Q.What is a Not-for-Profit Organisation? State its meaning and any four features that distinguish it from a profit-seeking business enterprise.

A Not-for-Profit Organisation exists to serve its members or society, not to earn profit for owners, and this single difference in objective shapes every feature that follows.

Meaning: A Not-for-Profit Organisation (NPO) is an organisation — a club, society, charitable hospital or school, professional association, or trust — formed to render a service to its members or to society at large, and not to earn or distribute profit. It is funded mainly by member subscriptions, donations, entrance fees, government grants, and legacies.

Four distinguishing features (compared with a profit-seeking business):

1. Objective: An NPO's objective is service to members/society; a business's objective is to earn profit for its owners.
2. Ownership: An NPO has no proprietor, partners, or shareholders — it is managed by an elected managing committee acting on behalf of the members. A business has identifiable owner(s) entitled to its profit.
3. Treatment of the year's result: An NPO's excess of income over expenditure is called Surplus (or Deficit, if expenditure exceeds income), and it is always retained in the Capital Fund for the organisation's continued use — never paid out to any individual. A business's Profit may be withdrawn or distributed as dividend.
4. Final accounts prepared: An NPO prepares a Receipts and Payments Account, an Income and Expenditure Account, and a Balance Sheet. A business prepares a Trading Account, a Profit and Loss Account, and a Balance Sheet.

(A fifth feature worth noting: capital in an NPO's Balance Sheet is called the Capital Fund or General Fund, not 'Capital'.)

Students often say an NPO 'never earns any surplus' — that is wrong; it can and regularly does earn a surplus, the real difference is that the surplus is never distributed to any owner and is instead retained in the Capital Fund. Another common slip is naming 'Profit and Loss Account' as one of its final statements instead of the correct 'Income and Expenditure Account'.