Accounting for Non Profit Organizations- Meaning, Components

Typically, businesses engage in economic activities with the main goal of making a profit. However, there are certain groups that run with the aim of giving services to both their members and the wider public. In these cases, the directors of such groups bear full duty to the members and the public. Consequently, the need for accounting for Non Profit Organizations becomes important.

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Accounting for Non Profit Organizations

• Non-profit organizations refrain from engaging in trading or business activities.
• Primary income sources include member subscriptions, donations, government financial assistance, and returns from investments.
• Transactions mainly occur in cash or through bank channels.
• Cash book records all receipts and payments, while a ledger tracks accounts related to income, expenses, assets, and liabilities.
• A stock register is maintained to document fixed assets and consumables comprehensively.
• Instead of a capital account, nonprofits manage a capital fund (general fund) that accumulates through surpluses, life membership fees, donations, and legacies.

Financial Statements in Accounting for Non Profit Organizations

• Receipt and Payment Account
• Income and Expenditure Account
• Balance Sheet

Receipt and Payment Account in Accounting for Non Profit Organizations

• The Receipt and Payment Account, managed annually, is a consolidation of cash and bank transactions based on entries in the cash book.
• This summary categorizes various financial activities, such as consolidating subscriptions from members recorded on the cash book's debit side into a single entry on the receipts side of the Receipt and Payment Account.
• Similarly, expenditures like salary, rent, and electricity charges, documented on the cash book's credit side, are aggregated on the payment side of the Receipt and Payment Account for the entire year.

Steps in Preparation of Receipt and Payment Account in Accounting for Non Profit Organizations

• Record the initial cash in hand and cash at the bank on the debit side.
• If there's a bank overdraft at the beginning of the year, note it on the credit side.
• Include all receipt amounts on the debit side, regardless of their nature (capital or revenue), and whether they relate to past, current, or future periods.
• Include all payment amounts on the credit side, regardless of their nature (capital or revenue), and whether they relate to past, current, or future periods.
• Do not include receivable income and payable expense in this account, as they don't involve cash inflow or outflow.
• Calculate the difference between the total on the debit side and the total on the credit side.
• If the debit side total is greater, enter the difference as the closing balance of cash/bank on the credit side.
• If the credit side total is greater, show the difference on the debit side as a bank overdraft and close the account.

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Income and Expenditure Account in Accounting for Non Profit Organizations

• Summary of income and expenses for the accounting year, similar to a business profit and loss account on an accrual basis.
• Focuses on revenue items, with the balance at the end indicating surplus or deficit.
• Comparable to a business profit and loss account, serving the same purpose.
• Includes current period revenue items, expenses, losses, incomes, and gains.
• Presents the net operating result as surplus (income > expenditure) or deficit (expenditure > income).
• The outcome is transferred to the capital fund in the balance sheet.
• Prepared on an accrual basis using Receipts and Payments Account, adjusting for outstanding, prepaid expenses, depreciation, etc.
• Adjustments necessary for items in Receipts and Payments Account.

Steps in Preparation of Income and Expenditure Account in Accounting for Non Profit Organizations

• Thoroughly examine the Receipt and Payment Account.
• Disregard the opening and closing balances of cash and bank as they do not constitute income.
• Omit capital receipts and capital payments, as these should be reflected in the Balance Sheet.
• On the income side of the Income and Expenditure Account, include only revenue receipts. Adjust by excluding amounts related to preceding and succeeding periods and including current year amounts not yet received.
• Allocate revenue expenses to the expenditure side of the Income and Expenditure Account, making necessary adjustments based on additional information about amounts received in advance and those pending.
• Consider the following factors not present in the Receipt and Payment Account when determining the surplus/deficit for the current year:

Balance Sheet in Accounting for Non Profit Organizations

• Not-for-profit organizations create a Balance Sheet to assess their financial status, following a structure similar to business entities.
• The Balance Sheet reflects assets and liabilities at the end of the fiscal year, with assets on the right and liabilities on the left.
• Instead of Capital, there is a Capital Fund or General Fund, with the surplus or deficit from the Income and Expenditure Account either added to or deducted from this fund.
• Capitalized items like legacies, entrance fees, and life membership fees are often directly incorporated into the capital fund.
• Additional funds, like building or sports funds, established for specific purposes or to meet donor requirements, are separately listed on the liabilities side of the balance sheet.
• In some cases, it's necessary to prepare a Balance Sheet at the beginning of the year to determine the opening balance of the capital or general fund.

Steps in Preparation of Balance Sheet in Accounting for Non Profit Organizations

• Begin with the opening balance of the Capital/General Fund, adding the surplus from the Income and Expenditure Account.
• Include entrance fees, legacies, life membership fees, and similar items received during the year.
• List all fixed assets that were not sold, discarded, or destroyed during the year. Add any new additions after accounting for depreciation as per the Income and Expenditure Account.
• Compare items on the receipts side of the Receipts and Payments Account with the income side of the Income and Expenditure Account to determine:

• Similarly, compare items on the payments side of the Receipt and Payment Account with the expenditure side of the Income and Expenditure Account to ascertain: