Accounting for Not-for-Profit Organizations

Accounting for Not-for-Profit Organizations

1. Introduction

Not-for-profit organizations (NPOs) are entities that exist for purposes other than making a profit. Their primary aim is to provide services or support for social, educational, religious, or charitable activities. Examples include schools, hospitals, clubs, and charities.

2. Characteristics of NPOs

• Purpose: To serve a social cause rather than earn profits.
• Ownership: No individual ownership; assets belong to the organization.
• Surplus Utilization: Any surplus is reinvested in the organization’s activities, not distributed as profit.
• Sources of Income: Donations, grants, subscriptions, membership fees, and income from investments.

3. Financial Statements of NPOs

The financial statements prepared by NPOs include:

• Receipts and Payments Account
• Income and Expenditure Account
• Balance Sheet

4. Receipts and Payments Account

• Nature: A summary of all cash and bank transactions during an accounting period.
• Characteristics:
• Cash basis of accounting.
• Records all cash receipts and payments, including capital and revenue items.
• Does not consider outstanding or prepaid amounts.
• Format:

  Receipts and Payments Account for the Year Ended 31st March, 20XX

  Receipts                                      Amount      Payments                                    Amount
  ---------------------------------------------------------------------------------
  Opening Balance: Cash/Bank             XXX          Salaries                                           XXX
  Donations                                      XXX          Rent                                                XXX
  Subscriptions                               XXX          Utilities                                             XXX
  Sale of Old Assets                       XXX          Office Supplies                                  XXX
  Interest Income                           XXX          Closing Balance: Cash/Bank         XXX
  Miscellaneous Income                 XXX          Miscellaneous Expenses                   XXX

5. Income and Expenditure Account

• Nature: Similar to the profit and loss account of a for-profit entity, prepared on an accrual basis.
• Characteristics:
• Revenue basis of accounting.
• Records only revenue items (income and expenses related to the current period).
• Excludes capital items.
• Adjusts for outstanding and prepaid amounts.
• Format:

  Income and Expenditure Account for the Year Ended 31st March, 20XX

  Expenditure                                Amount      Income                                        Amount
  ---------------------------------------------------------------------------------
  Salaries                                          XXX          Subscriptions                               XXX
  Rent                                                 XXX          Donations                                     XXX
  Utilities                                            XXX          Interest Income                           XXX
  Office Supplies                                XXX          Miscellaneous Income                    XXX
  Depreciation                                    XXX
  Surplus (Excess of Income)              XXX

6. Balance Sheet

• Nature: A statement of financial position showing the assets, liabilities, and capital fund of the organization as of a specific date.
• Characteristics:
• Prepared at the end of the accounting period.
• Shows the financial health of the organization.
• Format:

  Balance Sheet as on 31st March, 20XX

  Liabilities                             Amount           Assets                                    Amount
  ---------------------------------------------------------------------------------
  Capital Fund                             XXX                 Fixed Assets                           XXX
  Add: Surplus                              XXX                 Investments                            XXX
  Life Membership Fees                  XXX                 Cash/Bank                                 XXX
  Subscriptions Received in Advance XXX                 Subscriptions Due                       XXX
  Outstanding Expenses                 XXX                 Prepaid Expenses                       XXX

7. Key Terms and Concepts

• Capital Fund/General Fund: Represents the accumulated surplus of the organization.
• Subscriptions: Membership fees paid by members, usually on an annual basis.
• Donations: Contributions received from individuals or entities to support the organization’s activities.
• General Donations: For general use.
• Specific Donations: For a specific purpose.
• Endowment Fund: A fund where the principal amount is kept intact, and only the income generated is used for specific purposes.
• Life Membership Fees: Fees paid by members for lifelong membership.
• Legacies: Amounts received under a will of a deceased person.
• Honorarium: Payment given for voluntary services, usually less than the usual fee.

8. Accounting Treatment of Important Items

• Subscriptions:
• Outstanding Subscriptions: Added to the subscription income in the Income and Expenditure Account.
• Advance Subscriptions: Deducted from the subscription income in the Income and Expenditure Account.
• Donations:
• General Donations: Treated as income in the Income and Expenditure Account.
• Specific Donations: Shown separately in the Balance Sheet and used for the specified purpose.
• Life Membership Fees: Credited directly to the Capital Fund.
• Legacies: Added to the Capital Fund unless specified otherwise.
• Sale of Old Assets: Treated as capital receipt and recorded in the Receipts and Payments Account.
• Honorarium: Treated as an expense in the Income and Expenditure Account.

9. Preparation of Financial Statements

1. Receipts and Payments Account:

• Summarize all cash and bank transactions.
• Identify the opening and closing balances.

1. Income and Expenditure Account:

• Convert the Receipts and Payments Account to accrual basis.
• Adjust for outstanding and prepaid expenses.
• Include non-cash items like depreciation.

1. Balance Sheet:

• List all assets and liabilities.
• Ensure that the closing balance of the Capital Fund matches the accumulated surplus.

By understanding the unique aspects of accounting for not-for-profit organizations, one can accurately record and report their financial activities, ensuring transparency and accountability.