NOT FOR PROFIT ORGANISATION

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Meaning of Not-for-Profit Organisation

  • There are certain organisations which are set up for providing service to its members and the public in general.
  • Such organisations include clubs, charitable institutions, schools, religious organisations, trade unions,welfare societies and societies for the promotion of art and culture.
  • These organisations have service as the main objective and not the profit as is the case of organisations in business. Normally, these organisations do not undertake any business activity, and are managed by trustees who are fully accountable to their members and the society for the utilization of the funds raised for meeting
NPO can be registered as a Trust under Trust Act or as a Society under Societies Registration Act or as
Non-profit Company under section 8 of the companies act 2013.
 
 Section 12A of Income Tax Act’1961: 12A registration is a one-time registration which is granted by the
Income Tax Department to trusts and other not for profit organisations. The purpose of the registration is
to be exempted from the payment of income tax.
 
Meaning and Characteristics of Not-for-Profit Organisation:
 
1. Such organisations are formed for providing service to a specific group or public at large such as education,
health care, recreation, sports and so on without any consideration of caste, creed and colour. Its sole aim is
to provide service either free of cost or at nominal cost, and not to earn profit.
2. These are organised as charitable trusts/societies and subscribers to such organisation are called members.
3. Their affairs are usually managed by a managing/executive committee elected by its members.
4. The main sources of income of such organisations are: 
(i) subscriptions from members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income from investments, etc.
5. The funds raised by such organisations through various sources are credited to capital fund or general fund.
6. The surplus generated in the form of excess of income over expenditure is not distributed amongst the
members. It is simply added in the capital fund.
7. The Not-for-Profit Organisations earn their reputation on the basis of their contributions to the welfare of the
society rather than on the customers’ or owners’ satisfaction.
8. The accounting information provided by such organisations is meant for the present and potential
contributors and to meet the statutory requirement.

 

Final Accounts or Financial Statements

The Not-for-Profit Organisations are also required to prepare financial statements at the end of each accounting period. Although these organisations are non-profit making entities and they are not required to make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was sufficient to meet the expenses or not. Not only that they have to provide the necessary financial information to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation as stated earlier, the final accounts of a ‘not-for-profit organisation’ consist of the following:

  • i. Receipt and Payment Account (Cash and bank Account)
  • ii. Income and Expenditure Account, and
  • iii. Balance Sheet.

Receipt and Payment Account (Cash and bank Account):

It is an account that shows the summary of all cash and bank transactions occurred during an accounting period. It starts with the opening balances of cash and bank and ends with the closing balances of cash and bank. This account is a Real Account and lays the basis for the preparation of Income and Expenditure Account and the Balance Sheet.

Receipts and Payments Account

Receipts and Payments Account for the Year Ended 2020

Dr. Receipts Cr. Payments
Description Amount Description Amount
To Balance b/d (Opening Balance): By Balance b/d (Bank Overdraft)
   Cash in Hand [Amount] By Salaries [Amount]
   Cash at Banks [Amount] By Rent [Amount]
To Subscriptions: By Postage Expenses [Amount]
   For Previous Year [Amount] By Newspapers and Magazines, etc. [Amount]
   For Current Year [Amount] By Repairs [Amount]
   For Next Year [Amount] By Audit Fee [Amount]
To General Donations [Amount] By Maintenance Expenses [Amount]
To Entrance/Admission Fees [Amount] By Insurance [Amount]
To General Grants [Amount] By Secretary’s Honorarium [Amount]
To Sale of Newspaper, Grass, etc. [Amount] By Honorarium [Amount]
To Sale of Old Used Sports Materials [Amount] By Municipal Tax [Amount]
To Interest on Investments [Amount] By Prize Distributed [Amount]
To Income from Concerts/Lectures [Amount] By Office Expenses [Amount]
To Dividends [Amount] By Expenses on Show [Amount]
To Rent Received [Amount] By Miscellaneous Payments [Amount]
To Interest Received [Amount] By Purchase of Fixed Assets (e.g., Furniture) [Amount]
To Miscellaneous Receipts [Amount] By Sports Equipment [Amount]
To Life Membership Fees [Amount] By Investments [Amount]
To Subscriptions for Specific Purpose [Amount] By Books [Amount]
To Donation for Specific Purpose [Amount] By Loan (Repayment) [Amount]
To Legacies [Amount] By Building [Amount]
To Endowment Fund [Amount]
To Sale of Fixed Assets [Amount]
To Receipts on Account of Special Fund (e.g., Match Fund, Prize Fund) [Amount]
To Balance c/d (Bank Overdraft) [Amount] By Balance c/d (Closing Balance):
   Cash in Hand [Amount]
   Cash at Bank [Amount]

It is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared on accrual basis in case of the business organisations. It includes only revenue items and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves the same purpose as the profit and loss account of a business organisation does. All the revenue items relating to the current period are shown in this account, the expenses and losses on the expenditure side and incomes and gains on the income side of the account.

Receipts and Payments Account

Receipts and Payments Account for the Year Ended [Insert Date]

Dr. Receipts Cr. Payments
Description Amount Description Amount
To Balance b/d (Opening Balance): By Balance b/d (Bank Overdraft)
   Cash in Hand [Amount] By Salaries [Amount]
   Cash at Banks [Amount] By Rent [Amount]
To Subscriptions: By Postage Expenses [Amount]
   For Previous Year [Amount] By Newspapers and Magazines, etc. [Amount]
   For Current Year [Amount] By Repairs [Amount]
   For Next Year [Amount] By Audit Fee [Amount]
To General Donations [Amount] By Maintenance Expenses [Amount]
To Entrance/Admission Fees [Amount] By Insurance [Amount]
To General Grants [Amount] By Secretary’s Honorarium [Amount]
To Sale of Newspaper, Grass, etc. [Amount] By Honorarium [Amount]
To Sale of Old Used Sports Materials [Amount] By Municipal Tax [Amount]
To Interest on Investments [Amount] By Prize Distributed [Amount]
To Income from Concerts/Lectures [Amount] By Office Expenses [Amount]
To Dividends [Amount] By Expenses on Show [Amount]
To Rent Received [Amount] By Miscellaneous Payments [Amount]
To Interest Received [Amount] By Purchase of Fixed Assets (e.g., Furniture) [Amount]
To Miscellaneous Receipts [Amount] By Sports Equipment [Amount]
To Life Membership Fees [Amount] By Investments [Amount]
To Subscriptions for Specific Purpose [Amount] By Books [Amount]
To Donation for Specific Purpose [Amount] By Loan (Repayment) [Amount]
To Legacies [Amount] By Building [Amount]
To Endowment Fund [Amount]
To Sale of Fixed Assets [Amount]
To Receipts on Account of Special Fund (e.g., Match Fund, Prize Fund) [Amount]
To Balance c/d (Bank Overdraft) [Amount] By Balance c/d (Closing Balance):
   Cash in Hand [Amount]
   Cash at Bank [Amount]

Balance Sheet

 

‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financial position of the organisation. The preparation of their Balance Sheet is on the same pattern as that of the business entities. It shows assets and liabilities as at the end of the year.

Any surplus or deficit in the Income and Expenditure Account is transferred to Capital Fund, where, Capital Fund = Total Assets – Total Liabilities.

Balance Sheet


Balance Sheet as at 2020

Dr. Liabilities Cr. Assets
Description Amount Description Amount
Capital Fund or General Fund or Corpus Fund: Fixed Assets:
   Opening Balance [Amount] Building:
   Add: Surplus (or Less: Deficit) [Amount]    Opening Balance [Amount]
[Total]    Add: Additions [Amount]
Building Fund:    Less: Depreciation [Amount]
   Opening Balance [Amount] [Total]
   Add: Donation for Building [Amount] Furniture:
   Income from Building Fund Investment [Amount]    Opening Balance [Amount]
[Total]    Add: Additions [Amount]
Sports Fund:    Less: Depreciation [Amount]
   Opening Balance [Amount]    Less: Sale [Amount]
   Add: Donation for Sports Fund [Amount] [Total]
   Income on Sports Fund Investment [Amount] Current Assets:
   Less: Sports Prize Awarded [Amount] Cash in Hand [Amount]
[Total] Cash at Bank [Amount]
Current Liabilities: Subscriptions in Arrear [Amount]
Outstanding Expenses: Accrued Interest [Amount]
   Rent [Amount] Investments:
   Salaries [Amount] Building Fund Investments [Amount]
   Electricity/Water Charges [Amount] Sport Fund Investments [Amount]
Subscriptions Received in Advance [Amount] Prepaid Expenses:
   Insurance [Amount]
   Rent [Amount]

Question :

Particulars As at 1st April, 2020 As at 31st March, 2021
Creditors for Sports Materials 2,000 1,300
Stock of Sports Materials 3,000 500

During 2020–21, the payment made to these creditors was 10,800. There were no cash purchases of sports material. Calculate stock of sports material consumed?
a) 10,100
b) 10,800
c) 12,100
d) 12,600
e) 13,100

Answer: d) 12,600

Calculation:
To calculate the stock of sports material consumed, use the formula:
Sports Material Consumed = Opening Stock + Purchases – Closing Stock

  1. Opening Stock: Given as 3,000 (as at 1st April, 2020).
  2. Closing Stock: Given as 500 (as at 31st March, 2021).
  3. Purchases: Since there were no cash purchases, all purchases were on credit. Calculate purchases using the creditors’ account:
    • Opening Creditors: 2,000 (1st April, 2020)
    • Closing Creditors: 1,300 (31st March, 2021)
    • Payments to Creditors: 10,800
    • Formula for Purchases:
      Purchases = Payments to Creditors + Closing Creditors – Opening Creditors
      Purchases = 10,800 + 1,300 – 2,000 = 10,100
  4. Sports Material Consumed:
    Consumed = Opening Stock + Purchases – Closing Stock
    Consumed = 3,000 + 10,100 – 500 = 12,600

Total receipt of subscription of Not-for-profit organization in FY20-21 is INR 10,00,000. Out of total receipt, subscription for FY 19-20 is INR 1,00,000 and advance subscription for FY 21-22 is INR 1,50,000. Calculate amount of subscription to be recorded as Income by Not-for-profit organization for FY 20-21.
a) INR 7,50,000
b) INR 8,50,000
c) INR 9,00,000
d) INR 10,00,000
e) INR 12,50,000

Answer: a) 7,50,000

Calculation:
For a not-for-profit organization, the subscription income recorded in the Income and Expenditure Account for FY 20-21 includes only the subscriptions pertaining to that financial year. Adjustments are made for subscriptions received for other years (previous or future).

  • Total Subscriptions Received: 10,00,000
  • Subscriptions for FY 19-20 (Previous Year): 1,00,000 
  • Advance Subscriptions for FY 21-22 (Next Year): 1,50,000 
  • Subscription for FY 20-21:
    Income = Total Receipts – (Previous Year + Next Year)
    Income = 10,00,000 – (1,00,000 + 1,50,000) = 10,00,000 – 2,50,000 = 7,50,000

In 2018–19, the actual salaries paid amounted to 10,000. Ascertain the amount chargeable to Income and Expenditure Account for the year ending on 31st March, 2019 from the following

Particulars Amount
Prepaid Salaries on 31st March, 2018 1,000
Prepaid Salaries on 31st March, 2019 500
Outstanding Salaries on 31st March, 2018 1,500
Outstanding Salaries on 31st March, 2019

2,000

a) 10,000
b) 10,500
c) 11,000
d) 11,500
e) 12,000

Answer: b) 10,500

Calculation:
The amount chargeable to the Income and Expenditure Account for salaries is based on the accrual basis, adjusting for prepaid and outstanding amounts:
Salaries Chargeable = Salaries Paid + Prepaid at Beginning + Outstanding at End – Prepaid at End – Outstanding at Beginning

  • Salaries Paid: 10,000
  • Prepaid Salaries on 31st March, 2018 (Beginning): 1,000 (salaries paid in 2017–18 but applicable to 2018–19)
  • Prepaid Salaries on 31st March, 2019 (End): 500 (salaries paid in 2018–19 but applicable to 2019–20)
  • Outstanding Salaries on 31st March, 2018 (Beginning): 1,500 (salaries for 2017–18 paid in 2018–19)
  • Outstanding Salaries on 31st March, 2019 (End): 2,000 (salaries for 2018–19 to be paid in 2019–20)

Formula:

Salaries Chargeable = 10,000 + 1,000 + 2,000 – 500 – 1,500

= 10,000 + 1,000 + 2,000 – 500 – 1,500 = 11,000 – 500 = 10,500

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