Accounting for Not-for-Profit Organisations

Not-for-Profit Organisations & Significance of Balance Sheet

Every business undertakes activities to make a profit but some organisations work to provide just service to the community. Not-for-profit organisations are the type of organisations that do not make a profit but the income from the business is used to keep up their objectives. Since they work with service motive, their rules do not allow the owners to take the profit from the organisation. In fact, they are also part of contributors and called as trustees. Examples may be charitable, devotional trusts, etc.

Not-for-profit organisations though they provide service their trustees are very much accountable to the other stakeholders and also public. So, it becomes necessary for them to maintain a proper book of accounts and balance sheet. They do not need to prepare Profit and Loss A/c, but Receipts and Payments account since they have some special transactions pertaining to subscriptions and donations, etc.  

The not-for-profit organisations do not use the term Capital, but it appears as General or Accumulated fund on their balance sheet financial statements. 

Accounting Treatment for Not-for-Profit Organisation

The following are the financial statements that not-for-profit organisations need to prepare at the end of every year.

  1. Receipts and Payments A/c 

  2. Income and Expenditure A/c 

  3. Balance Sheet

Preparation of Receipts and Payments A/c

The NPO is required to maintain a cashbook for a given period. This is the summary of the bank and cash transactions that help to prepare Receipts and Payments accounts. But this does not disclose the end result of the organisation. So they need to prepare the income statement and balance sheet.

Preparation of Income and Expenditure A/c.

This is more like a Profit and Loss account that helps to find out the surplus of a deficit if any. With the information from the Receipts and Payments account and some other additional information the Income and Expenditure a/c is prepared. After this, the balance sheet is prepared.

Preparation of Balance Sheet

One of the components of accounting is the preparation of the balance sheet of the company. But before that one must know the balance sheet meaning. A simple balance sheet shows a summary of financial health in an organisation for a given period. It has two columns, where assets are listed on the left and liabilities and Equity are listed on the right.  The basic accounting equation is as found below:

Assets = Liabilities + Equity

The balance sheet is one of the core financial statements that forecast the company’s financial position. It is also called a balance sheet statement, statement of net worth, or statement of financial position. Balance sheet accounts are generally used to streamline the transactions that include the company's assets, liabilities, and equity. The balances in these accounts as arrived at the final moment of a financial year will be reported on the final balance sheet prepared at the end of the year.

For a startup, the new balance sheet (opening) shows only cash on hand and capital or general fund that was contributed by the owners or the trustees. In the case of an operating business, the opening balance sheet is prepared by the information provided at the end of the earlier accounting period.

The balance sheet of an NPO is like a normal balance sheet of a company i.e. other profit-making organisations. 

  • For a new balance sheet, the initial investment is shown as a general fund. Whereas, the respective surplus or deficit is added to the General fund while preparing the balance sheet for the following years.

  • Life membership or legacies are added next.

  • The fixed assets of the business are listed on the assets column of the balance sheet. 

  • The amount paid in advance and the amount due has to be shown on the assets and liabilities column.

  • Closing balances of the assets and liabilities are posted on the respective sides of the balance sheet

  • Final fund amount is calculated by deducting the total value of the liabilities from that of assets. 

Sample images of the components of the financial statements of a charitable trust are found below.

[Image to be added Soon]

FAQs (Frequently Asked Questions)

1. Is a Comparative Balance Sheet Necessary for a Not-for-Profit Organisation?

A Comparative Balance Sheet, unlike the basic balance sheet, is a statement that gives the information about a firm’s Assets, Liabilities for “two or more period of the same company” or “two or more than two company of same industry” or “two or more subsidiaries of a same company” in the same page format, for easy accessibility. But for a Not-for-profit organisation, it is not required under GAAP (generally accepted accounting principles). A comparative balance sheet has two columns where one shows the current financial position and the other one shows the previous year’s financial position for the investors to understand and analyze the financial performance of the organisation.

2. What are the off-Balance-Sheet (OBS) Items?

There are some items that are not shown in the bank balance sheet. Though the organisation owns certain assets and liabilities, it could not be recorded on the balance sheet. The term used for such assets or liabilities is referred to as off-balance sheet (OBS) items. They are not the company’s own property or its direct obligation. An operating lease, Leaseback agreements, Accounts Receivables are some of the common off-balance sheet items. These items are quite difficult to be noticed and tracked in a company’s financial statement because they have the potential to become hidden liabilities.