Accounting for

Non-Profit
Organisations
B.COM, SEMESTER 1
 In the previous chapters, the main emphasis was on
recording and reporting for trading and manufacturing
organisations which are formed for the exclusive
purpose of earning a profit for the owner /
stakeholders. There are, however, a large number of
organisations that do not operate for the profits or
gains of their individual members. These
What are organisations are known as Non-profit organisations.
A non-profit organisation is operated for the benefit of
NPOs? the society as a whole, rather than for the benefit of a
sole proprietor or a group of partners or shareholders.
In every society, some organisations or associations
are found which do not have profit making as their
objective. Their main objective may be social,
educational, religious or charitable and they take the
form of clubs, societies or charitable bodies and so
on.
 1. Management : A non-profit organisation is governed by elected members.
2. Motive : Non-profit entities do not operate with the motive of earning a profit.
3. Main Objectives : Their main objective may be social, educational, religious or charitable
and they take the form of clubs, societies or charitable bodies and so on.
4. Area of Service : They render services to the members of the public which may range
from a limited members of citizens of a community to almost the entire population of a city,
state or nation.

Characteristics 5. Sources of Income : These entities, generally, depend on subscriptions and the
donations given by members or outsiders.
of Non-profit 6. Utilisation of Funds : A non-profit organisation should spend the funds in such a way that
Organisations provides maximum benefits to the members.
7. Annual Budget : It is very important for a non-profit organisation to prepare an annual
budget.
8. Basis of Accounting : A non-profit organisation generally employs the accrual basis of
accounting.
9. Utilisation of Surplus : ‘Surplus’ of the year is not distributed among the members. It is
added with the ‘Capital Fund’. Similarly, deficit is deducted from the ‘Capital Fund’.
10. Separate Entity : Non-profit organisation is separate from its members,. the death or
resignation of any member will not affect its duration. It will continue in the usual manner.
Accounting Records
The extent of records kept by a non-profit organisation will depend upon the size of the organisation. All big
organisations are keeping detailed record of all transactions under double entry system, normally with the help of a
suitable accounting package. However, small organisations keep accounting records under single entry method
where mainly cash transactions are recorded regularly. Generally, the following books of accounts are maintained :

(i) Petty Cash Book

(ii) Cash Book

(iii) Purchase Journal

(iv) Sales Journal

(v) General Journal

The functions of all the books of accounts are like that of a trading organisation.
Distinction
Between Non-
profit
Organisation
and Profit-
seeking
Organisation
Financial Statements
Non-profit organisations must prepare regularly annual accounts reflecting the financial affairs of
the organization for submitting to the members and government departments for financial grants
and the like. A majority of the organisations keep their accounting records under the single entry
system. They mainly maintain cash book, suppliers’ ledger and members’ register. Where the size
of the organisation is large, the accounts are kept under complete double entry system. Whatever
may be the system of accounting, these organisations prepare, at the year end, the following three
key statements:
1. Receipts and Payments Account;
2. Income and Expenditure Account; and
3. Balance Sheet.
Receipts and Payments Account
A Receipts and Payments Account is a summary of the Cash Book. This is the primary report
prepared by the treasurers of clubs, societies etc to present the result of the year’s cash position.

Since it is a cash basis of reporting, the Receipts and Payments Account gives the opening cash
and bank, the receipts and payments in cash or by cheque during an accounting period and the
resultant balance of cash and bank at the end of the accounting period.

All the receipts(whether in cash or cheque) are shown on the left-hand side, and all payments
(whether in cash or cheque) are shown on the right-hand side.
Example

Receipts and Payments Account of….for the year ended…..

Income and Expenditure Account
The Income and Expenditure Account is equivalent to the Profit and Loss Account of a business enterprise. It is
prepared by matching the revenues against the expenses for a specified period, usually a year.

Since non-profit organisations do not earn profit (or incur loss) they do not prepare Profit and Loss Account but for
evaluating the financial condition of the organisation, they prepare Income and Expenditure Account at the year-end.
This account shows surplus or deficit of income over expenditure.

The method and technique of the preparation of an Income and Expenditure Account is similar to that which is
followed in the preparation of a Profit and Loss Account of a profit-seeking concern. The main sources of revenue of
these organisations are subscriptions, admission fees, donations and government or other grants.

The whole of the revenue income and revenue expenditure for the period is taken into consideration, irrespective of
the fact whether they have been actually received or paid or not. Just like Profit and Loss Account, all accrued
incomes and outstanding expenditures are shown in this account.
Example

Income and Expenditure Account of…..for the year ended ……

Receipts and Payments Account vs
Income and Expenditure Account
Balance Sheet
The Balance Sheet of a non-profit concern is prepared on the same principles as the Balance
Sheet of a profit-seeking business. It may be prepared either in the order of liquidity or in the
order of permanence.
Terminology Used in Accounts of
Non-Profit Organisations
1. Capital Fund:

It is an item on the Balance Sheet of a non-profit organisation representing the net investment in the organization of its contributing
members. It is nothing but the capital of non-profit organisations. It represents the surplus of assets over liabilities of the
organisation. It may be made up in part by special donation or by capitalizing admission fees etc. This fund is increased (or
decreased) by any surplus (or deficit) on the income and expenditure account. It is also called ‘General Fund’ or ‘Accumulated Fund’.

2. Donation

It is the amount contributed by the supporters, members and well-wishers of the organisation in the form of cash or kind. The
donation may be general or special (such as donation for building, prize etc.)

3. Legacy

It is an amount or other item of value received from a deceased person under the terms of a will. When anything is personally given
away by a will, it is treated as a gift in the eye of law. The gift which is made by a will, out of general fund of an estate, it is described
as ‘legacy’. The amount received as legacy may be big or small. A legacy may be ‘demonstrative’ when it is made out of a particular
fund or ‘specific’ when a particular portion of the estate is assigned. The legacy may be for a specific purpose or just general. If it is
for a specific purpose, then it should be capitalised in the name of the ‘fund’ for that particular purpose. Otherwise, it is directly
added to capital fund.
Terminology Used in Accounts of
Non-Profit Organisations
4. Subscriptions

It is the amount paid by the members at regular intervals to keep his membership alive. Subscriptions are the normal main source of
revenue of non-profit organisations. At the beginning of the accounting period all subscriptions normally become due and almost all
members pay it immediately, since the organisations usually have rules which provide for members to be deleted from the
membership roll if they do not pay their subscriptions within a decided period.

5. Sectional Subscriptions

It is the special subscriptions collected from the members who participate in a particular activity because of the cost involved in
providing these may vary considerably.

6. Life Membership

This is a system whereby a member pays a lumpsum and then becomes a member for the whole life.

7. Honorarium

A token payment made to a person who has voluntarily undertaken a service which would normally command a fee. It is thus an
expression of gratitude rather than a payment for the work done.
Sources of Income of Non-profit
Organisations
1. Membership subscriptions

2. Donations

3. Life membership fees

4. ‘Profits’ from bar sales

5. ‘Profits’ from the sale of food in the club, restaurant or cafeteria

6. ‘Profits’ from social events, such as dinner-dance

7. Interest received on investments