Endowments can be significant to nonprofit organizations. Usually, the more endowments an organization has, the more stable and established it is. Accounting for endowments can be difficult because each endowment may have its own contract and compliance issues.
Foundation and individual estates are common donors of endowments. The typical endowment comes with the stipulation for the principal to be held in perpetuity, and income, such as interest, to be used by the organization. The idea is to provide the nonprofit with a basis for growth and to attract more funding. When a foundation gives a million dollars to a nonprofit, it gives the message that the organization is well regarded and not a fly-by-night operation.
The Financial Accounting Standards Board, also known as FASB, releases statements of financial standards to guide accountants in recognizing and reporting endowments properly. The statements number 116 and 117, along with staff position 117-1 refer directly to endowments, including definitions, examples and updates. Many organizations consider temporarily restricted funds as endowments; however, these are "term" endowments per statement 117 and not "real." Real endowments are booked under the permanently restricted net asset area, while term endowments are recognized under the temporarily restricted net assets.
The journal entry to recognize an endowment is to debit an investment account (asset) and to credit a revenue account within the permanently restricted net assets. Depending on grant documentation, income from invested endowments could be used for operations, and the entry would be to debit the investment account and credit an interest or income account within the unrestricted net asset area. This type of income usually has its own set of accounts to distinguish it from other kinds of revenues.
In times of tight cash flows, some nonprofits may need to borrow against their endowment funds. In this situation, original donors should be contacted beforehand and asked for permission in writing. If a an organization declares bankruptcy, creditors may or may not have access to endowment funds, depending on individual state law. Note that for accounting purposes, an endowment is usually recognized when received -- never when the nonprofit is added to a will.