Accounting for Not-For-Profit Organisation: A Beginner’s Guide for Students

Accountancy is a vital subject and is the backbone of every organisation. It exposes students to the relevance of financial record-keeping and money management. So, whether you are pursuing commerce with maths or commerce without maths, a good understanding of this subject is a must for you. As the exams for Class 12th are approaching, we are offering you an easy way to prepare by making notes for the important chapter: Accounting for Not-for-Profit Organisations. In this blog, we are going to cover all the essential points for your quick revision, so that your burden can be relieved.

Not-for-Profit Organisation: Meaning 

A Not-for-Profit Organisation (NPO) is an entity formed not for earning profit but for promoting the welfare of its members or society at large through rendering services. These organisations are usually established as charitable institutions, clubs, or societies and are managed by a group of trustees or an elected managing committee. Their primary objective is service to the community rather than profit generation.

Examples: Schools, hospitals, religious institutions, sports clubs, professional bodies, trade unions, welfare societies, NGOs, and charitable trusts.

Key Characteristics of Not-For-Profit Organisations

According to the accounting for not-for-profit organisations chapter, these organisations are discernible and identifiable because of certain main features. The following features distinguish NPOs while studying Accounting for Not-For-Profit Organisation:

• Main objective is to provide services (education, healthcare, sports, cultural activities, etc.) either free of cost or at nominal charges.
• Profit earning is not the motive; any surplus is used for achieving the organisation’s objectives.
• Members are the owners, not shareholders; they are called subscribers or members.
• Managed by elected members or trustees.
• Major sources of funds include subscriptions, donations, legacies, government grants, entrance fees, life membership fees, and income from investments.
• Surplus is not distributed among members but added to the Capital Fund or General Fund.
• They are required to maintain proper books of account and prepare financial statements for transparency and statutory compliance.

Financial Statements for Not-for-Profit Organisations

Not-for-profit organisations prepare annual financial statements to meet legal requirements, as explained in the chapter Accounting for Not-for-Profit Organisations. These statements help ensure that funds are used appropriately and protect general funds from misuse. Like other entities, not-for-profit organisations also maintain their accounts using the double-entry bookkeeping system. Their financial statements typically include the following:

• Receipt and Payment Account
• Income and Expenditure Account
• Balance Sheet

These statements are prepared following the double-entry system and ensure proper utilisation and safeguarding of funds.

Receipt and Payment Account

A Receipt and Payment Account is a summary statement that records all cash and bank transactions made during a financial year. It captures every amount received and every payment made, making it useful for preparing the Income and Expenditure Account as well as the Balance Sheet of not-for-profit organisations.

This account opens with the cash or bank balance available at the beginning of the year on the receipts side, and it shows the closing cash or bank balance on the payments side at the end of the year. Let’s understand the format of the Receipt and Payment Account in the next section.

Also Read: Best Self-Introduction for Cabin Crew Interview

Format of Receipt and Payment Account

The format of the receipt and payment account is tabulated below. It is important to mention in the chapter on accounting for a not-for-profit organisation. You can have a look here: 

Receipts	Amount	Payments	Amount
Balance b/dCash in HandCash at the bank	xxx	Balance b/d (Bank overdraft)	xxx
Subscriptions	xxx	Rent	xxx
General Donations	xxx	Wages and Salaries	xxx
Locker Rent	xxx	Rates and Taxes	xxx
Legacies	xxx	Insurance	xxx
Grant in Aid	xxx	Audit fees	xxx
Interest on FD	xxx	Printing and Stationery	xxx
Interest on investments	xxx	Maintenance	xxx
Membership fees	xxx	Repair and Renewals	xxx
Entrance fees	xxx	Purchase of assets	xxx
Miscellaneous Receipts	xxx	Purchase of investments	xxx
Balance b/d(Bank overdraft)	xxx	Closing b/dCash in handCash at bank	xxx
Total	xxx		xxx

Features

The features of the same are mentioned below:

• Starts with opening cash and bank balances (debit side).
• All cash receipts (revenue and capital) are recorded on the debit side.
• All cash payments (revenue and capital) are recorded on the credit side.
• Ends with closing cash and bank balances.
• Prepared on a cash basis; non-cash items like depreciation or accruals are not recorded.
• Both revenue and capital items are included without distinction.

Income and Expenditure Account

An income and expenditure account is a financial statement used by not-for-profit organisations and serves a purpose similar to the profit and loss account prepared by business enterprises. It records all revenue-related transactions pertaining to the current accounting period. After listing the incomes and expenses, the statement shows either a surplus or a deficit at the end.

This account is prepared on the accrual basis of accounting, meaning that all expenses and incomes are recorded when they are incurred or earned, regardless of actual cash movement. It includes two main sections:

• Expenditure section – covering all expenses and losses
• Income section – covering all incomes and gains

Non-cash items such as depreciation are also included in this statement.

Unlike some other financial statements, it does not begin with an opening balance. The final figure appears as either a surplus (excess of income over expenditure) or a deficit (excess of expenditure over income).

Format of Income and Expenditure Account

There is a proper format for income and expenditure accounts. It is tabulated below:

Expenditure	Amount	Income	Amount
Rates and Taxes	xxx	Subscriptions	xxx
Lighting	xxx	Entrance fees	xxx
Insurance Premium	xxx	Locker Rent	xxx
Audit Fees	xxx	Outstanding Interest	xxx
Printing and Stationery	xxx	Interest on investment	xxx
Salaries and Wages	xxx
Postage and Courier charges	xxx
Surplus	xxx

Balance Sheet

A balance sheet presents the financial status of an organisation at a specific point in time. In the case of a not-for-profit organisation, it shows the assets, liabilities, and the capital or general fund. It is prepared after completing the Income and Expenditure Account, as discussed in the chapter on accounting for not-for-profit entities. The standard format of the balance sheet is given below.

Liabilities	Amount	Assets	Amount
Capital	xxx	Cash in hand/bank	xxx
Opening balance Add surplus Subtract deficit	xxx	Outstanding Incomes	xxx
Legacies	xxx	Prepaid Expenses	xxx
Entrance fees	xxx	The stock of Consumable Items	xxx
Membership fees	xxx
Donations	xxx

Peculiar Items

As discussed in the chapter on accounting for not-for-profit organisations, their financial statements resemble those of business enterprises. However, some terms and items are unique to not-for-profit accounting. These include:

• Subscriptions: Main recurring source; shown in Income and Expenditure A/c after adjusting outstanding and advance subscriptions.
• Donations: Amounts received as gifts from individuals or organisations. Donations may be general or meant for a specific purpose.
  • General → Credited to Income and Expenditure A/c
  • Specific → Added to the specific fund or capitalised
• Legacies: Amount received as per will; treated as capital receipt and added to Capital Fund.
• Life membership fee: It is a one-time lump sum payment; added directly to the Capital Fund.
• Entrance fees: It is usually treated as a capital receipt and added to the Capital Fund (unless policy says otherwise).
• Sale of an old asset: The proceeds from selling an asset appear in the receipts side of the Receipts and Payments Account. Any profit or loss from the sale is recorded in the Income and Expenditure Account.
• Sale of periodicals: Since this income is recurring, it is shown on the income side of the Income and Expenditure Account.
• Payment of Honorarium: A payment made to guest performers or specialists for their services.
• Endowment Fund: A fund created out of a donation meant for a specific purpose. It is shown on the liabilities side of the balance sheet.
• Government Grants: Financial assistance provided by the government to support the organisation’s activities.

Mastering these concepts is essential for understanding Accounting for Not-For-Profit Organisation as prescribed in Class 11 and Class 12 NCERT syllabus. Proper treatment of peculiar items and preparation of the three financial statements form the core of this chapter.

Also Read: Bachelor of Aviation: Top Courses, Universities, Fees

FAQs

Related Reads:

How to Join DGCA (Directorate General of Civil Aviation)?	CMA Course
Online BBA: Colleges, Job Prospects	BCom Banking and Finance: Eligibility, Colleges, Scope
Top 10 Institutes for BBA Distance Education	Animation Courses After 12th

Hopefully, this blog was helpful for a quick revision of Accounting for Not-for-Profit Organisations. For more exciting and educational content, follow Leverage Edu on Youtube, Linkedin, Instagram and Quora! If you need help or want to find out about courses for commerce students, get in touch with our Leverage Edu experts. Sign up for a free session today!