Accountancy · Ch 4 — Not-For-Profit Organization
Meaning and Features of Not-for-Profit Organizations
Meaning and Features of Not-for-Profit Organizations
Clubs, charitable trusts, hospitals run on a no-profit basis, schools and colleges managed by trusts, sports associations, and religious or professional societies exist to provide a service to their members or to society rather than to earn a profit for owners. These are called Not-for-Profit Organizations (NPOs) or non-trading concerns. The Andhra Pradesh Intermediate Accountancy syllabus (BIEAP, Second Year Commerce) treats their accounting as a natural extension of the double-entry principles already studied for trading concerns — only the terminology and the purpose of the final accounts change.
Features of a Not-for-Profit Organization
- Formed to provide a service to members or to society — promoting sport, education, health, culture, or charity — and not to earn profit for owners.
- Managed by a group of persons elected by the members, usually called the managing committee, governing body, or executive committee.
- Financed mainly by subscriptions from members, donations, legacies, grants-in-aid, and income from investments, rather than by capital contributed for a return.
- Any surplus generated is never distributed among members as a dividend; it is retained and added to the Capital Fund to strengthen the organization.
- Owns assets (building, furniture, sports equipment, investments) and has liabilities exactly like a trading concern, so a Balance Sheet is prepared in the same manner.
Final accounts prepared by an NPO
Because there is no trading and no distribution of profit, an NPO does not prepare a Trading and Profit & Loss Account. Instead, it prepares three statements each year:
- Receipts and Payments Account — a summary of actual cash and bank transactions.
- Income and Expenditure Account — income earned and expenditure incurred on the accrual basis, to find the surplus or deficit for the year.
- Balance Sheet — assets, liabilities, and Capital Fund as on the last day of the accounting year.
These three statements are studied in detail in the sections that follow.
The accumulated excess of a not-for-profit organization's assets over its liabilities, built up from each year's surplus and from capital receipts such as legacies and life membership fees; also called the General Fund or Accumulated Fund.
The excess of income over expenditure for the year, as shown by the Income and Expenditure Account; added to the Capital Fund.
The excess of expenditure over income for the year; deducted from the Capital Fund.