Back to Main Page

Web Notes

Not for profit Organization

General Accounting Principles Not for profit organisation

Not-for-Profit Organisations

Not-for-Profit Organisations refer to the organisations that are for used for the welfare of the society and are set up as charitable institutions which function without any profit motive. Their main aim is to provide service to a specific group or the public at large. The funds raised by such organisations are credited to capital fund or general fund. The major sources of their income usually are subscriptions from their members donations, grants-in-aid, income from investments, etc.

The main objective of keeping records in such organisations is to meet the statutory requirement and help them in exercising control over utilisation of their funds.

They also have to prepare the financial statements at the end of each accounting period (usually a financial year) and ascertain their income and expenditure and the financial position, and submit them to the statutory authority called Registrar of Societies.

The main characteristics of such organisations are:

Its sole aim is to provide service either free of cost or at nominal cost, and not to earn profit.
These are organised as charitable trusts/societies and subscribers to such organisation are called members.
Their affairs are usually managed by a managing/executive committee elected by its members.
The main sources of income of such organisations are:

subscriptions from members,
donations,
legacies,
grant-in-aid,
income from investments, etc.

The funds raised by such organisations through various sources are credited to capital fund or general fund.
The surplus generated in the form of excess of income over expenditure is not distributed amongst the members. It is simply added in the capital fund.
The Not-for-Profit Organisations earn their reputation on the basis of their contributions to the welfare of the society rather than on the customers’ or owners’ satisfaction.
The accounting information provided by such organisations is meant for the present and potential contributors and to meet the statutory requirement.

BOOKS OF ACCOUNTS MAINTAINED

IN A PROFIT MAKING ENTITY-

IN A NOT FOR PROFIT ORGANIZATION

Final Accounts or Financial Statements:

The Not-for-Profit Organisations are also required to prepare financial statements at the end of the each accounting period. Although these organisations are non-profit making entities and they are not required to make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was sufficient to meet the expenses or not. For this purpose, they have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation as stated earlier, the final accounts of a ‘not-for-profit organisation’ consist of the following:

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

Receipt and Payment Account

The Receipt and Payment Account is the summary of cash and bank transactions which helps in the preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the Income and Expenditure Account, and the Balance Sheet.

It is a real account made on cash basis of accounting.

Income and Expenditure Account

Income and Expenditure Account is akin to Profit and Loss Account. The Not-for-Profit Organisations usually prepare the Income and Expenditure Account and a Balance Sheet with the help of Receipt and Payment Account. However, this does not imply that they do not make a trial balance. It is a nominal account.

Balance Sheet

In fact, if an organisation has followed the double entry system they must prepare a trial balance for checking the accuracy of the ledger accounts and it will also facilitate the preparation of Receipt and Payment account. Income and Expenditure Account and the Balance Sheet.

Features of Receipt & Payment Account-

Salient Features

It is a summary of the cash book. Its form is identical with that of simple cash book (without discount and bank columns) with debit and credit sides. Receipts are recorded on the debit side while payments are entered on the credit side.
It shows the total amounts of all receipts and payments irrespective of the period to which they pertain
It includes all receipts and payments whether they are of capital nature or of revenue nature.
No distinction is made in receipts/payments made in cash or through bank. With the exception of the opening and closing balances, the total amount of each receipt and payment is shown in this account.
No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account.
It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft. In fact, the closing balance in this account (difference between the total amount of receipts and payments) which is usually a debit balance reflects cash in hand and cash at bank unless there is a bank overdraft.
Receipt & Payment account record cash & Bank transaction only. It is based upon cash basis not accrual basis. So, depreciation is a non cash expense & outstanding subscription is on accrual basis.

Receipt & Payment Account

Particular

Amount

Particular

Amount

Balance b/d

Cash in hand

Cash at bank

Capital Receipts:

Legacies

Sale of office furniture

Sale of sports equipments

Donations for special purposes e.g., building, prizes etc.

Life membership fees

Sale of investments

Endowment fund receipts

Receipt on account of special funds e.g., Prize fund, tournament fund etc.

Interest on specific fund

Investments

Entrance fees

Revenue Receipts:

Subscriptions

General donations

Proceeds from entertainments

Interest or dividends

sale of old newspapers, waste papers etc

Miscellaneous receipts

Balance c/d

Cash at bank (Bank overdraft)

Balance b/d

Cash at Bank(overdraft)

Capital payments:

Building construction

Sports equipments or materials

Cost of leasehold land

Investments

Advance for purchase of buildings

Government's loan

Furniture

Revenue payments:

Prizes paid

Postages

Honorarium

Expenses on special food to patients

Entertainment expenses

Insurance, rent, salaries

Advertisement

Audit fee

Telephone, electric charge

Gardening

Newspapers and periodicals

Printing and stationery

Bar expenses

Up-keep of lawns

Municipal taxes

Charity

Printing of year book

Balance c/d (closing balance)

Cash in hand

Cash at bank

SOME RELEVANT TERMS-

Main source of income

For an organisation which is a not for profit entity , the main source of their income is donations and subscription where people subscribe their membership and pay the fees for the same . Donations received can be general or specific in nature.

Subscriptions:

Subscription is a membership fee paid by the member on annual basis.
This is the main source of income of such organisations.
Subscription paid by the members is shown as receipt in the Receipt and Payment Account and as income in the Income and Expenditure Account.
It may be noted that Receipt and Payment Account shows the total amount of subscription actually received during the year while the amount shown in Income and Expenditure Account is confined to the figure related to the current period only irrespective of the fact whether it has been received or not.

Subscription Account

Particular

Amount

Particular

Amount

To Balance b/d

(Out. at the beg)

To Income & Expenditure A/c

(bal. fig.)

To Balance c/d

(Adv. at the end)

By Balance b/d

(Adv. at the beg)

By Cash A/c

(Sub. received during the year)

By Bad debts(if any)

By Balance c/d

(Out. At the end)

Statement showing calculation of subscription

Particular

Amount

Total Subscription received during the year(whether relates to any year)

Less: Subscription o/s at the beg. Of current year

Less: Advance Subscription received during the current year

(relates to any future period)

Add: O/s Subscription at the end of current year

(including sub. o/s for p/y year till the end of current year)

Add: O/s Subscription received in advance at the end of current year

Subscription to be shown in income and expenditure a/c

1. Subscription received during the year Rs. 2,00,000 in the year 2019-2020. Outstanding subscription of year 2018-19 received during the year Rs. 50,000. Outstanding subscription for the year 2019-20 is Rs. 60,000. The subscription to be booked in the income & expenditure account

Answer –

Explanation –

Subscription rec. during the year – Rs. 2,00,000

+o/s subscription for the year - 60,000

-o/s sub of previous year – 50,000

=Subscription for the year RS. 2,10,000

2. Subscription received during the year Rs. 2,00,000 in the year 2019-2020. Prepaid subscription at the end of year 2018-19 received during the year Rs. 50,000. Prepaid subscription for the year 2019-20 is Rs. 60,000. The subscription to be booked in the income & expenditure account

Answer –

Explanation-

Subscription rec. for the year Rs. 2,00,000

+opening prepaid 50,000

-closing prepaid 60,000

= Subscription for the year Rs. 1,90,000

Donations:

It is a sort of gift in cash or property received from some person or organisation. It appears on the receipts side of the Receipts and Payments Account. Donation can be for specific purposes or for general purposes.

a) Specific Donations:

If donation received is to be utilised to achieve specified purpose, it is called Specific Donation. Such donation is to be capitalised and shown on the liabilities side of the Balance Sheet irrespective of the fact whether the amount is big or small. The intention is to utilise the amount for the specified purpose only.

b) General Donations:

Such donations are to be utilised to promote the general purpose of the organisation. These are treated as revenue receipts as it is a regular source of income hence, it is taken to the income side of the Income and Expenditure Account of the current year.

Legacies:

It is the amount received as per the will of a deceased person. It appears on the receipts side of the Receipt and Payment Account and is directly added to capital fund/general fund in the balance sheet, because it is not of recurring nature. However, legacies of a small amount may be treated as income and shown on the income side of the Income and Expenditure Account.

Life Membership Fees:

Some members prefer to pay lump sum amount as life membership fee instead of paying periodic subscription. Such amount is treated as capital receipt and credited directly to the capital/general fund.

Entrance Fees:

Entrance fee also known as admission fee is paid only once by the member at the time of becoming a member. In case of organisations like clubs and some charitable institutions, is limited and the amount of entrance fees is quite high. Hence, it is treated as non-recurring item and credited directly to capital/general fund. However, for some organisations like educational institutions, the entrance fees is a regular income and the amount involved may also be small. In their case, it is customary to treat this item as a revenue receipt. However, if there is specific instruction, it is advisable to treat the entire amount as capital receipt and the relevant amount should be directly added to capital/general fund.

Sale of old asset:

Receipts from the sale of an old asset appear in the Receipts and Payments Account of the year in which it is sold. But any gain or loss on the sale of asset is taken to the Income and Expenditure Account of the year.

Sale of Periodicals:

It is an item of recurring nature and shown as the income side of the Income and Expenditure Account.

Sale of Sports Materials:

Sale of sports materials (used materials like old balls, bats, nets, etc) is the regular feature with any Sports Club. It is usually shown as an income in the Income and Expenditure Account.

Payments of Honorarium:

It is the amount paid to the person who is not the regular employee of the institution. Payment to an artist for giving performance at the club is an example of honorarium. This payment of honorarium is shown on the expenditure side of the Income and Expenditure Account.

Government Grant:

Schools, colleges, public hospitals, etc. depend upon government grant for their activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e. income of the current year) and credited to Income and Expenditure account. However, grants such as building grant are treated as capital receipt and transferred to the building fund account. It may be noted that some Not-for-Profit organisations receive cash subsidy from the government or government agencies. This subsidy is also treated as revenue income for the year in which it is received

Fund Based Accounting –

the income earned on such investments is added to the respective fund
Similarly, the expenses incurred on such specific purposes are also deducted from the special fund.

Funds –

1. Unrestricted Funds –

The funds which are not restricted are termed as unrestricted funds. The management can use these funds as required by them in any manner.

General Fund or Capital Fund

The corpus donations received by the Not for profit organizations are included in it and through this fund the entity starts working.

2. Restricted Funds

a) Government Grant

Schools, colleges, public hospitals, etc. depend upon government grant for their activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e. income of the current year) and credited to Income and Expenditure account. However, grants such as building grant are treated as capital receipt and transferred to the building fund account. It may be noted that some Not-for-Profit organisations receive cash subsidy from the government or government agencies. This subsidy is also treated as revenue income for the year in which it is received.

b) Endowment Fund –

It is a fund arising from a bequest or gift, the income of which is devoted for a specific purpose. Hence, it is a capital receipt and shown on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.

c) Annuity Fund –

This fund is received by NPO by a donor on a condition to pay periodically specified amount to a specific beneficiary. Annuity is a fixed amount paid by the beneficiary during their lifetime after which the fund becomes the property of NPO

d) Loan Fund –

Fund set up to provide loans to people

e) Fixed Assets Fund –

A fund set up to purchase or repair or construct a specific asset

f) Prize Fund –

It is set to give awards or prizes by the NPO.

Show the following information in financial statements of a ‘ Not-for-Profit’ Organisation:

Particular

Amount (Rs.)

Match Expenses

Match Fund

Donation for Match Fund

Sale of Match tickets

14,000?

6000

8000

5000

(b) What will be the effect, if match expenses go up by Rs. 6,000 other things remaining the same?

Solution

Balance Sheet as on………..*

(a)

Liabilities

Amount

Match fund-6,000

Add-donations rec.8,000

Add- sale of match tickets5,000

-match expense (14000)

*Only relevant data.

(b) If match expenses go up by Rs. 6,000, the net balance of the match fund becomes negative i.e. Debit exceeds the Credit, and the resultant debit balance of Rs. 1,000 shall be charged to the Income and Expenditure Account of that year.

Stationery:

Normally expenses incurred on stationary, a consumable items are charged to Income and Expenditure Account. But in case stock of stationery (opening and/or closing) is given, the approach would be make necessary adjustments in purchases of stationery and work out cost of stationery consumed and show that amount in Income and Expenditure Account and its stock in the balance sheet.

Stationery –

Opening stock xxx

+ Purchases xxx

-closing stock xxx

NPO – School Chale Hum purchased stationery worth Rs. 49000 on credit, which is 70% of the total purchases made. At the end of the year unused stationery left worth Rs. 10,000. Stationery consumed during the year

Answer – 60,000

Explanation –

Credit Purchase = Rs. 49,000

Total Purchases be x

Total purchase = cash + credit purchase

Credit purchase = 70% of x

49000 = 70/100* X

X = 49000/70*100

X = 70,000

Total Purchase = Rs. 70,000

Stationery used during the year =

op stock+ purchase - cl. Stock

= 70,000-10,000

=Rs. 60,000

Treatment of salary-

Salaries paid during the year by the Not for Profit organisation Rs. 1,00,000. salaries for the month of march is outstanding Rs. 20,000.The salaries for the year to be shown in the income & expenditure account.

Explanation-

Salaries – Rs. 1,00,000

+o/s salary – Rs. 20,000

= income & expenditure account – Rs. 1,20,000

Incidental Trading Activity

Sometimes, trading activities such as chemist Shop, hospital, canteen, beauty parlour etc. also take place in such organisations to provide certain facilities to members or public in general. In such a situation, trading account has to be prepared to ascertain the results of such incidental activity. The profit from such commercial (trading) activities is applied to fulfill the main objectives for which the organisation was set up, and so it is transferred to the Income and Expenditure Account. It is pertinent to note the following procedure:

1. Prepare trading account to determine profit (or Loss) due to incidental commercial (trading) activity. All costs and revenues directly and exclusively related to such activity are recorded in the trading account. Balance of trading account is transferred to the Income and Expenditure Account.

2. Income and Expenditure Account records, in addition to trading Profit (or loss), all other incomes and expenses not recorded in the Trading Account. Surplus or deficit revealed by the Income and Expenditure Account is transferred to capital/general fund.

INCOME & EXPENDITURE ACCOUNT-

It is the summary of income and expenditure for the accounting year.
It is just like a profit and loss account prepared on accrual basis in case of the business organisations.
It includes only revenue items and the balance at the end represents surplus or deficit.

It shows the net operating result in the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess of expenditure over income), which is transferred to the capital fund shown in the balance sheet.

Consider the following items not appearing in the Receipt and Payment Account that need to be taken into account for determining the surplus/ deficit for the current year :

(a) Depreciation of fixed assets.

(b) Provision for doubtful debts, if required.

(c) Profit or loss on sale of fixed assets

Income and Expenditure Account

Expenditure

Amount

Income

Amount

Expenses account(e, g, salary):

Total salaries paid during the year xxxxx

Add: Outstanding at the end xxxxx

Less: outstanding in the beginning xxxxx (or accrual amount paid for last year)

Add: Advance paid in the previous year

xxxxx

Less: Advance paid for the salaries in the current year xxxxx

Salary of the year

Expenses on consumable materials:

(e.g., stationery)

Opening stock of stationary xxxx

Add: Purchases during the year xxxx

Less: Creditors for stationery in the beginning xxxx

Add: Creditors for stationery at the end xxxx

Add: Advance payments for stationery last year xxxx

Less: Advance payments for stationery in the current year xxxxx

Less: Stock of stationery at the end

xxxxx

Stationery actually consumed

Loss on the sale of an asset:

Book value of the asset

Less: Sale price Net loss on sale Other expenses and losses after necessary adjustments

Expenses for specific purpose

(e.g., cinema shows)

Expenses paid xxxxx

Less: Collection xxxxx

Net expenses of specific item Depreciation

Excess of Income over Expenditure to be added to Capital Fund in the Balance Sheet (Balancing Figure)

Income Account:

(e.g., subscriptions)

Total amount of subscriptions received during the year xxxxx

Add: Outstanding at the end

Less: outstanding in the beginning

xxxxx

(or actual amount of last year received this year)

Add: Advance received last year

xxxxx

Less: Advance received this year

xxxxx

Current Income:

Profit on sale of asset :

Sale price of the asset xxxxx

Less: Book value of the asset sold

xxxxx _______

Net profit on sale

Receipts for specific items xxxx

(Cinema shows)

Less: Amount spent xxxx

Net Income on specific item:

Other income and gains with adjustments

Excess of Expenditure over Income to be deducted from the Capital Fund in the Balance Sheet (Balancing Figure)

BALANCE SHEET

‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financial position of the organisation.
It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side.
There will be a Capital Fund or General Fund in place of the Capital and the surplus or deficit as per Income and Expenditure Account which is either added to/deducted from the capital fund, as the case may be.
It is also a common practice to add some of the capitalised items like legacies, entrance fees band life membership fees directly in the capital fund.
Books are Capital Expenditure hence booked in balance sheet as an asset