What is a Non-profit Organisation?
Non-profit organisations can be defined as an organisational setup which functions mainly to promote welfare in the society. Mostly, these organisations set up as charitable institutions and operate to render service to society. Notably, these organisations may generate revenue through their course of operations, but it is not their ultimate objective.
Typically, the members of a non-profit organisation elect trustees who are entrusted with the managerial responsibility of the organisation. Usually, such organisations raise funds from the general public and also from their members to meet their objectives.
Let’s quickly check out the characteristics of non-profit organisations to become more familiar with their fundamental aspects.
Characteristics of Non-profit Organisations
Main Features are as Follows –
Motive
Non-profit organisations operate with the motive of public service and not profit generation. Typically, such organisations extend services for free or at negligible cost. Education, healthcare, food, clothing, recreation, shelter, etc. are some examples of services extended by such organisations.
Member and Management
Since they operate as trusts or charitable societies, their subscribers are their members. Generally, the executive committee is responsible for their functioning and are elected by the organisation’s members.
Income Source and Revenue
Donations, legacies, subscriptions, grants, returns on investments, etc. are among their sources of income. The surplus thus accumulated is usually distributed among the organisation’s members.
Access to Accounting Information
Existing, prospective contributors and statutory bodies can access accounting information of a non-profit organisation.
With that being said, let’s now proceed to check the accounting for non-profit organisations.
Accounting Treatment of Non-profit Organisations
Maintaining non-profit making organisation accounts is vital as it enables trustees to understand their financial needs and devise ways to lower unwarranted expenses.
Since these organisations are not involved with the process of manufacturing and sale of goods and service, they do not maintain a Trading or Profit and Loss Account. Regardless, they tend to credit all their receivable funds to their General Fund Account or Capital Fund. These organisations also have to maintain stock registers to record their consumables, fixed assets and also prepare a final account.
As per law, these organisations are required to maintain a record of all their assets, liabilities, income and expenses so that the government can monitor their grants accordingly. Also, the organisations are accountable to both their members and contributors and must provide information as and when required. Additionally, all these records come in handy for curtailing the risk of embezzlement and fraud.
Components of Final Accounts
Final accounting for not for profit organisation include these –
Receipt and Payment Account or Cash Flow Statements
It serves as a summary of the non-profit organisation’s all bank and cash transactions. Furthermore, it comes in handy for the preparation of both Income and Expenditure Account and Balance Sheet.
Income and Expenditure Account
In practice, it is similar to an organisation’s Profit and Loss Account and helps to identify surplus or deficit accurately. It helps to keep track of the changes in its net assets, which further helps to compare the organisation’s aggregate of income, expenses, gains, etc. in a particular fiscal year.
Statement of Financial Standing
Typically a balance sheet shows shareholder or owner’s equity, which represents the net worth of the organisation. Since there is no owner in case of a non-profit organisation, their balance sheet is known as the statement of financial position.
It is formulated in the same manner a profit-making organisation expresses its balance sheet. The only difference lies in the fact that after liabilities are subtracted from total assets; the remainder is termed as net assets. This represents non-profit organisations’ net worth and can be further divided into – permanently restricted, temporarily restricted and unrestricted net worth.
Test Your Knowledge: Premdaan is a non-profit organisation which works for the betterment of orphans and street children. The organisation provides them with food, clothing and basic education. List down their main sources of income and also highlight the procedure of accounting for not-profit organisations.
Let’s check out the fundamental differences between financial statements accounting for non-profit organisations and profit organisations.
Both profit and non-profit organisations rely on several statements and reports to track their earnings.
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FAQs on Accounting for Non-Profit Organizations
1. What is a Not-for-Profit Organisation (NPO), and what is its primary objective?
A Not-for-Profit Organisation (NPO) is an entity established for purposes other than making a profit. Its primary objective is to provide services to the public or its members to promote art, culture, education, sports, or charity. Any surplus generated from its activities is used to further the organisation's objectives rather than being distributed to its members as profit. The accounting practices for NPOs are detailed in the NCERT Solutions for Class 12 Accountancy to ensure financial transparency.
2. What are the main characteristics of a Not-for-Profit Organisation?
The main characteristics that define a Not-for-Profit Organisation are:
- Primary Motive: The main aim is to provide a service, not to earn profit.
- Separate Legal Entity: It is legally distinct from its members.
- Source of Funds: Major sources of income include subscriptions from members, donations, grants-in-aid, and legacies.
- Management: They are typically managed by an elected executive committee or a board of trustees.
- Financial Statements: NPOs prepare a Receipt and Payment Account, an Income and Expenditure Account, and a Balance Sheet at the end of each accounting period.
3. How does the accounting for NPOs differ from the accounting for profit-making businesses?
The key differences in accounting are:
- Objective: NPOs focus on accounting for funds and expenditures to achieve service goals, while for-profit businesses focus on calculating net profit or loss.
- Financial Statements: NPOs prepare a Receipt and Payment Account, an Income and Expenditure Account, and a Balance Sheet. In contrast, for-profit businesses prepare a Trading and Profit & Loss Account and a Balance Sheet.
- Net Result: The net result for an NPO is termed a Surplus (excess of income over expenditure) or Deficit (excess of expenditure over income), whereas for-profit entities calculate Net Profit or Net Loss.
- Capital vs. Capital Fund: For-profit entities have Owner's Capital, while NPOs have a Capital Fund or General Fund, which represents accumulated surplus over the years.
4. What are the key financial statements prepared by an NPO as per the CBSE 2025-26 syllabus?
As per the CBSE Class 12 Accountancy syllabus for 2025-26, Not-for-Profit Organisations prepare the following three key financial statements at the end of an accounting period:
- Receipt and Payment Account: This is a summary of all cash and bank transactions that occurred during the year.
- Income and Expenditure Account: This is similar to a Profit and Loss Account and is prepared on an accrual basis to determine the surplus or deficit for the period. You can learn to prepare it from a trial balance using our resources on the Income and Expenditure Account.
- Balance Sheet: This statement shows the financial position of the NPO by listing its assets and liabilities on a specific date.
5. Why is an Income and Expenditure Account prepared when a Receipt and Payment Account already exists?
An Income and Expenditure Account is essential because the Receipt and Payment Account does not reveal the true financial performance of the NPO. The Receipt and Payment Account is just a summary of cash transactions, including both capital and revenue items and transactions related to different accounting periods. In contrast, the Income and Expenditure Account is prepared on an accrual basis, includes only revenue items for the current period, and considers non-cash expenses like depreciation to calculate the true surplus or deficit.
6. What is the significance of 'Fund-Based Accounting' in NPOs?
Fund-Based Accounting is a critical system for NPOs where self-balancing sets of accounts are maintained for specific purposes. When an NPO receives a donation for a specific purpose (e.g., building construction or a sports tournament), a separate fund is created. All income related to that fund is added to it, and all related expenses are deducted from it. The net balance of the fund is shown on the liabilities side of the Balance Sheet, ensuring that these restricted funds are used only for their intended purpose. For more details, see our guide on Fund-Based Accounting and Subscription.
7. How are 'peculiar items' like donations and legacies treated in NPO accounting?
The treatment of such items depends on their nature:
- Donations: These are classified into two types. General Donations are treated as revenue income and shown in the Income and Expenditure Account. Specific Donations (received for a particular purpose) are treated as capital receipts and are added to the specific fund on the liability side of the Balance Sheet.
- Legacies: A legacy is a donation received under the will of a deceased person. Unless specified otherwise, it is treated as a capital receipt and added directly to the Capital Fund.
Understanding these some peculiar items is crucial for correct accounting.
8. Are all donations received by an NPO considered revenue income?
No, not all donations are treated as revenue. A clear distinction must be made based on the donor's intent. If a donation is given for a specific purpose, such as for the construction of a building or for a prize fund, it is considered a capital receipt and is credited to a separate Fund Account. Only donations of a general nature, where the donor has not specified any use, are treated as revenue income and credited to the Income and Expenditure Account.
9. What is the difference between a Capital Fund and the capital of a for-profit entity?
The Capital Fund (also known as the General Fund) of an NPO represents the accumulated amount of surplus, legacies, life membership fees, and other capital receipts over the years. It is an indicator of the organisation's net worth but does not belong to any individual. In contrast, the capital of a for-profit entity is the amount invested by its owners, who have a claim on the firm's assets and profits.
10. Can you provide some real-world examples of Not-for-Profit Organisations?
Yes, there are many examples of NPOs that we encounter in daily life. Common examples include:
- Public schools and colleges
- Government and charitable hospitals
- Sports clubs (e.g., a local cricket or football club)
- Religious institutions (temples, mosques, churches)
- Societies for the promotion of art and culture
- Non-Governmental Organisations (NGOs) focused on social causes. For more context, you can learn about the full form of NGO and its functions.
