Key Financial Statements in Not for Profit Organisation Accounting
Accounting records of not for profit organisations are financial statements and documents maintained by clubs, societies, trusts, educational institutions, and other entities not focused on earning profits. For Class 11, Class 12, CA Foundation, and competitive exams, understanding these records is very important, as the subject frequently appears in both theory and numerical questions. Effective accounting in NPOs ensures proper use of funds and upholds donor trust.
| Type of NPO Accounting Record | Main Purpose | Prepared On |
|---|---|---|
| Receipts and Payments Account | Records all cash transactions (receipts and payments) during the year | Cash Basis |
| Income and Expenditure Account | Shows income earned and expenses incurred in the current year | Accrual Basis |
| Balance Sheet | Presents financial position—assets, liabilities, and capital fund | Year-end |
Meaning of Accounting Records of Not for Profit Organisations
Accounting records of not for profit organisations are specialized financial documents used to record receipts, payments, income, expenditure, and financial position. Unlike businesses, these entities aim to serve society, not earn profits. Their records emphasize transparency, accountability, and proper utilization of funds received from subscriptions, donations, legacies, and grants.
Features of Not for Profit Organisations
- Mission-driven: Serve a particular social cause instead of profit.
- Non-distribution constraint: Surplus is not distributed among members.
- Reliance on donations and grants: Major funds from public, government, and members.
- Capital or general fund: Instead of capital account, maintain a general fund.
- Accountability and transparency: Accounts are available to members, trustees, and authorities.
- Board governance: Managed by a committee or trustees.
- Volunteer involvement and programmatic focus.
Special Items in NPO Accounting Records
- Subscription: Annual contributions from members for running activities; shown as income (current year), assets (arrears), or liability (advance) on the balance sheet.
- Donation: Money given for general or specific purposes; specific donations are capital receipts, general donations are revenue receipts.
- Legacy: Amounts received according to a will; usually treated as a capital receipt.
- Capital/General Fund: Accumulated surplus, acts as the main equity of the NPO.
- Grants: Funds from government or organizations, treated per their specific purpose.
Accounting Records and Types of Accounts Maintained
The main accounting records for not for profit organisations are as follows:
- Receipts and Payments Account: Records all actual cash received and paid during a financial year, irrespective of the period it belongs to. It does not distinguish between capital and revenue items.
- Income and Expenditure Account: Accrual-based account showing actual income earned and expenditure incurred. It is similar to the Profit and Loss Account for businesses but does not include profit determination.
- Balance Sheet: Prepared at year-end to show the financial position, assets, liabilities, and capital fund.
Sometimes, NPOs also prepare ledger accounts and a trial balance if they follow the double-entry system of accounting.
Difference Between NPO and Profit Organisation Accounting
| Basis | Not-for-Profit Organisation | Profit Organisation |
|---|---|---|
| Aim | Service to society | Profit maximization |
| Main Account | Income & Expenditure Account | Profit & Loss Account |
| Surplus Distribution | Added to capital/general fund | Distributed as profit/dividends |
| Sources of Funds | Subscriptions, donations, grants | Sales of goods/services |
Accounting System and Standards for NPOs
Not for profit organisations often maintain their records on a cash basis to start with, but for preparing final accounts, they use the accrual basis. Accounting must comply with applicable accounting standards such as Indian Accounting Standard (AS) 12 for grants and AS 29 for provisions and contingencies. Transparency is ensured with computerized accounting in many modern NPOs.
Examples: Solved Statements and Adjustments
Here is a simple illustration showing the treatment of subscription:
| Particulars | Amount (₹) |
|---|---|
| Subscription received during the year | 60,000 |
| Add: Subscription outstanding at year end | 5,000 |
| Less: Subscription received in advance | (3,000) |
| Total Subscription Income (For Income & Expenditure Account) | 62,000 |
Detailed practice examples and solutions can be found in DK Goel Solutions and TS Grewal Solutions for NPO accounting.
Peculiar Items and Incidental Trading
NPOs sometimes engage in incidental trading activities (like charity fairs or canteens). Profits/losses from such activities are shown separately and transferred to the capital fund. Special items like endowment funds, life membership fees, and legacies require careful treatment under capital or revenue heads.
Why Study Accounting Records of Not for Profit Organisations?
- Essential for CBSE, ISC, and CA Foundation exam preparation.
- Helps analyze transparency in clubs, schools, charitable trusts, and hospitals.
- Improves conceptual clarity on service vs. profit entities.
- Aids in business ethics and financial management knowledge for everyday life.
- Ensures readiness for future studies in accounting and audit.
Related Topics and Further Learning
- Income and Expenditure Account
- Receipt and Payment Account
- Balance Sheet
- Difference Between Bookkeeping and Accounting
- Final Accounts
- Methods of Depreciation
- Accounting Standards
- Vedantu Commerce: Accountancy Section
At Vedantu, we simplify Commerce topics like accounting records of not for profit organisations by using clear tables, stepwise solutions, and real-life illustrations. This helps students not only score higher on their exams but also better understand the practical world of social service and charity accounting.
In summary, accounting records of not for profit organisations are critical for tracking funds, ensuring regulatory compliance, and upholding trust. Students should focus on these records, their formats, and unique treatments for exams, and use them for developing real-world financial literacy for both social and professional growth.
FAQs on Accounting Records of Not for Profit Organisations: Meaning, Statements & Examples
1. What are the accounting records of a not-for-profit organisation?
Accounting records for not-for-profit organisations (NPOs) are specialized financial documents tracking monetary transactions. These include:
- Receipts and Payments Account: Records cash inflows and outflows.
- Income and Expenditure Account: Shows income earned and expenses incurred during a period.
- Balance Sheet: Presents a snapshot of the NPO's assets, liabilities, and capital fund at a specific point in time.
2. What is the accounting for a non-profit organization?
Non-profit accounting differs from for-profit accounting by focusing on the management of funds rather than profit generation. It tracks resources received (donations, subscriptions, grants) and their utilization for mission-related activities. Key statements include the Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet.
3. What are the accounting standards for nonprofit organizations?
Accounting standards for NPOs vary depending on the jurisdiction and organization type. Many follow generally accepted accounting principles (GAAP) adapted for non-profit contexts. In India, relevant Indian Accounting Standards (AS) are applied. The core principle is transparency and accuracy in reporting financial activities.
4. What is the accounting system adopted by not-for-profit organisations?
Many NPOs start with a cash basis accounting system, recording transactions when cash changes hands. However, to gain a clearer picture of financial performance, they increasingly adopt accrual basis accounting, recognizing revenue when earned and expenses when incurred. This leads to a more accurate Income and Expenditure Account.
5. What is Income & Expenditure Account?
The Income and Expenditure Account is a crucial financial statement for NPOs. It summarizes the income generated and expenses incurred during a specific period, much like a profit and loss statement for a for-profit business, but focusing on surplus or deficit rather than profit. Key items included are subscriptions, donations, legacies, and program expenses.
6. How is accounting for a non-profit organisation different from a business?
Non-profit accounting focuses on demonstrating responsible use of funds, rather than maximizing profit. NPOs prioritize transparency and accountability to donors and stakeholders. They don't distribute profits to owners, instead using surpluses to further their mission. Financial statements like the Income and Expenditure Account highlight how resources are utilized.
7. What is the Capital Fund in not-for-profit accounting?
The Capital Fund represents the accumulated surplus or deficit of an NPO. It's like the equity of a for-profit entity but reflects the organization's net assets. Increases come from donations, legacies, and surpluses from operations; decreases result from deficits or distributions.
8. Do nonprofits have to prepare financial statements?
Yes, nonprofits are generally required to prepare financial statements to maintain transparency, demonstrate accountability to donors, and comply with legal and regulatory requirements. These statements typically include the Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet.
9. How are subscriptions in arrears and advances recorded in NPO accounts?
Subscriptions in arrears (due but unpaid) are recorded as assets (receivables) on the Balance Sheet. Subscriptions received in advance are liabilities (amounts owed) on the Balance Sheet, reflecting that the NPO owes services to its members.
10. How is depreciation shown in Income and Expenditure Account of NPO?
Depreciation on fixed assets is shown as an expenditure on the debit side of the Income and Expenditure Account, similar to for-profit accounting. It reflects the reduction in the value of assets over time and impacts the surplus or deficit reported.
11. What are ‘peculiar items’ in NPO accounting?
Peculiar items in NPO accounting are unique transactions not typically found in for-profit businesses. These include: donations, legacies (inheritances), endowment funds (restricted donations), and life memberships. Their accounting treatment differs from standard business transactions.
12. How do NPOs ensure funds are not misused?
NPOs employ various mechanisms to prevent fund misuse. These include: maintaining detailed accounting records, undergoing regular audits by independent firms, establishing internal control measures, and having oversight by a board of directors or trustees who are accountable for the organization’s finances and actions.
