Accounting of Non Profit Organisation

Accounting of Non Profit Organisation

Non Profit Organisation is an entity which is run for the benefit of the society rather than with an intention to earn profit. The sole aim of a Non Profit Organisation is to serve the society without and self interest. They come into existence to support and develop various fields like sports, science, health, religion, Etc. Entities like Educational Institutions, Hospitals, Clubs, etc. are the examples of Non-Profit Organisations.

Accounts of Non Profit Organisation

Traditionally all entities have to maintain books of accounts and based on them prepare the financial statements. Non Profit Organisation prepare different set of financial statements which include – Receipts and Payments A/c, Income & Expenditure A/c and Balance Sheet.

Receipts & Payments A/c

A Receipt and Payment A/c is a summary of a Cash Book without a Date Column. It consists of all money received and all money paid by the organisation in cash or by cheque. It also shows the opening and closing cash and bank balance.

All the Receipts (Irrespective of Nature and Period) are recorded on the Debit side.

All the Payments (Irrespective of Nature and Period) are recorded on the Credit side.

Here Nature means Capital or Revenue and Period indicates Current Year or any other year.

The Receipts and Payments would always balance because it records the opening and closing balances of Cash and Bank. In case it does not balance then the balancing figure would indicate the closing Cash or Bank Balance.

Income & Expenditure A/c

Income and Expenditure A/c is equivalent to Profit and Loss A/c of a Business Organisation. It records all the Expenses on the Debit side and the Incomes on the Credit Side. The balancing figure represents Surplus (Profit) or Deficit (Loss). The surplus or loss is transferred to the Balance Sheet under the head Capital Fund.

Income and Expenditure A/c records only Revenue Items and that too related to current year only. Any item of capital nature or related to any other year is not recorded in Income and Expenditure A/c.

Balance Sheet

Balance Sheet is the same as learned in the earlier chapter of Final Accounts of a Sole Proprietor. The only difference here is the balancing figure on the Liability side is Called as Capital Fund.

Items Unique to Non-Profit Organisation

1.      Capital Fund: The Capital of NPO is called Capital Fund.

2.      Legacy: It is in nature of Gift, given to NPO in cash or property as per the will. It is shown on the Receipt Side of the Receipt & Payment A/c. It is not taken as an Income rather it is shown as a Capital Receipt and is shown in the Liabilities side of Balance Sheet.

3.      Donations: It is a very common source of Income of NPO.  Donations can be of different types as shown below –

Note: Some Authors show General donations in 2 Parts based on the amount of Donation received. If the amount is huge it would be taken as Capital Income and  the Small amount of Donation is considered as Revenue Income.

4.      Sale of Fixed Asset: Only the Profit or Loss on sale of Fixed Asset is shown on the Credit or Debit Side of Income & Expenditure A/c as the case may be. The Book Value of the Asset sold should be deducted from the concerned asset in the Balance Sheet.

5.      Sale of Old Newspapers, Periodicals, Etc.: Such sale is treated as Ordinary Income and hence should be Credited to Income and Expenditure A/c.

6.      Endowment Fund: It is a fund arising from a bequest or gift, it is for a specific purpose and hence is treated as a Capital Receipt to be shown in Balance Sheet.

7.      Entrance Fees: It is the fees paid by the members at the time of joining the NPO. Entrance fees is one of the most controversial Items in accounting. It may be treated as a capital Receipt or as a Revenue Receipt.

8.      Life Membership Fees: It is the fees paid by the members once in the life of their membership and it is considered as a Capital Receipt, hence recorded in Balance Sheet – Liability Side.

9.      Subscription: It is one of the most common source of Income for most of the NPO’s. Its calculation for the purpose of Income & Expenditure A/c is very essential for the Accounting of NPO as only the amount of Subscription related to current year is to be transferred to I & E A/c.