Accounting for Not-for-Profit Organisations

A Not-for-Profit Organisation is formed to provide service, not mainly to earn profit.

A business sells goods or services mainly to earn profit.

But some organisations are made for social, cultural, educational, religious, sports, or welfare purposes.

Examples include sports clubs, libraries, school societies, temple committees, welfare societies, and cultural clubs.

Simple line: A Not-for-Profit Organisation works for service, not mainly for profit.

It may earn surplus, but the surplus is used for the organisation's purpose. It is not distributed as business profit.

Riya is the treasurer of a small sports club.

The club receives subscription from members, donation from supporters, entry fees from new members, and interest from bank.

The club spends money on sports equipment, ground rent, coach salary, electricity, repairs, and tournament expenses.

At the end of the year, Riya wants to know how much cash was received and paid.

She also wants to know whether the club had surplus or deficit.

She needs to know what assets the club owns and what liabilities the club has.

For this, the club prepares Not-for-Profit Organisation accounts.

Receipts and Payments Account is a summary of cash and bank receipts and payments.

It records actual cash and bank money received and paid during the year.

It includes cash receipts, bank receipts, cash payments, and bank payments.

It records both capital and revenue items.

It records only actual cash and bank transactions.

Examples of receipts are subscription received, donation received, sale of old furniture, and bank interest received.

Examples of payments are salary paid, rent paid, purchase of sports equipment, and electricity paid.

Simple line: Receipts and Payments Account is like a cash book summary.

Income and Expenditure Account shows surplus or deficit for the year.

It is like Profit and Loss Account, but for a Not-for-Profit Organisation.

It includes income of the current year and expenses of the current year.

It does not include capital receipts, capital payments, opening cash balance, or closing cash balance.

Surplus means income is more than expenditure.

Deficit means expenditure is more than income.

Simple line: Income and Expenditure Account shows surplus or deficit.

A Not-for-Profit Organisation also prepares a Balance Sheet.

It shows assets, liabilities, and capital fund.

Capital Fund is like capital in a business, but it belongs to the organisation, not to one owner.

If assets are Rs.1,00,000 and liabilities are Rs.20,000, capital fund is Rs.80,000.

Calculation: Rs.1,00,000 - Rs.20,000 = Rs.80,000.

Simple line: Capital Fund is the organisation's accumulated fund.

Subscription is the amount paid by members to the organisation.

Example: Members of a sports club pay Rs.1,000 each every year.

Subscription of the current year is treated as income.

Subscription received for the current year is income.

Outstanding subscription means subscription due but not yet received. It is added to income and shown as asset.

Subscription received in advance means money received now for next year. It is deducted from current year income and shown as liability.

Example: subscription received Rs.50,000, outstanding subscription Rs.5,000, advance subscription Rs.3,000.

Current year subscription income = Rs.50,000 + Rs.5,000 - Rs.3,000 = Rs.52,000.

Donation is money received from supporters.

Small or general donation is usually treated as income.

Specific donation is treated as a fund or liability because it must be used for a special purpose.

Example: donation for building fund should be used for building.

Legacy is money received through a will after someone's death. It is usually treated as capital receipt if it is large or specific.

Entrance fees are paid by new members when joining. They may be treated as income or capital depending on the question instruction.

Life membership fees are one-time fees paid for lifetime membership. They are usually treated carefully as capital/fund or spread over years depending on instruction.

Simple line: For special receipts, read the instruction carefully.

Revenue items are related to regular income or expense of the year.

Examples are subscription, salary, rent, electricity, and sports expenses.

Capital items are related to assets, funds, or long-term benefit.

Examples are building fund, purchase of furniture, purchase of sports equipment, and specific donation.

Sale of an old asset is a cash receipt, but it is not ordinary income like subscription.

Simple line: Revenue affects Income and Expenditure. Capital affects Balance Sheet.