Accounting For Not-For-Profit Organisation

Rating:
5
(1)
Accounting for Not-for-profit Organisations

Accountancy is a vital subject; it is the backbone of every organisation and exposes students to the relevancy of financial recordkeeping and money management whether you are pursuing commerce with maths or commerce without maths. With the dreaded 12th exams coming closer, we have taken it upon ourselves to ease the burden of preparation and made notes for the important chapter: Accounting for Not-for-Profit Organisation. In this blog, we are going to cover all the essential points for your quick revision!

Not for Profit Organisation: Meaning 

A not-for-profit organisation is defined as an organisation whose primary aim is to provide a service to its members for the welfare of a group or society in general according to the chapter accounting for not-for-profit organisation. The organisation is set up as a charitable institution, often managed by trustees and is not in any way driven by profiteering. Examples: schools, charities, trade unions, welfare societies etc. Read more about introduction to accounting.

Characteristics

According to the accounting for not-for-profit organisation chapter, Not-for-profit organisations are discernable and identifiable because of certain main features. They are mentioned below:

  • These organisations are established to provide a service either at no cost or minimal cost for the advancement of society. The nature of the service varies from education to health to recreation.
  • The aim is the welfare of a specific group or society and not making profits.
  • These organisations function as charitable societies and their subscribers are called members.
  • The organisation’s primary functions are managed by trustees or an executive group of members elected by its own members.
  • These organisations do not participate in any business activities and hence, rely on income sources like subscriptions, donations, grant-in-aid, income from investment or legacies or financial assistance from the government.
  • The funds or any surplus generated by such organisations are credited to the general fund or capital fund.
  • It is legally binding for these organisations to provide a financial record. These organisations prepare financial statements for the statutory requirement and for maintaining control over assets/funds.   

Must Read: Nature and Significance of Management Class 12 Notes

Financial Statements for Not-for-Profit organisations

Not-for-profit organisations keep a financial statement every year for legal reasons, as mentioned in the chapter accounting for not-for-profit organisation. A financial statement is necessary for the proper utilization of funds and safekeeping of the general funds from misappropriation. These organisations follow the double-entry system of accounting. The financial statements of such organisations consist of the following:

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

Receipt and Payment Account

Receipt and Payment Accounts provide a summary of all the cash and bank transactions that took place during the financial year. It is important to account for receipts and payments because they help in preparing income & expenditure accounts and balance sheets as mentioned in accounting for not-for-profit organisation chapters. This account begins with recording cash in hand/cash in the bank on the receipt side and the closing balance includes cash in hand/bank left at the end on the payment side. Find out more about career in accountancy.

Read: CBSE Accountancy Class 12

Format of Receipt and Payment Account

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

Receipts Amount Payments Amount
Balance b/dCash in HandCash at 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:

  • It is similar to a cash book wherein the receipts are on the debit side and the payments are on the credit side.
  • All receipts and payments are recorded regardless of the financial period.
  • Receipts and payments of capital nature or revenue nature are certain terms are included.
  • Non-cash items such as depreciation, outstanding expenses or accrued income are not recorded.
  • No difference between receipts and payments made out in cash or through a bank transaction.

Income and Expenditure Account

An income and expenditure account for a not-for-profit organisation is like a profit and loss account of any business organisation according to the chapter accounting for a not-for-profit organisation. 

  • The account records all the revenue items of the current period and at the bottom, it records deficit or surplus in the balance column.
  • The income and expenditure account is prepared on an accrual basis and contains two columns, i.e. expenditure column which includes losses and expenses and the income column which includes incomes and gains.
  • This account takes into account non-cash items like depreciation.
  • It does not include an opening balance and the closing balance is written either as surplus or deficit. 

Format of Income and Expenditure Account

There is a proper format of income and expenditure account. 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 determines the financial position of a business enterprise. A balance sheet for a not-for-profit organisation includes assets, liabilities and capital or general fund and is prepared after income & expenditure as mentioned in the chapter accounting for not-for-profit organisation. The format of the same is mentioned below: 

Liabilities Amount Assets Amount
Capital xxx Cash in hand/bank xxx
Opening balanceAdd surplusSubtract 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 mentioned in the chapter accounting for a not-for-profit organisation, a financial statement of a not-for-profit organisation looks similar to a financial statement of a business enterprise yet there are certain terms that are present only in the former statement, let’s have a look at them:

  • Subscriptions: Subscriptions refer to the fees collected from members of an organisation on an annual basis.
  • Donations: Donations are gifts received by an organisation from a person or enterprise. Donations can be specific or general.
  • Legacies: Legacies refer to the amount received by the organisation because a person left it in their will and is added to the capital fund.
  • Life membership fee: Life membership is a lumpsum amount received from a member and is added to the capital fund. 
  • Entrance fees: It is the fees paid by a prospective member and is added directly to the capital fund.
  • Sale of an old asset: This item is generally included in the receipts section of the receipts and payments account while any profit or loss incurred from this sale is mentioned in the income and expenditure account.
  • Sale of periodicals: This item is represented in the income and expenditure account as income due to its recurring nature.
  • Payment of Honorarium: It refers to the payment given to a guest performer for their service.
  • Endowment Fund: It is included in the liabilities section of a balance sheet and refers to a gift for a specific purpose.
  • Government Grants: Governments support the not-for-profit organisation by giving grants.

Explore: Accounts Project Class 12

Hopefully, this blog was helpful for a quick revision for Accounting for Not-for-Profit Organisation. 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!

Leave a Reply

Your email address will not be published. Required fields are marked *

2 comments
  1. The way the design of this website has been is spectacular, easy flow to scroll and the notes are better in comparison to other websites and are also clean and clear. I will recommend my friends to have notes from this website. Thanks for making my day better!

You May Also Like