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.
Receipts and Payments A/c
Income and Expenditure A/c
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 on Accounting for Not-for-Profit Organizations: Comprehensive Guide
1. What are Not-for-Profit Organisations (NPOs) and what are their primary objectives?
A Not-for-Profit Organisation (NPO) is an entity established for promoting art, science, commerce, charity, or any other useful social objective, not for the purpose of earning profits. Their primary goal is to provide services to a specific group or the public at large. Instead of measuring profit, their success is gauged by their ability to fulfil their service objectives. Common examples include schools, public hospitals, and charitable trusts.
2. What are the main financial statements prepared by a Not-for-Profit Organisation?
NPOs prepare three key financial statements at the end of an accounting period to present their financial position and performance:
Receipts and Payments Account: A summary of all cash and bank transactions, recording all receipts and payments of both capital and revenue nature during the year.
Income and Expenditure Account: Prepared on an accrual basis, it is similar to a Profit and Loss Account and shows the surplus (excess of income over expenditure) or deficit for the period.
Balance Sheet: A statement of assets and liabilities that shows the overall financial position of the NPO on a specific date. You can learn more about the fundamental types of accounts that form the basis of these statements.
3. What is the fundamental difference between an Income & Expenditure Account and a Profit & Loss Account?
While both accounts determine the net result of operations over a period, their fundamental difference lies in their objective and context:
Objective: An Income & Expenditure Account calculates the surplus or deficit for an NPO, whereas a Profit & Loss Account calculates the net profit or net loss for a for-profit business.
Prepared by: The former is prepared by Not-for-Profit Organisations, while the latter is prepared by commercial business entities.
Outcome Distribution: A surplus in an NPO is added to the Capital Fund and used to further its objectives. A net profit in a business is typically distributed to its owners or shareholders.
4. How is a 'Surplus' in an NPO's Income & Expenditure Account different from 'Net Profit' in a business?
A 'Surplus' represents the excess of income over expenditure for an NPO. It is not considered a profit because the organisation's primary motive is service, not commerce. This surplus is transferred to the Capital Fund (or General Fund) in the Balance Sheet and is reinvested to further the organisation's objectives. In contrast, 'Net Profit' is the excess of revenue over expenses in a for-profit entity and belongs to the owners. This reflects the core philosophy of NPOs versus commercial forms of business organisations.
5. What is the importance of a Balance Sheet for an NPO if its goal isn't to show financial wealth?
The purpose of a Balance Sheet for an NPO is not to display wealth for owners, but to provide a clear picture of its financial stability and stewardship of funds. It is crucial because it:
Shows Financial Health: It reveals the organisation's assets and liabilities, indicating its ability to meet its long-term obligations.
Ensures Accountability: It shows how the organisation has managed its funds, including specific-purpose funds and the overall Capital Fund, which is important for donors and members.
Aids in Decision Making: Stakeholders like donors and government agencies use it to assess the NPO's solvency and operational efficiency before providing further grants.
6. How are specific-purpose donations treated differently from general donations in NPO accounting?
The treatment depends entirely on the donor's intent, which is a key aspect of NPO accounting.
General Donations: These are donations made without any specified condition for their use. They are treated as revenue income and are shown on the credit side of the Income and Expenditure Account.
Specific-Purpose Donations: These are received for a specific purpose, such as a donation for building construction. They are treated as a liability on the Balance Sheet until they are used for the specified purpose. This ensures funds are used as intended, a core principle in various accounting concepts.
7. Why can't a Not-for-Profit Organisation simply use the same accounting methods as a regular business?
An NPO cannot use the exact same methods as a regular business because their objectives and sources of funds are fundamentally different. The key distinctions are:
Profit Motive: Businesses focus on profit, so their accounting measures profitability. NPOs focus on service, so their accounting measures surplus/deficit and proper use of funds.
Source of Funds: Businesses raise capital from owners. NPOs receive funds from members, donors, and grants, which often have restrictions requiring separate tracking (e.g., specific funds).
Key Stakeholders: Business investors want to know the return on their investment. NPO stakeholders (donors, members) want to ensure their contributions are being used effectively for the intended purpose.
8. Is the chapter 'Accounting for Not-for-Profit Organisations' still part of the CBSE Class 12 Accountancy syllabus for the 2025-26 exams?
No, as per the latest CBSE guidelines, the chapter 'Accounting for Not-for-Profit Organisations' has been removed from the Class 12 Accountancy syllabus. While the concepts are vital for a comprehensive understanding of accounting in various sectors, students preparing specifically for the CBSE 2025-26 board exams are not required to study this chapter for their final examination. Always refer to the official CBSE Class 12 Accountancy Syllabus for the most accurate and updated curriculum details.
9. What is the difference between Entrance Fees and Life Membership Fees in NPO accounting?
These are two common sources of funds for NPOs with distinct accounting treatments:
Entrance Fees (or Admission Fees): This is a fee paid once by a person at the time of becoming a member. Unless specified otherwise, it is generally treated as a revenue receipt and credited to the Income and Expenditure Account as it is a regular source of income for the organisation.
Life Membership Fees: This is a lump sum amount paid by a member to avail services for their entire life. Since it is a non-recurring receipt of a capital nature, it is directly capitalised, meaning it is added to the Capital Fund on the liabilities side of the Balance Sheet.
