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ACCOUNTANCY Chapter 1: Accounting for Not-for-Profit Organisation
(1) 01 ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATION Accounting for Not-for-Profit Organisation Introduction to Not-for-Profit Organisation Meaning, Features and Financial Statements of a Not-for-Profit Organisation: ● Meaning and Concept of Not-for-Profit Organisations: i. These are the institutions/organisations that are set-up with general or specific objectives for rendering services and providing other social activities to enhance the welfare of general or a particular group of people. ii. The aim of such institutions is not to earn profit, however, the organisations are capable of earning profit. iii. A separate legal entity not owned by any individual or an enterprise. iv. Examples of such organisations are schools, colleges, public hospitals, literacy societies for promoting sports, arts, culture, etc. ● Characteristics or Features of Not-for-Profit Organisations: i. Formed by Promoters: These organisations are formed by the promoters who can be either individual or groups of individuals and enterprises. ii. Separate Existence: These organisations have separate existence from its members, i.e. the life of an NPO is unaffected by the life of its members. iii. Purpose: Its purpose is to further cultural, educational, religious, professional or public service objectives. iv. Form: It is set-up as a charitable society or trust. v. No Profit Motive: Its aim is not to earn profit, however, the organisation is capable of earning profit. Any surplus is used by the organisation for its prescribed objectives rather than distributing it among the members. vi. Management: It is managed by a group of individuals known as Trustees or Managing Committee. vii. Funding: The main source of their income is subscription, donations, government grants and other receipts viii. Accounts: Unlike profit-seeking organisations, NPOs do not prepare Profit and Loss Account; rather they prepare Income and Expenditure Account to show a summary of revenue incomes and revenue expenses. The NPOs prepare final accounts every year which comprises of Receipt and Payment Account, Income and Expenditure Account and Balance Sheet. ● Difference between Not-for-Profit Organisation and Profit Earning Organisation:
(2) 01 ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATION Sr. no. Basis Not-for-Profit Organisation Profit Earning Organisation no. (Business Firm) 1 Purpose To render services Its purpose is to earn profits 2 Formation & and Management Formed by Promoters and managed by Trustees Formed by Entrepreneur(s) managed by Owners or Managers 3 Funds It raises funds by way of Membership Fee, Donations, and Surplus from Operations which are shown in the books as General or Capital or Corpus funds It receives funds from the proprietor, partners in the form of capital (in case of proprietorship and partnership) and from shareholders in the form Share Capital (in case of Companies) Profits which are not distributed to partners and shareholders are shown as reserves. 4 Financial Statement Final accounts are prepared every year that comprises of Receipt and Payment Account, Income and Expenditure Account and Balance Sheet Final accounts comprises of Trading, Profit and Loss Account and Balance Sheet 5 Surplus/Profi t Excess of income over expenditure in the Income and expenditure Account is termed as Surplus/Profit. Excess of credit side over the debit side of the Profit and Loss Account is termed as Net Profit. ● Financial Statements of a Not-for-Profit Organisation: i. It prepares annual or final accounts every year showing the financial transactions of the organisation.
(3) 01 ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATION ii. These annual or final accounts are prepared for its members and to comply with statutory requirements. iii. Financial Statements of an NPO comprise of the following: a. Receipts and Payments Account, b. Income and Expenditure Account and. c. Balance Sheet. Understanding Receipts and Payments Account Meaning, Features, Format and Limitations of Receipts and Payments Account: Meaning: It is an account that shows the summary of all cash and bank transactions occurred during an accounting period. It starts with the opening balances of cash and bank and ends with the closing balances of cash and bank. This account is a Real Account and lays the basis for the preparation of Income and Expenditure Account and the Balance Sheet. Features: Following are the features of Receipts and Payments Account: i. Nature: It is a summary of cash receipts and payments and hence, it an Asset Account/Real Account ii. Recording: It provides the summary of all cash and bank transactions in a chronological order. iii. Basis of Preparing: It is prepared on cash basis, i.e., it records only cash inflow and outflow. Accrued and outstanding transactions are not recorded in this account. iv. Capital and Revenue: It records all the transactions whether capital or revenue. v. Period: It records all the cash and bank transactions irrespective of whether they relate to current, previous or succeeding accounting periods. vi. Opening and Closing Balances: Opening balance of this account is the cash in hand/ bank at the beginning of the accounting year and the closing balance shows cash in hand/bank at the end of the accounting period. Format: Dr. Receipts and Payments Account for the year Cr