Accounting for Non Profit Organisation

There are several similarities between a non-profit organisation and a profit organisation. However, besides differences in motive, they do not necessarily follow the same accounting standards. To elaborate, non-profit accounting tends to follow a different set of norms and regulations in terms of accounting treatment. 

On that note, let’s find out more about such institutions to understand the concept of accounting for Non-profit Organisation in-depth and more effectively. Doing so, you will be able to differentiate the accounting standards of non-profit organisations with that of a profit-making businesses.

Read along to find all about it below!

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 –

  1. 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.

  1. 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. 

  1. 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.

  1. 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 –

  1. 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.

  1. 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.

  1. 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.  

Non-profit organisation

Profit-making organisation

1. Statement of financial standing

2. Statement of financial and non-financial activities

3. Cash flow statement

1. Balance sheet

2. Cash flow statement

3. Income statement

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FAQ (Frequently Asked Questions)

1. What is a Non-Profit Organisation?

Ans. Such organisations operate to provide public service and do not necessarily intend to generate revenue.

2. Give 2 Characteristics of a Non-Profit Organisation.

Ans. Two characteristics are 1. Source of income – donations, grants, subscriptions, etc. 2. Members – Individuals who subscribe to these organisations become their members. These members unanimously elect their trustee who supervises all functions.

3. Name Two Financial Statements of Non-Profit Organisations.

Ans. Two financial statements are – Cash flow statement and statement of financial standing. Cash flow statements help to record all bank and cash transactions, whereas the statement of financial standing helps analyse an organisation’s financial position in a given year.