Ch.1 – Accounting for Not for Profit Organisation

Chapter 1

Accounting for Not for Profit Organisation


Not for  profit organisations which are set up for providing Service to its members and the public in general. Profit is not the objective of such organisations. Ex: Clubs, Charitable Institutions, Schools, religious organisations,trade unions,welfare societies etc.

These organisations have service as the main objective and not the profit as is the case of organisations in business. These organisations do not undertake any business activity,they do not manufacture, purchase or sell goods and may not have credit transactions.

Characteristics of NPO

  1. NPO are formed for providing service to a specific group or public such as education, health care, recreation, sports and so on.
  2. These are organised as charitable trusts/societies and subscribers are called members.
  3. It is managed by elected managing/executive committee.
  4. The main sources of income are :- subscriptions from members,donations,govt. aid  legacies,  income from investments, etc.
  5. The funds raised by such organisations are credited to Capital fund/General fund.
  6. The surplus generated is not distributed among the members.

Difference between Trading organisation and Non-Profit Organisation

BasisTrading entitiesNot for Profit Entities
1. Motive To earn profitTo render service 
2. Status Proprietors or owners Subscribers or members
3. Distribution of profit Among the owners Not distributed to any one
4. Result of activitiesProfit or loss either withdrawn or retained in the businessSurplus or Deficit ,which cannot be withdrawn by the members
5. Accounting statements Manufacturing or Trading Profit and loss account and Balance Sheet Receipts and payments account, Income and expenditure account and Balance sheet
6.Accounting systemAccrual systemHybrid system (combination of accrual and cash system) 

Accounting records of Not for profit Organisations

The not for  profit organisation prepares 3 financial statements at the end of every accounting  period. They are required to provide necessary financial information to members, donors, contributors,  and the Registrar of Societies. It is also necessary to know whether the income during the year is sufficient to  meet the expenses or not.  The final accounts of a ‘not-for-profit organisation’ consist of the following:

 1. Receipt and payment account   

  2. Income and expenditure account     

  3. Balance sheet

Receipt and payment account

    It is a cash book. It is a summary of all cash transactions during the year. It starts with opening cash and bank balance and ends with closing cash and bank balance. All receipts (cash and cheque) are shown on the debit side and all payments (cash and cheque) are shown on the credit side. Receipt and payment account never records non cash items like depreciation, outstanding expenses,  accrued incomes etc. Opening and closing balances in receipt and payment account represents the opening and closing cash/bank balance. If there is a bank overdraft at the end it shall be shown on its debit side as the last item.

(a) General  
(b) Specific purpose 
Entrance Fees 
Sale of Investments
 Sale of Fixed Assets 
Subscriptions from Members
Life Membership Fees 
Sale of old Newspapers 
Sale of Old Sports Material 
Interest on Fixed Deposits 
Interest/ Dividend on Investments 
Proceed from Charity Shows 
Sale of Scrap 
Interest/Dividend on Specific Fund Investments 
Miscellaneous Receipts.
Purchase of Fixed Assets
Purchase of Sports Material
Investment in Securities
Printing and Stationery
Wages and Salary
Telephone Charges
Electricity and Water Charges
Repairs and Renewals 
Conveyance Charges
Subscription for Periodicals
Audit Fees
Entertainment Expenses
Municipal Taxes
Postage and Courier
ChargesUpkeep of Play Ground

Steps in the Preparation of Receipt and Payment Account–

  1. Take the opening cash in hand/Bank balance and enter on Debit side,if balance is Bank overdraft at the beginning enter the same on Credit side
  2. All receipt enter on Debit side( including capital,revenue,or for past,current and future)
  3. All payments enter Credit side( including capital,revenue,or for past,current and future)
  4. None of the receivable income and payable expense is to be entered in this account as they do not involve inflow or outflow of cash
  5. Does not contain  non cash items such as depreciation,bad debts etc
  6. Balance the account  – if Debit side is more than credit side ,it is cash /bank balance(on credit side),otherwise balance is Bank overdraft (on debit side)

Specimen of receipt and payment account

Receipt and payment account for the year ended ………………..(date)

Salient features of Receipt and Payment Account

  1. It is a summary of the cash book
  2. It shows the total amount of all receipts and payments irrespective of the period to which pertain.
  3. It includes all receipts and payments whether they are of capital nature or of revenue nature.
  4. No distinction is made in receipts /payments made in cash or through bank.
  5. No non-cash items such as depreciation, outstanding expenses,accrued income etc are shown in this account. 
  6. It begins with opening balance of cash in hand and cash at bank(or bank overdraft) and closes with the year end balances of cash in hand /cash at bank or bank overdraft.

Income and expenditure account

It is similar to Profit and Loss A/c prepared by trading concerns.All the revenue items relating to the current period are shown in this account.It is debited with all expenses or losses and credited with all incomes and gains.The balance,being either excess of income over expenditure,Surplus (Net profit in the case of trading concern) or excess of expenditure over income ,Deficit(net loss in the case of trading concern) is transferred to capital fund.

The Income and Expenditure Account is prepared on accrual basis with the help of Receipts and Payments Account along with additional information regarding outstanding and prepaid expenses and depreciation etc.

Steps in the preparation of Income and Expenditure Account

  1. Read the receipt and Payment Account carefully
  2. Exclude the Opening and closing cash/ Bank Balances,as they are not Income
  3. Exclude the Capital Receipts and Payments as these are  to be shown in B/S
  4. Consider only the Revenue Receipts and enter on the Income(Credit) side of IE a/c with adjustments.
  5. Take the revenue expenses to the expenditure(Debit) side of IE a/c with adjustments as per the additional information provided. 
  6. Consider the following items which are not appearing in Receipt and Payment A/c
  1. Depreciation of fixed assets.
  2. Provision for doubtful debts, if required
  3. Profit or loss sale of fixed assets.
  4. Balance the Account ,If  Credit side is heavier than debit side it is Surplus,  otherwise Deficit.

Difference between receipt and payment account & income and expenditure account

Items of Receipts and Payments Account – 

The items of receipts and payments account may be classified as 

1. Revenue Receipts, 2. Capital Receipts, 3. Revenue Payments and 4. Capital payments. 

1. Revenue Receipts – These are the amounts received by the organization on a recurring nature. 

  1. Annual membership subscription. 
  2. Admission fee not capitalized. 
  3. Receipts from sale of old news papers and magazines. 
  4. Hall rent received. 
  5. Interest received on investment, fixed deposits and loan advanced. 
  6. Donations, grants and legacies (receipt as per the will of a deceased person). 
  7. Locker rent, cloak room rent received.
  8. Receipts from sale of refreshment.
  9.  Any other items of similar nature. 

2. Capital Receipts – These are the amounts received during the current year, the benefit of which will relate to future years also. Such receipts are not received at regular intervals. They include:

  1.  Donations from outsiders or members for specific purpose.
  2. Amount received as loans.
  3. Life membership subscription.
  4.  Admission fees to the extent capitalized. 
  5. Sale proceeds of fixed assets. 
  6. Legacies for specific purposes.
  7. Grants received from Government for meeting capital expenditure. E.g. construction of a Library building. 
  8. Any other receipts of capital nature. 

3. Revenue Payments – These are the payments of recurring nature and to be paid at regular intervals.

  1.  Salaries, wages and honorarium paid.
  2.  Travelling and conveyance allowances.
  3.  Rent, taxes, insurance, electricity , printing and stationary, postage and telegram, repairs etc. 
  4.  Payments for organizing sports meets and tournaments. 
  5.  Payments for purchase of refreshment, dinner etc.
  6.  Interest paid on loan and on bank overdraft. 
  7. Any other payment of revenue nature

4. Capital Payments – These are the payments made during the current period, the benefits of which are available in the future years also. They are not made at regular intervals. 

  1. Construction expenses. 
  2. Purchase of fixed assets like furniture, office equipments etc. 
  3. Purchase of books for library.
  4. Amounts advanced to outsiders as loans. 
  5. Purchase of sports goods and equipments.
  6. Any other payments of capital nature. 

Treatment of Important Items

SubscriptionRevenue receipt – Income side of IE A/c– For current year only
Donation for general purposeRevenue – Income side of IE A/c
Donation for specific purpose(for Building,ground)Capital – Liability side of B/S
Legacy – Amount received by the non-profit organisations asper the will of a deceased person.Capital (If small amount treated as Income )Added to Capital Fund
Life membership feeCapital – Added to Capital Fund
Entrance fee/Admission fee – This is the amount of fees collected on the admission of members.For Schools – Revenue Income ( Unless otherwise as per instruction)                                                 For  Clubs – Capital – Added to Capital FundIf nothing is specifically mentioned about entrance fee ,it is better to treat it as an income
Government Grant – general PurposeRevenue-Income side of IE A/c
Government Grant – Specific Purpose(For building,ground etc)Capital – Liability side of B/S
Endowment Fund – Fund meant for providing permanent means of support.Capital – Liability side of B/S
Sale of Fixed AssetsCapital – Add to Cash balance- (if profit or loss , to be shown in Income and Exp: A/c)
Sale of old news paper,periodicals, sports materialRevenue –Income side of IE A/c
Stationery Consumed Revenue – expenditure side of IE A/c
Sale of grassRevenue – Income side of IE A/c
HonorariumRevenue – expenditure side of IE A/c

Balance sheet

The Balance sheet of not for profit organisation is prepared on the same principle as the balance sheet of a profit seeking business. it is a statement of all assets and liabilities of the business. There is no Capital in the case of a trading concern but it may have Capital Fund.Capital fund is made up of surplus of income over expenditure and certain items which are capitalised.Excess of assets over liabilities is called Capital Fund or General Fund

Steps in the Preparation of Balance sheet 

  1. Find out the opening capital fund by preparing the opening balance sheet, take only the assets and liabilities on opening date, the difference between the two sides is capital fund.
  2. Surplus added to the capital fund and deduct deficit if any. Also add items to be capitalised along with capital funds like legacy,entrance fee etc.
  3. Take all the fixed assets which are already shown in the Opening balance sheet and add purchases of fixed assets (from receipt and payment account) or less sale of fixed assets during the year.
  4. Calculate the depreciation on fixed assets and deduct depreciation from the value of assets and shown in the asset side of the balance sheet.
  5. Consider the following items : 
  • Subscription due but not yet received – shown in Asset side of balance sheet.
  • Income received in advance – shown in the liability side of the balance sheet.
  • Sale of fixed assets – adjusted along with assets.
  • Outstanding expenses – shown in the liability side of the balance sheet.
  • Prepaid expenses – shown in the Asset side of the balance sheet.
  1. Stock of consumables eg. stationery items – shown in the Asset side of the balance sheet.
  2. Closing balance of cash and bank – shown in Asset side of the balance sheet. 8) If bank overdraft – shown in liability side of balance sheet.

Calculation of Subscription for the year.

Subscription is a membership fee paid by the member on annual basis. This is the main source of income of such organisations. Subscription paid by the members is shown as receipt in the Receipt and Payment Account and as income in the Income and Expenditure Account..Adjustments should be made to show the correct income for the period.

Method – 1 Statement Form

                                      Subscription received during the year         – xxx

                                          Add: Outstanding at the end                     – xxx  – (Closing B/S -Asst)

                                                   Advance at the beginning                  – xxx – (Open. B/S – Liabt)


                                           Less: Advance at the end                           – xxx –(Closing –B/S- Liab)

                                                     Outstanding at the beginning        –  xxx  – (Open. –B/S- Asst)

                                         Subscription credited to income side   – xxx

Method 2 – Account Form

Treatment of Special Funds(Tournament Fund,Lottery fund etc)

If there is any special purpose fund, eg. Tournament fund, Charity Fund,Prize Fund, Endowment Fund etc. and there are certain items of expenses and incomes relating to that fund ,then incomes and expenses should not be shown in the income and expenditure account but income should be added to the fund and expenses deducted from such fund on the liabilities side of the balance sheet.