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Not for Profit Organisations- Features and Financial Statements

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  • Last Updated : 16 Jun, 2022
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An organisation that works with the motive to render services to society and not for profit-making is a Not for Profit Organisation. It is also known as a Non-Trading Organisation. NPO is a separate legal entity and not owned by any individual or enterprise. It is set with an objective to render services to society, which may be social, educational, religious, or charitable. NPO provides services to the members or beneficiaries or society in general. They are voluntary organizations, such as schools, hospitals, literary societies, charitable hospitals, clubs, etc. Their sources of income are donations, subscriptions, legacies, life membership, entrance fees, voluntary contributions by people, etc. If any trading activities are carried out by these organizations by providing facilities to its members, the profit earned from these trading activities is used for the motive for which the organization has been set up. Example: A Canteen run by the club.

Features of Not-for-Profit Organisation:

1. Entity: NPO is a separate legal entity which is promoted by individuals or enterprises. It is not owned or governed by any individual or enterprise although promoted by them.

2. Objectives: NPOs are established with the social objective of rendering services and welfare of society. Its main objectives can be education, the social welfare at large, charity, etc.

3. Form: NPOs are set up in form of charitable hospitals, clubs, educational institutes, trusts, charitable societies, etc.

4. Management: NPOs are either managed by elected members of the social group or the trustees.

5. Motive: NPOs do not operate with a profit-earning motive. They may provide facilities to their members. NPOs, in course of their operation, may earn profit from the trading activities, which are used for social services, and not distributed amongst the members. 

Example: An organisation working for the development of rural culture can encourage rural people to make art objects and sell them in urban areas and earn profits. The profit arising from it is used for the objective of the organisation, i.e., upliftment of rural culture. 

6. Funding: NPOs’ income is through donations and contributions made by their members or the outside people to operate the project undertaken for the social cause. These organizations have a source of income as a subscription, life membership, entrance fees, legacies, etc. They use the incomes to meet the cost of the project undertaken, and also to meet the operating cost.

7. Accounts: NPOs maintain regular books of accounts and  follow a double-entry system of accounting, reflecting the purpose for which they are established. The financial transactions of the organisation are summarized in form of Receipt & Payment A/c, Income & Expenditure A/c, and the Balance Sheet. These accounts are used by its members and government departments to comply with statutory requirements, and also for seeking financial grants.

Financial Statement of Not-for-Profit Organisation:

Not-for-Profit Organisations maintain books of accounts following the double-entry system of accounting, but NPOs with low-key operations are not in the position to maintain the books of accounts following the double-entry system of accounting, therefore, prepare a Cash Book from which Receipt & Payment A/c, Income & Expenditure A/c, and Balance sheet are prepared to show the financial report of the organisation. The financial transactions summarized in these accounts are used by its members and government to meet the statutory obligations and seek any financial grants. 

The financial activities of NPOs are recorded in the form of:

1. Receipt and Payment A/c,

2. Income & Expenditure A/c, and

3. Balance Sheet

1. Receipt and Payment A/c:

Receipt and Payment A/c is a classified summary of Cash Book depicting receipts and payments under appropriate heads of accounts. Receipt and Payment A/c is a real account. It is a summary of cash receipts and cash payments. It records the transactions and events related to cash whether it is of revenue or capital nature. Receipt and Payment A/c is prepared for a specific period, and it is not based on the accrual system of accounting. Receipt and Payment A/c is maintained on the cash system of accounting. It records all events and transactions related to receipts and payments, which are settled in cash, irrespective of capital or revenue nature. 

All the receipts are written on the debit side, and all the payments made are written on the credit side of the account. The opening balances of this account show Cash in Hand and Cash at Bank at the beginning of the accounting period, and the closing balances of this account show Cash in Hand and Cash at Bank at the end of the accounting period. Receipt and Payment A/c fairly depicts the cash position of the organisation.

2. Income and Expenditure A/c:

Income and Expenditure A/c is equivalent to Profit & Loss A/c of profit earning business. It is prepared from the Trial Balance where complete sets of accounts are maintained or from Receipts & Payment A/c and other information. Income and Expenditure A/c is a nominal account and records expenses and income of revenue nature on the accrual system of accounting. It records all the income and expenses paid or not that is related to the current accounting period. 

Income and Expenditure A/c is prepared at the end of the accounting period to ascertain the surplus or deficit. All the incomes which are of revenue nature are credited and all the expenses which are of revenue nature are debited. Income and Expenditure A/c shows either Surplus (if the total of the credit side is more than the total of the debit side) or Deficit (if the total of the debit side is more than the total of the credit side). The surplus or the deficit of Income and Expenditure A/c is added or deducted, respectively from the capital fund in the Balance Sheet.

3. Balance Sheet:

A Balance Sheet is a statement showing the financial position of the organisation at a particular date. The Balance Sheet of an NPO is of similar nature as business firms. A Balance Sheet shows Assets, Liabilities, and Capital Fund. The surplus or deficit ascertained from the Income & Expenditure A/c is transferred to Capital Fund. If the opening balance of the Capital Fund is not given, it is derived from the excess of Assets at the beginning over the Liabilities at the beginning. (Capital = Assets – Liabilities)

While preparing the Balance Sheet following points should be considered:

1. Assets appearing on the previous year’s Balance Sheet should be adjusted for sale during the year, if any, or purchase during the year and depreciation. 

2. On purchase of a new asset, the payment made will be shown in Receipt & Payment A/c and then the scrutinized value of the asset shall be shown in the asset side of the balance sheet.

3. If any loan is raised, it shall be shown in the receipt side of Receipt & Payment A/c  and the value(less repayment, if any) shall be shown on the liabilities side of the balance sheet.

4. Special receipts like donations for the building are directly shown on the liabilities side of the Balance Sheet.

5. The liabilities of the previous year’s Balance Sheet shall be scrutinized for any payment if made (Information from Receipt & Payment A/c should be taken) and the net value shown in the Balance Sheet.

6. Adjustments made on the accrual basis of accounting shall also be shown in Balance Sheet, i.e., outstanding expenses and advance income are shown on the liability side, and prepaid expenses and accrued income will be shown on the Asset Side of the Balance Sheet.

7. The net amount of the advances shall be shown in the Balance Sheet, i.e., payment of advances shall be shown on the Payment Side, and recovery of advances shall be shown on the Receipt Side of Receipt & Payment A/c and the difference between them is shown in the Balance Sheet.

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