Retained Earnings for Non-Profit Organizations – Definition, Formula, and Much More

Overview

A non-profit entity is considered a public entity that works for public interest without an intention to generate any profit. Non-profit organizations have an underlying objective or a mission to provide benefit to the public. Unlike organizations that are made for profit, non-profit organizations have different ways of representing information on the financial statements. This is because financial statements in a for-profit organization are made for the purpose of investors, as well as for compliance-related issues. However, as far as financial statements for non-profit organizations are concerned, they are formulated for compliance-related issues.

Definition of Retained Earnings

Retained Earnings can be defined as the accumulated profits and losses of the company. There is basically revenue that has been withheld by the company, over and above the expenses that have been incurred. It is presented under the equity section of the balance sheet.

For newly formed companies, retained earning balance is typically low (or close to zero). This is because they barely generate enough profits to be able to retain. Normally companies retain their profits in order to create a cushion that can be used by companies in order to fuel their expansion.

Formula for Retained Earnings

Retained Earnings can be calculated using the following formula:

Retained Earnings = Beginning Balance + Profit (Loss) – Dividend

However, this formula is used only for For-Profit companies.

What are Retained Earnings for Non-Profit Organizations called?

Retained Earnings for Non-Profit Organizations are also referred to as Accumulated Earnings. It is referred to as retained capital, or earned surplus that appears in the shareholder equity section of the Statement of Financial Position. It is referred to as the Balance Sheet.

For a non-profit organization, there is no owner’s equity. In fact, the difference between total assets and total liabilities is referred to as Net Assets of a Non-Profit concern. This is because non-profits are mostly funded from donations, or from third-party sources. Hence, there is no shareholder’s capital or owner’s equity in the balance sheet of the company.

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Retained Earnings for Non-Profit Organizations

Non-Profit organizations do not have profit as their objective. Therefore, they do not have ‘earnings’ per se. The way the Income Statement for Non-Profit Organizations is structured such that there is no derivation of profits. In fact, there is a list of revenues, followed by a list of expenses. The surplus of revenues and expenses is then presented and is referred to as a surplus of revenues over expenses.

Therefore, the accumulated fund is used to describe all the surpluses that an organization has gathered over the years. Hence, the accumulated fund can be described as the surplus cash that is left over, when a Non-Profit Organization receives more cash than it spends. It is similar to profit entities in the case where revenues are greater than expenses.

Retained Earnings for Non-Profit Organizations – A detailed explanation

Non-Profit organizations are referred to as businesses that have been granted tax-exempt status by the Internal Revenue Service (IRS), because it is based on a social cause that provides benefit to the public. Donations that are made to the non-profit organizations are tax-deductible, and the receiving organization also does not

Having established the fact that retained earnings for non-profit organizations are referred to as Accumulated Fund, it can be seen that the reasoning behind this mainly lies in the fact that Non-Profits barely have any retained earnings.

Accumulated Funds are therefore referred to as capital funds of the non-profit organization, and the amount is subsequently added in the surplus when the revenues are greater than the expenses.

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Similarly, accumulated funds reduce when there is a deficit. This is when the expenditure is greater than the revenue generated. Hence, Accumulated Funds can also be described as the net amount of accumulated surpluses and deficits over the course of time, since the inception of the Non-Profit Organization.

Example of Retained Earnings (Accumulated Funds)

The concept of Retained Earnings (or Accumulated Funds) for Non-Profit Organizations is illustrated below:

Women’s Club is a Not-for-Profit Organization that has been formed in 2018 in order to provide women with networking opportunities. They receive donations from various companies, which acts as revenue for them.

Similarly, out of the donations that they receive as revenue for the company, non-profit organizations deduct all the relevant expenses. For the years 2018, 2019, and 2020, Women’s Club had the following balances:

Particulars201820192020
Revenue (Donations)$30,000$40,000$50,000
Expenses$20,000$45,000$30,000
Net Revenue$10,000($5,000)$20,000
    
Accumulated Fund$10,000$5,000$25,000

In the example mentioned above it can be seen that for the first year of operations, the Women’s Club generated donations worth $30,000. Subsequently, the corresponding expenses were $20,000. The Net Revenue, i.e. the net of both Revenue and Expenses amounted to $10,000. The Accumulated Fund for the first year of operations was calculated to be $10,000.

For the next year, i.e. 2019, the company had a negative Net Revenue, i.e. $5,000. In order to cover this deficit, Accumulated Fund was utilized, and therefore, the balance of the Accumulated Fund was then $5,000. Finally, in 2020, the Women’s Club reported a Net Revenue of $20,000, which eventually resulted in an increase in Accumulated Fund, equivalent to $25,000.

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What is Owner’s Equity in a Non-Profit Organization?

The presentation of assets and liabilities is the same for both, for-profits, and for non-profits. Factually, it can be seen that as far as the Balance Sheet for Non-Profits is concerned, there is no owner’s equity.

As far as for-profit organizations are concerned, their balance sheet comprises retained earnings and stock. However, non-profits do not have owners, hence, there is no owner’s equity as far as non-profits are concerned.

In the Balance Sheet, the difference between the Total Assets, and Total Liabilities is referred to as Net Assets. This is also presented in the Statement of Financial Position of the company.

From the perspective of non-profit organizations, Net Assets are defined as the net amount of the financial position of the company, in terms of what it owes, and how it is invested and deposited. On the other hand, liabilities are referred to as the amount that the company owes to other stakeholders of the business.

Retained Earnings and Net Assets are similar in terms of the difference between revenue and expenses. Therefore, for non-profit organizations, revenue is supposed to be assigned as net assets with, or without donor restrictions.

Net Assets with Donor Restrictions

Net Assets with donor restrictions include donations that are both, temporarily, as well as permanently restricted. These are the donations that have certain covenants attached to the way this amount is spent.

Net Assets without Donor Restrictions

Net Assets without donor restrictions comprise all the assets present in the unrestricted funds class. This implies that the nonprofit organization can use this for any purpose, without any limitations attached.

Therefore, whenever a non-profit receives a donation from any source, it includes both, with and without donor restrictions.                                                                       

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