAL MANAGEMENT FOR NON

GOVERNMENTAL ORGANIZATIONS (NGOs)
 ACCOUNTING AND FINANCIAL MANAGEMENT FOR NON
GOVERNMENTAL ORGANIZATIONS (NGOs)

• What are the objectives of NGOs

 Introduction
• All over the globe there is an upsurge in the establishment of private,
non-profit or non-governmental organizations.
• The term NGO is broad and ambiguous. It covers a range of
organizations within civil society, from political action groups to
sports clubs. Its clear definition still remains contested. However, it
can be argued that all NGO’s can be regarded as civil society
organizations though not all civil society organizations are NGO’s.
• The concept of NGO came into use in 1945 following the
establishment of the United Nations Organizations which recognized
the need to give a consultative role to organizations which were not
classified as neither government nor member states (Willett, 2002).
• NGOs take different forms and play different roles in different
continents, with the NGO sector being most developed in Latin
America and parts of Asia.
 Introduction

• The roots of NGOs are different according to the

geographical and historical context. They have
recently been regarded as not-for-profit
organizations.
• Although there is contestation of the definition of
an NGO, it is widely accepted that these are
organizations which pursue activities to relieve
the suffering, promote interests of the poor,
protect the environment, provide basic social
services, and undertake community development
 Introduction
• Some of the operational areas within which NGOs have worked,
independently and in collaboration with other organizations:
– organization of the community
– democracy
– education
– enterprise development
– environment
– health
– housing
– human rights
– infrastructure
– political franchise
– poverty alleviation
 Characteristics of NGOs
• not for profit organizations are in certain respects hybrid
because they have some characteristics similar to those
governmental entities and other characteristics similar to
those of business enterprises. Among the features of not
for profit organizations that resemble characteristics of
governmental entities are the following:
1. Service to Society: not for profit organizations often
render service to society as a whole. The members of this
society range from a limited number of citizens in a
community to almost the entire population of a city, state,
or nation. Similar to the services rendered by
governmental entities, the services of not for profit
organizations are to benefit many rather than the few.
 Characteristics of NGOs
2. Not profit motivation: not for profit organizations do not operate with the
objective of earning a profit. Consequently, not for profit organizations
generally are exempt from federal and state income taxes. Governmental
entities, except for enterprises, have the same characteristics.
3. Financing by the citizenry/ donors: as with governmental entities, most
not for profit organizations depend on the general population for a
substantial portion of their support, because revenues from charges for
their services are not intended to cover all their operation costs.
Exceptions are professional societies and the philanthropic foundations
established by wealthy individuals of families. Of course tax to the
government are involuntary contribution where as contributions to not for
profit organizations are voluntary
5. Importance of Budget: the characteristic of not for profit organizations
cause their annual budget to be as important as for governmental entities.
 Characteristics of NGOs
Among the characteristics of not for profit organizations that resemble those of
business enterprises are the following:
• Governance by board of directors: as with a business corporation, a not for
profit corporation is governed by elected or appointed directors, trustees, or
governors. In contrast, the legislative and executive branches of a
governmental entity share the responsibilities for its governance.
• Measurement focus of cost expirations: governance by board of directors
means that not for profit organization does not answer to a lawmaking body as
does a governmental entity. One consequence is that cost expirations, or
expenses, rather than expenditures, are reported in the statement of activities
of not for profit organizations. Allocation of expense including depreciation and
revenues to the appropriate accounting period thus a common characteristics
of not for profit organizations and business enterprises.
• Use of accrual basis of accounting: not for profit organizations employ the
same accrual basis of accounting used by business enterprises.
 Types of NGOs
• Non-profit businesses are organizations started for purposes
other than making money for their principal owners. The major
categories for non-profits businesses are charitable, scientific,
literary, public safety and amateur sports
1. Charitable non-profit organizations are usually organized as a
public charity or private foundation. Public charities may include
churches, hospitals, colleges or universities; these organizations
have ongoing fundraising activities with funds donated from
multiple individuals and companies. Private foundations have one
major source of funding, such as a family or corporation, and use
their funds to further the efforts of other charitable
organizations. Private foundations may also issue grants or
awards to individuals for certain goals or achievements.
 Types of NGOs
2. Scientific non-profit businesses are used to help provide
funding for research on current needs in health and
human services.
• Energy, environmental and medical researchers are
types of scientific categories where non-profit
businesses can be successful.
• Scientific organizations help fund research for
companies that may be too costly without outside
donations. Donations from outside individuals and
groups can help non-profits produce valuable scientific
information without the constant worries about making
profits for shareholders.
 Types of NGOs

3. Literary non-profit businesses help fund the arts community.

This category may include museums, historical centers and
other types of community centers.
• Most literary foundations are started as businesses to help
distribute the donations they receive from outside groups.
Filing as a non-profit helps maintain their donations inside
the business, allowing more funds for their service rather
than taxes on profits.
4. Public safety businesses help inform consumers about
product safety and public awareness issues. These
organizations act as a watchdog for consumers by providing
information about questionable products and services in the
marketplace.
 Types of NGOs
NGO types can also be understood by their orientation and level of operation.
• Charitable Orientation often involves a top-down paternalistic effort with little
participation by the "beneficiaries". It includes NGOs with activities directed toward
meeting the needs of the poor -distribution of food, clothing or medicine; provision of
housing, transport, schools etc. Such NGOs may also undertake relief activities during a
natural or man-made disaster.
• Service Orientation includes NGOs with activities such as the provision of health, family
planning or education services in which the program is designed by the NGO and people
are expected to participate in its implementation and in receiving the service.
• Participatory Orientation is characterized by self-help projects where local people are
involved particularly in the implementation of a project by contributing cash, tools, land,
materials, labor etc. In the classical community development project, participation begins
with the need definition and continues into the planning and implementation stages.
Cooperatives often have a participatory orientation.
• Empowering Orientation is where the aim is to help poor people develop a clearer
understanding of the social, political and economic factors affecting their lives, and to
strengthen their awareness of their own potential power to control their lives. Sometimes,
these groups develop spontaneously around a problem or an issue, at other times outside
workers from NGOs plays a facilitating role in their development. In any case, there is
maximum involvement of the people with NGOs acting as facilitators.
 NGO Types by Level of Operation:

• Community-based Organizations (CBOs) arise out of people's own initiatives. These can
include sports clubs, women's organizations, neighborhood organizations, religious or
educational organizations. There are a large variety of these, some supported by NGOs,
national or international NGOs, or bilateral or international agencies, and others
independent of outside help. Some are devoted to raising the consciousness of the
urban poor or helping them to understand their rights in gaining access to needed
services while others are involved in providing such services.
• Citywide Organizations include organizations such as the Rotary or lion's Club,
chambers of commerce and industry, coalitions of business, ethnic or educational
groups and associations of community organizations. Some exist for other purposes,
and become involved in helping the poor as one of many activities, while others are
created for the specific purpose of helping the poor.
• National NGOs include organizations such as the Red Cross, YMCAs/YWCAs,
professional organizations etc. Some of these have state and city branches and assist
local NGOs.
• International NGOs range from secular agencies such as Save the Children
organizations, OXFAM, CARE, Ford and Rockefeller Foundations to religiously motivated
groups. Their activities vary from mainly funding local NGOs, institutions and projects,
to implementing the projects themselves.
 The Use of Fund Accounting for NGOs

• Like government organizations, these organizations do not have

an identifiable individual or group of individuals who hold a
legally enforceable residual claim to the net assets of the
organization.
• A distinguishing characteristics of these organizations is that
they are not owned or controlled by a government.
• The activities of not- for- profits are commonly financed through
voluntary contributions. Although these organizations may have
creditors, the financial statements are intended primarily for use
by present and potential donors.
• As was the case with government, donors to not –for- profit
organizations often impose restrictions on the use of
contributed resources.
 The Use of Fund Accounting for NGOs

• Not for profit organizations must follow all

applicable FASB standards in recording transactions.
• In addition, the FASB issues some standards that
apply only to not for profit organizations.
• Typically these are in response to transactions or
practices unique to not for profit organizations.
Examples include contributions, donor-imposed
restrictions, and gifts that are to be directed to
another beneficiary.
 The Use of Fund Accounting for NGOs

• The accounts of the contributions and

donations and other grants should be
prepared under the historical cost convention.
• The day-to-day transactions should be
recorded at the monetary value of the goods
or services or fair market value of the donated
services.
• But the accounting practice for most local
NGOs may vary from state to state.