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Private Christian School - Budgeting & Revenue Recognition - Accrual Basis

Please bear with me as I ask the following set of questions: Background: A private, non profit K3-12 Christian School which operates as a ministry of a church is working on their budget for 2015-2016. They have historically worked under a cash basis but for 2015-2016 will be working under an accrual basis. 1. How do you recognize tuition revenue and its corresponding tuition discounts both in budget and at time of transaction? Proper recognition of the tuition revenue and discounts in the budget as I understand it: Budget for GROSS Revenue in the Tuition Revenue Account Budget for Discounts in the Tuition Reduction (Contra-Revenue) Accounts (basically this is an expense). Is this correct? As tuition is billed, I would recognize the revenue (and the discounts applied), because the family is only expected to pay the net of those amounts (which would increase the A/R Account balance). Debit A/R Debit Discounts Credit Revenue 2. How do you reflect in the budget that you expect some students who are committed at time of budget proposal/approval will inevitably withdraw? Do you just reduce your proposed gross revenue line by the amount you project will equal revenue lost to withdrawals? Or do you need to budget it for it differently? Should you recognize the lost revenue from withdrawals in your General Ledger/Financial Statements when the transaction actually takes place or should you let it accurately reflect a deficit in comparison of actual vs. budget? My thoughts are the latter, as we would not have provided a service, therefore, why would we recognize revenue? 3. How do you reflect in the budget that you expect some new students to enroll after the budget proposal/approval, if at all? We don't currently project this in the budget amounts, but if it happens, we expect to see a surplus of actual revenue vs budget. 4. Should you budget for Bad Debt Expense? What are the entries processed when a family account balance is written off (to affect any balance sheet or income statement accounts)? Should an entry happen at any other time (each accounting period (monthly) or only at time of transaction? Having a Bad Debt Expense account should also require the set up of an Allowance for Doubtful Accounts account in the Balance Sheet, correct? This Allowance for Doubtful Accounts would be an Asset account with a normal Credit Balance Correct and basically a sub-account of Accounts Receivable, correct? Also, if it makes any difference, we will be using QuickBooks Enterprise Accountant as a Non Profit/Religious Organization. Hopefully, someone will be able to shed some light because trying to get others to understand the process and reasoning is making me feel c.r.a.z.y! LOL. I just want to be sure my thought process is correct. Thanks

Answers

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

I think you're very much on the right path. I did some work for a similar entity a few years ago but I am by no means an authority on the nuances of the non-profit education industry. I'll provide my thoughts but there may be certain rules with which I'm not familiar.

1. I would make one change to your method - I would credit a liability for unearned tuition rather than straight to revenue. I would then recognize the revenue (and relieve the liability) monthly to better match your expenses (salaries, et al).

2. Your thought is correct -- your financials will not reflect withdraws as no financial transaction has occurred. Your budget would typically reflect the anticipated net enrollment. If withdrawals are higher or lower than anticipated, you would have a variance to budget.

3. A fair question but remember that budgets are simply a management tool. For non-profits, your anticipated revenues allow you to determine staffing and the related services that you can offer. If you can reasonably project income from late enrollments, then it might make sense to include them in your budget. If not easily projected though, I would not include in the budget or plan around that income. The negative consequence of missed expectations can just be too painful.

4. Correct thinking - Both for budget and actual purposes, I would expect bad debts. Hopefully you have enough history to get a feel for what is a "typical" default rate (let's assume 5%). Each month when I recognize $100 tuition revenue, I would also debit $5 to Bad Debt Expense with a credit offset to Allowance for Doubtful Accounts (set up as you suggested as a contra asset sub-account of AR). When a receivable is deemed uncollectible, you would DR the Allowance and CR Accounts Receivable.

- The problem with the method I proposed above is that your likely to experience your bad debts early in your revenue cycle so you'll end up writing off Bad Debts against the reserve before you've "funded" the reserve through your P&L entry (so you'd end up with a DR balance in your Allowance account early in the school year). You may instead try these entries:
--- On initial billing:
DR Accounts Receivable $100
CR Allowance for Bad Debts $5 (fully "funding" the Bal Sht reserve up-front)
CR Unearned Tuition $95
--- Monthly revenue recognition (assuming over 10 mos):
DR Unearned Tuition $9.50
DR Bad Debt Expense $0.50
CR Tuition Income $10.00

Hope that's helpful!

Anonymous
(unemployed) |

Thank you so much Edward for your response and for the validation of my thought processes. In response to how you recommend I handle the unearned tuition, that is what I was planning on doing with those families who opt to pay their tuition in full at the beginning of the year (placing their full year billing into a Deferred Revenue account, then evenly allocating on a monthly basis over a 10 month period). For those families who opt for the 10 month pay plan, I would be able to directly code to the Revenue line.

I have another question for you in relation to how we reflect the tuition reduction accounts in both our budget and in our financials/chart of accounts. Currently, these accounts are reflected as expenses. Should they instead be set up as contra-revenue accounts in the revenue section of the chart of accounts and GL? Our deacon board has asked that I move those accounts out of the budget expense section and place them in one summary line at the bottom of the budget as "Revenue Reductions" under the "Revenue" summary line. For what ever reason, they only reflect the total revenue on the budget distributed to the congregation (this is a school that operates as a ministry of the church) for approval as opposed to showing them the detail revenue line items. I'm just trying to gauge if this request is one that is appropriate.

Thank you again for your insight.

Topic Expert
Alan Hart
Title: Consultant
Company: Pacific Shine Group
(Consultant, Pacific Shine Group) |

With regard to the budgeting portion of your question, you will be much better off using a dedicated, purpose designed planning and budgeting software with integrated analytics capabilities. Unfortunately, QuickBooks (all levels of this software) is not a “true” planning and budgeting tool as its budget (you may be able to have several versions stored) can only hold one number per G/L account.

Ideally, what you need is a system that can mimic the QuickBooks Enterprise chart of accounts and where each budget line (e.g., revenue items, expense items, fixed assets, personnel expenses, etc.) will automatically update these COA account balances in the budgeting system as you update your forecasts. To achieve what you are looking for in forecasting revenues based on student headcounts, the budget should be able to use built in drivers where assumptions (via these drivers) will drive the forecasted revenue lines (and possibly certain forecasted expenses if needed).

Then, when your budget data input is complete, all applicable forecasted financial statements can be automatically generated, for each period of your budget and immediately compared with actual data from closed accounting periods. This process will make your planning, budgeting and analysis a lot more meaningful. Unfortunately, QuickBooks Enterprise on its own cannot do that.

Anonymous
(unemployed) |

Hi Alan,

Thank you for your response. I am not sold at all that QuickBooks was the best option for us to transition to for our accounting system and had I had the final say, we wouldn't be using it at all. With that said, our budget preparation is handled outside of our accounting system with excel spreadsheets. I would definitely be open to more efficient means of budget prep. What do you recommend we look into as an option to streamline this process that will work with QuickBooks?

Thanks

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

You're very welcome for the assistance. Regarding tuition reduction accounts for financial statement purposes, in my mind the distinction between the contra revenue and an expense account is whether the funds were legally earned. If you agree to provide tuition credits to a low-income family, that's the equivalent of putting a grocery item on sale so the net amount is the appropriate income base (and a contra-income account would be appropriate in order to provide detailed visibility of the amount of fees waived). If instead, a family walks away from a legally obligated debt, I would show that as bad debt expense.

For budget purposes, remember again that this is a management tool so the appropriateness of a form is really dependent on its purpose. I think it is important for those managing the program to know the details behind the revenue figures but I am not surprised that the full information is not available to the congregation. If you were to show parents paying full tuition that (being extreme) only half the families are paying for services, it could invite a level of scrutiny that clouds the overall mission of the ministry ("why am I paying for your child?!"). Full transparency is not appropriate for some audiences.

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