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Overview of Accounting Systems



Most colleges, universities, schools, and other educational entities are classified as "not-for-profit organizations" (NPOs), as the term is defined by Generally Accepted Accounting Principles (GAAP). Contrary to what some may think, not-for-profit organizations must earn profits. Otherwise, they will not be able to replace worn-out assets or grow to meet increasing demand for their programs. Profits are the lifeblood of any organization.

What distinguishes a not-for-profit organizations from a for-profit entity? Essentially, purpose. For-profit entities exist primarily to increase the wealth of their owners, while not-for-profit organizations exist primarily to serve a worthwhile social good. NPOs are not “owned,” so the idea of increasing someone’s wealth does not apply. Another important difference is the nature of revenues. Generally, for-profit entities earn their revenues, while not-for-profit organizations can receive revenues that are not earned (contributions). Those contributions can be treated advantageously by the donors for income tax purposes.

Some educational institutions are operated as for-profit entities. This chapter is not concerned with those entities because the GAAP that apply to them also govern any for-profit enterprise. This chapter, then, deals with the accounting and financial reporting that apply to educational institutions that are operated as not-for-profit organizations.

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