Accounting for Not-For-Profit Organisations (NPOs)

Meaning And Characteristics Of Not-For-Profit Organisation

Not-For-Profit Organisations (NPOs), also known as Non-Profit Organisations or Non-Business Entities, are entities established for purposes other than making profit. Their primary objective is to provide services to specific groups or the public at large. These organisations are typically set up for promoting art, culture, education, health, religion, charity, or social welfare.

Examples of NPOs in India include schools, colleges, hospitals, religious institutions (like temples, mosques, churches, gurdwaras), charitable societies, sports clubs, cultural associations, and trusts working for social causes.

Characteristics Of Not-For-Profit Organisation

1. Service Motive:

Their primary goal is to provide services or promote a cause, not to earn profits. They work for the welfare of their members or society.

2. Form of Organisation:

NPOs are typically set up as charitable societies, trusts, or Section 8 companies under the Companies Act, 2013, in India. They have a distinct legal identity separate from their members.

3. Management:

They are managed by a Managing Committee or Governing Body elected by their members.

4. Source of Funds:

Their main sources of income are not profits from sales of goods/services (though they may engage in some activities). Their funds come primarily from:

Subscriptions from members.
Donations (general or specific).
Grants from government or other organisations.
Legacies (money received as per a will).
Income from investments.

5. Surplus is Not Distributed:

Any surplus generated from their activities is not distributed among the members. It is retained and used for the furtherance of the organisation's objectives.

6. Separate Entity:

Like business entities, NPOs are treated as separate accounting entities, distinct from their members or donors (Business Entity Concept applies).

7. Accounting Requirements:

While their motive is not profit, they still need to maintain proper accounting records to manage funds, comply with legal requirements (like Registrar of Societies, Income Tax Department, Foreign Contribution Regulation Act - FCRA if applicable), and report to their members and donors. Their financial statements provide accountability for the funds received and how they were utilised.

Because their objective and operations differ from commercial businesses, the nature and format of their final accounts are also different.

Accounting Records Of Not-For-Profit Organisations

Although NPOs do not prepare a Trading and Profit and Loss Account, they still need to maintain accounting records to ascertain their financial position and the results of their activities. They can follow the Double Entry System of accounting, maintaining journals and ledgers for all transactions.

However, for simplicity and due to the nature of their receipts and payments (often cash/bank based), many NPOs primarily focus on meticulously recording all cash and bank transactions. This leads to the preparation of specific financial statements suitable for NPOs.

Key Accounting Records Maintained by NPOs:

Cash Book: Records all cash receipts and payments. This is a crucial book, often maintained in a detailed manner.
Journal Proper: Records non-cash transactions such as depreciation, credit purchases/sales (if any), outstanding/prepaid items, transfer entries, etc.
Ledger: Individual accounts are maintained for assets, liabilities, capital fund, incomes, and expenses.
Other Subsidiary Books (if applicable): Depending on the size and nature of operations, they might maintain a Purchases Book (for credit purchases of consumables), Sales Book (for credit sales of scrap or minor items), Stock Register (for consumables, assets).

Using these records, NPOs prepare the following final statements at the end of their accounting period:

1. Receipt and Payment Account:

A summary of all cash and bank transactions during the accounting period. Similar to a Cash Book summary.

2. Income and Expenditure Account:

Equivalent to a Profit and Loss Account for a business. It shows the incomes earned and expenses incurred for the period to ascertain the 'Surplus' or 'Deficit'.

3. Balance Sheet:

Shows the financial position (Assets, Liabilities, and Capital Fund) on a specific date.

These statements provide accountability and transparency regarding the management and utilisation of funds.

Receipt And Payment Account

The Receipt and Payment Account is a summary of cash and bank transactions during a specific period, prepared from the Cash Book. It is a Real Account in nature.

Salient Features

Nature: It is a summary of cash and bank transactions, similar to a summarised Cash Book. It is a Real Account.
Basis: It is prepared on the Cash Basis of accounting. It records only actual cash and bank receipts and payments during the period, regardless of whether they relate to the current, previous, or next period.
Period: It covers transactions for a specific accounting period.
Opening and Closing Balances: It starts with the opening balance of Cash in Hand and Cash at Bank (or Bank Overdraft) and ends with the closing balance of Cash in Hand and Cash at Bank (or Bank Overdraft).
Capital and Revenue Items: It records both Capital and Revenue items as long as they involve cash or bank movement. Capital receipts and payments are shown, as well as revenue receipts and payments.
Non-cash Items Excluded: It does not record non-cash items like depreciation, outstanding expenses, accrued income, profit or loss on sale of assets (only the cash received/paid is shown).
Purpose: It shows the total cash and bank transactions during the period and the closing cash/bank balance. It serves as the basis for preparing the Income and Expenditure Account and the Balance Sheet.

Steps In The Preparation Of Receipt And Payment Account

The Receipt and Payment Account is typically prepared from the Cash Book and other information regarding opening balances.

Format of Receipt and Payment Account:

Receipt and Payment Account for the period ended [Date]

Receipts (₹)		Payments (₹)
To Balance b/d (Opening Cash/Bank)	[Amount]	By Balance b/d (Opening Bank Overdraft, if any)	[Amount]
To Subscriptions (Total received)	[Amount]	By Salaries (Total paid)	[Amount]
To Donations (General/Specific - Total received)	[Amount]	By Rent (Total paid)	[Amount]
To Entrance Fees (Total received)	[Amount]	By Purchases of Consumables (Total paid)	[Amount]
To Sale of Assets (Cash received)	[Amount]	By Purchase of Assets (Cash paid)	[Amount]
To Sale of Investments (Cash received)	[Amount]	By Investment Purchases (Cash paid)	[Amount]
To Interest Received (Total received)	[Amount]	By Interest Paid (Total paid)	[Amount]
To Legacies (Total received)	[Amount]	By Loan Repaid (Cash paid)	[Amount]
To Specific Funds Receipts	[Amount]	By General Expenses (Total paid)	[Amount]
... (Other Receipts)	[Amount]	... (Other Payments)	[Amount]
		By Balance c/d (Closing Cash/Bank)	[Amount]
To Balance c/d (Closing Bank Overdraft, if any)	[Amount]
Total	[Sum of Receipts side]	Total	[Sum of Payments side]

All receipts are shown on the Debit side, and all payments are shown on the Credit side.

Steps:

Start with the opening balance(s) of Cash and Bank (Debit side) or Bank Overdraft (Credit side).
Debit the account with all cash and bank receipts during the period, irrespective of whether they are revenue or capital in nature, or whether they relate to the current, previous, or next period.
Credit the account with all cash and bank payments made during the period, irrespective of whether they are revenue or capital in nature, or whether they relate to the current, previous, or next period.
Enter the closing balance(s) of Cash and Bank (Credit side) or Bank Overdraft (Debit side) to balance the account. These balances are calculated based on total receipts and payments.

It is a factual summary of cash flows, not a measure of income earned or expenses incurred.

Income And Expenditure Account

The Income and Expenditure Account is the main statement prepared by NPOs to ascertain the results of their operations during an accounting period. It is equivalent to the Profit and Loss Account for a business concern. It is a Nominal Account in nature.

The primary objective is to determine the Surplus (excess of income over expenditure) or Deficit (excess of expenditure over income) for the period.

Salient Features:

Nature: It is a Nominal Account.
Basis: It is prepared on the Accrual Basis of accounting. It records only incomes earned and expenses incurred for the current accounting period, regardless of when cash is received or paid.
Period: It covers incomes and expenditures for a specific accounting period only.
Revenue Items Only: It records only items of a revenue nature (incomes and expenses related to the regular activities of the NPO). Capital receipts and payments are excluded.
Non-cash Items Included: It includes non-cash items that relate to the current period, such as depreciation, outstanding expenses, prepaid expenses, accrued income, profit or loss on sale of assets.
No Opening or Closing Balances of Cash/Bank: It does not start or end with cash/bank balances.
Purpose: To ascertain the Surplus or Deficit for the period, which is then transferred to the Capital Fund in the Balance Sheet.

Steps In The Preparation Of Income And Expenditure Account

The Income and Expenditure Account is typically prepared from the Receipt and Payment Account and additional information (adjustments).

Format of Income and Expenditure Account:

Income and Expenditure Account for the period ended [Date]

Expenditure (₹)		Income (₹)
To Salaries	[Amount paid as per R&P]	By Subscriptions	[Amount received as per R&P]
Add: Outstanding (Current Year)	[Amount]	Add: Outstanding/Accrued (Current Year)	[Amount]
Less: Outstanding (Previous Year)	[Amount]	Less: Received in Advance (Current Year)	[Amount]
Less: Prepaid (Current Year)	[Amount]	Add: Received in Advance (Previous Year)	[Amount]
Add: Prepaid (Previous Year)	[Amount]
[Total Salaries for current year]	[Amount]	[Total Subscriptions for current year]	[Amount]
To Rent	[Adjusted Amount for current year]	By Donations (General only)	[Amount]
To Printing and Stationery	[Adjusted Amount for current year]	By Entrance Fees (if revenue)	[Amount]
To Depreciation	[Amount for current year]	By Interest Received	[Adjusted Amount for current year]
To Loss on Sale of Assets	[Amount]	By Profit on Sale of Assets	[Amount]
To Other Revenue Expenses	[Adjusted Amount]	By Other Revenue Incomes	[Adjusted Amount]
To Deficit (Excess of Exp. over Income)	[Amount]
		By Surplus (Excess of Income over Exp.)	[Amount]
Total	[Sum of Expenditure side]	Total	[Sum of Income side]

Note on Subscriptions: Subscriptions are a major income for NPOs. The amount of subscription for the current year (to be shown in Income and Expenditure Account) is calculated as:

Subscription for Current Year = Total Subscription Received during the year (as per R&P A/c)

+ Outstanding Subscription at the end of Current Year

+ Subscription Received in Advance at the beginning of Current Year (related to current year)

- Outstanding Subscription at the beginning of Current Year (received in current year but related to previous year)

- Subscription Received in Advance at the end of Current Year (received in current year but related to next year)

This calculation ensures that only the subscription amount relating to the current period, whether received or not, is included as income.

Steps:

Debit all revenue expenses incurred during the current period (whether paid or not). Use amounts paid as per Receipt and Payment Account and adjust for outstanding/prepaid at the beginning and end of the year. Include non-cash expenses like depreciation, loss on sale of assets, etc.
Credit all revenue incomes earned during the current period (whether received or not). Use amounts received as per Receipt and Payment Account and adjust for outstanding/accrued and received in advance at the beginning and end of the year. Include non-cash incomes like profit on sale of assets.
Exclude all capital receipts and payments (e.g., purchase/sale of fixed assets/investments, loans, legacies, specific donations unless used for revenue purpose).
Calculate the difference between the total incomes and total expenditures. If Incomes > Expenditures, it is a Surplus. If Expenditures > Incomes, it is a Deficit.
Transfer the Surplus (or Deficit) to the Capital Fund in the Balance Sheet.

Distinction Between Income And Expenditure Account And Receipt And Payment Account

Basis	Income and Expenditure Account	Receipt and Payment Account
Nature	Nominal Account	Real Account (Summary of Cash Book)
Basis of Preparation	Accrual Basis	Cash Basis
Period Coverage	Records incomes/expenses for the current period only.	Records receipts/payments made during the period, irrespective of the period they relate to.
Items Included	Revenue items and non-cash items (Depreciation, Outstanding, Prepaid, Accrued, Profit/Loss on sale of assets).	Cash/Bank receipts and payments, both revenue and capital items. Excludes non-cash items.
Opening/Closing Balance	No opening or closing balance of cash/bank. Shows Surplus or Deficit.	Starts with opening cash/bank balance. Ends with closing cash/bank balance.
Purpose	To ascertain Surplus or Deficit.	To show total cash/bank transactions and closing cash/bank balance.
Double Entry	Is a part of the Double Entry system (derived from Ledger accounts).	Is not a part of the Double Entry system itself (is a summary of Cash Book, which is part of Double Entry).

Capital Fund (or General Fund):

Since NPOs do not have owners' capital in the traditional sense, they have a Capital Fund or General Fund. This represents the accumulated surplus from the NPO's operations over the years, plus specific funds (like building fund, sports fund), entrance fees (if capitalised), legacies, etc. It is equivalent to the Owner's Capital in a business and appears on the Liabilities side of the Balance Sheet.

Capital Fund = Opening Capital Fund + Surplus (or - Deficit) + Capital Receipts (unless specific fund) - Capital Payments (related to General Fund) - Deficit (if any)

The Capital Fund on the Balance Sheet is adjusted by adding the Surplus or deducting the Deficit from the Income and Expenditure Account.

Specific Funds:

Some receipts (like donations for a specific purpose, e.g., Building Fund, Tournament Fund) are meant to be used only for that specific purpose. These are treated as Capital Receipts and are not taken to the Income and Expenditure Account. Instead, they are shown as separate Liabilities on the Balance Sheet, and related expenses/incomes are adjusted against these specific funds.

Example 5. Specific Donation.

A school receives a donation of ₹5,00,000 for the construction of a new library.

Answer:

This is a specific donation (Capital Receipt).

Receipt and Payment Account (Debit side): Show "To Donation for Library Building ₹5,00,000" (as cash received).
Income and Expenditure Account: This donation is NOT shown here.
Balance Sheet (Liabilities side): Show a separate fund: "Library Building Fund ₹5,00,000". When expenses are incurred for building the library, they are deducted from this fund on the Liabilities side (or added to assets on the other side, as Capital Work-in-Progress).

Specific funds complicate the Balance Sheet but ensure that restricted donations are used and accounted for as intended.

Balance Sheet

The Balance Sheet of a Not-For-Profit Organisation is prepared in the same fundamental way as for a business concern, following the Accounting Equation: Assets = Liabilities + Capital Fund. It shows the financial position of the NPO on a specific date.

It lists all assets (what the NPO owns), liabilities (what it owes to outsiders), and the Capital Fund (the NPO's net worth, representing accumulated surpluses and specific funds).

Items on the Balance Sheet:

Assets Side: Lists all assets owned by the NPO, classified as Fixed Assets and Current Assets (similar to a business Balance Sheet). E.g., Building, Furniture, Investments, Cash in Hand, Cash at Bank, Debtors for subscriptions, Accrued Income, Prepaid Expenses.
Liabilities Side: Lists all amounts owed to external parties, classified as Non-Current and Current Liabilities. E.g., Creditors, Outstanding Expenses, Income Received in Advance, Loans.
Funds: Lists the Capital Fund and any Specific Funds.

The Balance Sheet balances if all assets equal total liabilities plus funds.

Preparation Of Balance Sheet

The Balance Sheet of an NPO is prepared using the closing balances of all Real and Personal accounts from the Ledger, and also incorporating information from the Receipt and Payment Account and the Income and Expenditure Account, along with additional adjustments.

Steps in preparing the Balance Sheet:

Determine the opening balances of all assets, liabilities, and the Capital Fund from the previous year's Balance Sheet (or initial information).
Update the asset balances using information from the Receipt and Payment Account (purchases and sales of assets) and adjustments (depreciation, profit/loss on sale). Show Fixed Assets at cost less accumulated depreciation.
Update the liability balances using information from the Receipt and Payment Account (loan taken/repaid, payments to creditors) and adjustments (outstanding expenses, income received in advance, etc.).
Update the cash and bank balances from the closing balances in the Receipt and Payment Account.
Update the Debtors and Creditors balances, considering any related adjustments (subscriptions/income accrued, expenses outstanding, bad debts, provisions).
Calculate the closing Capital Fund: Start with the opening Capital Fund, add any capital receipts (like legacies, capitalised entrance fees) that are not for specific funds, add the Surplus from the Income and Expenditure Account, and deduct the Deficit (if any).
Show any Specific Funds separately on the Liabilities side. Add donations/receipts for the fund, add any income from investment of that fund, deduct expenses related to that fund.
List all updated assets on the Assets side, grouped logically (Fixed Assets, Investments, Current Assets).
List all updated liabilities and funds on the Liabilities side, grouped logically (Funds, Non-Current Liabilities, Current Liabilities).
Ensure that the total of the Liabilities + Funds side equals the total of the Assets side.

Format of Balance Sheet (Horizontal):

Balance Sheet as on [Date]

Liabilities (₹)		Assets (₹)
Capital Fund	[Opening Balance]	Fixed Assets:
Add: Surplus (from I&E A/c)	[Amount]	Building	[Cost less Dep.]
Less: Deficit (from I&E A/c)	[Amount]	Furniture	[Cost less Dep.]
Add/Less: Adjustments (Legacies, Entrance Fees if capitalised)	[Amount]	Investments	[Amount]
	[Closing Capital Fund]	Current Assets:
Specific Funds (e.g., Building Fund)	[Opening Balance + Receipts - Expenses]	Cash in Hand	[Closing R&P Balance]
Non-Current Liabilities (e.g., Loan)	[Amount]	Cash at Bank	[Closing R&P Balance]
Current Liabilities:		Subscriptions Outstanding (Current Year)	[Amount]
Creditors	[Amount]	Accrued Income	[Amount]
Outstanding Expenses	[Amount]	Prepaid Expenses	[Amount]
Income Received in Advance	[Amount]	Stock of Consumables (Closing)	[Amount]
... (Other Liabilities)	[Amount]	... (Other Current Assets)	[Amount]
Total	[Sum of Liabilities + Funds side]	Total	[Sum of Assets side]

The preparation of the Balance Sheet requires systematically bringing in all relevant closing balances and adjustment effects to present the true financial position.

Income And Expenditure Account Based On Trial Balance

While NPOs commonly prepare the Income and Expenditure Account from the Receipt and Payment Account and additional information, it is also possible for larger NPOs that maintain a complete set of double-entry books (including journals and ledger for all transactions, not just cash) to prepare a Trial Balance at the end of the accounting period.

If a Trial Balance is prepared by an NPO, the process of preparing the Income and Expenditure Account and Balance Sheet from it becomes similar to preparing final accounts for a sole proprietorship from a Trial Balance.

Process when starting from Trial Balance:

Identify Nominal Accounts: All income and expense accounts (Nominal Accounts) appearing in the Trial Balance relate to the Income and Expenditure Account.
Identify Real and Personal Accounts: All asset and liability accounts (Real and Personal Accounts) appearing in the Trial Balance relate to the Balance Sheet.
Account for Adjustments: Any items given as adjustments outside the Trial Balance (outstanding, prepaid, accrued, unearned, depreciation, bad debts, provisions, closing stock) must be accounted for. Each adjustment will affect one account in the Income and Expenditure Account and one account in the Balance Sheet. (The treatment is the same as for a sole proprietorship as discussed in the previous chapter).
Prepare Income and Expenditure Account: Debit all expenses (adjusted) and credit all incomes (adjusted) from the Trial Balance and adjustments. The balancing figure is Surplus or Deficit.
Prepare Balance Sheet: List all assets (adjusted) from the Trial Balance and adjustments on the Assets side. List all liabilities (adjusted) from the Trial Balance and adjustments on the Liabilities side. The opening balance of the Capital Fund will be in the Trial Balance (Credit balance). Add the Surplus (or deduct Deficit) from the Income and Expenditure Account to the Capital Fund. Specific Funds, if any, will also be in the Trial Balance (Credit balances) and adjusted for related income/expenses and receipts/payments. Ensure the Balance Sheet totals agree.

NPO Final Accounts from Trial Balance Flowchart

In essence, when an NPO maintains full double-entry and prepares a Trial Balance, the final account preparation process mirrors that of a business, with the main difference being the terms used (Income and Expenditure Account instead of Profit and Loss Account, Surplus/Deficit instead of Net Profit/Loss, and Capital Fund instead of Owner's Capital).

However, the specific items and their nature (being NPO-related activities) remain distinct. For example, Subscription Income, Donations, Legacies will appear instead of Sales Revenue. Expenses will relate to running the NPO's services (e.g., medical supplies for a hospital, teaching staff salaries for a school).