Accounting for Not for Profit Organisations (NPO Notes)
Financial Accounting Notes NEP 2023
Q.1. What is Profit motive and Not-For-Profit Organisation? What
are its features?
Ans: Profit Motive organisation (Trading organisation): A profit motive organisation is one which is established and operated with the object to earn profit through buying and selling of goods and services. Examples of these are sole trade business, partnership business, company etc.
Not-For-Profit Organisation: A
Not-For-profit organisation is a voluntary association of persons which is set
up and operated not for the purposes of earning profit but, for the welfare of
the society or promotion of art, culture, sports and general public utility.
Examples of these are schools,
hospitals, Trade union, club and sports association. These organisations
provide services to their members and to the public in general. Their main
sources of income are membership fees, subscription, donation, grant-in-aid, legacy,
etc.
Characteristics of Not-for-profit
organisations: Following are the
main characteristics or the salient features of Not for Profit organisations:
a) The
main objective of not-for-profit organisations is not to make profit but to
provide service to its members and to the society in general.
b) The
main source of income of these organisations is admissions fees, subscriptions,
donations, grant-in-aid, etc.
c) Financial
statements of not for profit organisations include receipts and Payments A/C,
Income and Expenditure A/c and Balance sheet.
d) Revenue
and expenditure of not-for-profit organisations are recorded on accrual basis
of accounts.
e) These
organisations are managed by a group of persons elected by the members from
among themselves for example trustee, managing committee, and governing body.
f)
Surplus or deficit of not-for-profit
organisations are not distributed amongst the members but added with capital
fund.
g) A
not-for-profit organisation normally creates fund for future operating
expenses.
Q.2. What are various types of NPOs? Distinguish between
not-for-profit organisation and profit motive organisation?
Ans: Types of Not-for-profit organisation: A
not-for-organisation is of two types:
a)
NPO established by Public: These types of NPOs are established by public. Club,
society, schools and colleges are examples of such organisations. The main aim
of such NPOs is to provide service to its members and to the society in
general. The main source of revenue of such organisation is membership
subscription, donations etc.
b)
NPO established by Government: These types of NPOs are established by the
government to provide services in a specific state or areas. Hospital, sports
association, schools and colleges are examples of such organisations. These organisations are run with the help of
grants from government.
Difference between Not – for profit
organisation and Profit earning organisation
|
Basis |
Not-For-Profit
Organization |
Profit motive
Organization |
|
1.
Motive |
Main Motive is to provide services to the
society. |
Main Motive is to earn profits by selling
goods and services. |
|
2.
Source of Revenue |
Main sources of revenue are donations,
subscriptions, grant-in-aid etc. |
Main source of revenue is sale of goods and
services. |
|
3.
Distribution of profit |
Surplus is added with the capital fund. |
Profits is transferred to sole proprietor’s
capital account or distributed amongst the partners. |
|
4.
Financial Statements |
Financial statements of an NPO include
receipts and Payments A/C, Income and Expenditure A/c and Balance sheet. |
Financial Statements of a profit motive
organisation include Manufacturing A/C, Trading A/C, Profit and loss A/C and
balance sheet. |
|
5.
Management |
It is managed by trustees, committees and
governing bodies. |
It is managed by sole proprietor, partners
or managing directors, as the case may be. |
|
6.
Capital fund and capital |
The fund accumulated by an NPO for running
the organisation is called Capital fund. The capital fund is built up out of
surplus derived from income and expenditure account. It also includes
donation, legacy and entrance fees to the extent capitalised. |
But the sum of funds contributed by the
owners including reserves and surplus is called capital or owner’s equity. |
Q.3.
What are various types of financial statements prepared by NPOs? Explain cash and
accrual basis of accounts.
Ans: The type of
financial statements that are generally prepared by not-for- Profit
Organisations are:
1. Receipts
and Payments Account
2. Income
and Expenditure Account
3. Balance
Sheet
Cash Basis of accounting: Under
cash of accounting revenues are recorded when received and expenses are
recorded when paid. Receipts and payments account is prepared on cash basis.
Accrual basis of accounting: Under
accrual basis of accounting revenues are recorded when earned and expenses are
recorded when consumed. Income and expenditure is prepared on accrual basis.
Q.4. What
do you mean by Receipts and Payments Account? What are its features? Mention
its merits and limitations.
Ans: Receipts
and Payments Account: A Receipts and Payments Account is a
summary of cash and bank transactions under various heads of a not-for-profit
organisation, which is prepared at the end of the accounting year to show the
closing balance of cash or bank. All cash receipts and
payments are recorded in this account whether these belong to current year or
next year or previous year or whether these are of revenue nature or capital
nature. All Receipts are shown on the debit side of the account while all payments
are shown on the credit side of the account. It starts with the opening cash
and bank balances and closing balance of this account is cash in hand or at
bank/overdraft.
Following are the
main features of Receipts and Payments Account:
a) It
starts with the opening balance of cash or bank and ends with the closing
balance of cash or bank or both.
b) It
is a real account in nature.
c) It
is similar to cash book.
d) It
records only cash transactions and all non-cash transactions are ignored.
e) It
is the summary of all cash transactions of a particular year put under various
heads.
f)
It records all cash receipts and
payments of current year irrespective of the period they relate to i.e.
previous/current/next year.
g) It
is prepared on cash basis of accounting.
h) It
records cash transactions of both revenue and capital nature.
Objectives/Advantages
of Receipts and Payments Account:
a) The
primary objective of preparing receipts and payments accounting is to show the
cash position of an NPO at the end of the year.
b) It is in summary form. It is possible to know receipts and payments
during a period under different heads for the accounting year.
c) The
Receipts and Payments Account serves the purpose of trial balance and becomes
the basis of preparing financial statements i.e. Income and Expenditure Account
and Balance sheet for the organisation.
d) It
helps in forecasting the cash requirement of the organisation in future period.
e) The
balance of cash in hand and cash at bank can be determined at the end of the
accounting year.
Limitations
of Receipts and Payments account:
a) It is prepared on cash basis of accounting. It does not record
non-cash items like depreciation.
b) It is only a summary of cash receipts and payments. It does not show
details of each and every transaction.
c) It records both the revenue and capital items. It does not show any
surplus or deficit.
d)
It includes past, present and
next year items. It does show particular incomes or expenses for a particular
year.
e)
Information provided by this
account may not be sufficient for proper management of the organisation.
Q.5.
What do you mean by Income and Expenditure Account? What are its features?
Distinguish between Receipts and Payments and Income and Expenditure Accounts?
Ans:
Income and Expenditure Account: Income and Expenditure Account is a
Nominal Account which is prepared at the end of the accounting period by a
Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income
over expenditure, or the deficit, i.e., excess of expenditure over income for a
particular period. It records all expenses and losses on its debit side and all
incomes and gains on its credit side. It includes only revenue items whether
cash or non-cash but capital items are not shown in income and expenditure
account.
Features
of Income and Expenditure Account:
a) It
is a nominal account in nature which reveals either surplus i.e., excess of
income over expenditure, or the deficit, i.e.
Excess of expenditure over income.
b) It
is prepared on accrual basis of accounting.
c) It
is similar to profit and loss account.
d) In
Income and Expenditure account, only revenue items are considered, while
capital items are excluded.
e) Both
cash and non-cash items, such as depreciation, are recorded.
f)
There is no opening or closing balance
in income and expenditure account.
g) It
includes items of current year only. Past and future year’s items are not
shown.
Difference
between Receipts and Payments Account and Income and Expenditure Account
|
Basic |
Receipt
and Payment Account |
Income
and Expenditure Account |
|
1. Nature |
It is a Real Account in nature. |
It is nominal Account in nature. |
|
2. Basis |
It is prepared on cash basis of
accounting. |
It is prepared on accrual basis of
accounting. |
|
3. Balances |
It
starts with the opening balance and ends with the closing balance of cash or
bank or both. |
There is no opening or closing
balance in income and expenditure account. |
|
4. Recording |
All receipts and
payments are recorded in this account whether these are of revenue nature or
capital nature. |
It includes only revenue items whether
cash or non-cash but capital items are not shown in income and expenditure
account. |
|
6. Non cash items |
It ignores non-cash items like
depreciation, credit purchase, credit sales etc. |
It records non-cash items of revenue
nature. |
|
5. Period of items |
All cash receipts and
payments are recorded in this account whether these belong to current year or
next year or previous year. |
All incomes and expenses of present
year only are recorded in this account. |
|
7. Balance sheet |
Generally,
it is not followed by Balance Sheet. |
It if followed by balance sheet. |
Also Read: FINANCIAL ACCOUNTING CHAPTERWISE NOTESUNIT 11. Preparation of Trial Balance and Preparation of Financial Statements UNIT 2Part A: Accounting for Partnership UNIT 3 UNIT 4 Some other Important Chapters
Q.6. Explain the Treatment of the following Specific items in
Receipts and Payments and Income and Expenditure accounts.
Ans: Treatment of Some Specific Items in Receipts and Payments
accounts and Income and Expenditure account:
1. Subscription: It is a regular
payment made by the members to the organisation. It is generally contributed
annually. It is one of the main sources of income. It appears on the debit side
i.e. Receipts side of the Receipts and Payments Account. Apart from amount for
current year, it may include amount pertaining to previous year or advance
payment for next years. 2019
Since it is a major source of income
of the non-trading concern and is recurring in nature, therefore shown on the
credit side of income and expenditure account. Subscription to be shown in
income and expenditure account or subscription received during the year to be
shown in receipts and payments account is calculated by preparing subscription
account.
Subscription
account
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
|
To Balance B/d (Arrear) To Income and expenditure a/c
(Subscription income for the year) To Balance C/d (Advance) |
|
|
By Balance B/d (Advance) By Cash a/c (Subscription received
during the year) By Balance C/d (Arrear) |
|
|
|
|
|
|
|
|
If numbers of members are given, then
subscription income for the year can be calculated by multiplying number of
members with their annual membership subscription.
2. Life membership fees: Membership, if
granted to a person for the whole life, special fee is charged from him/her,
this is called life membership fees. It is charged once in the life time of a
member. It is a capital receipt for the organisation and hence shown as receipt
in receipts and payments account.
Only recurring receipts (revenue
receipt) are treated as income but life membership is non-recurring in nature. Therefore,
the life membership fees is capitalized and added with capital fund in balance
sheet but not shown in income and expenditure account.
3. Endowment fund: Endowment
fund is a specific fund which is created to ensure the long-term financial
health of the not-for profit organisation. These types of funds are created by
hospitals, universities etc. for long-term growth of the organisation. This
fund is shown on liability side of the balance sheet.
It is a fund which provides permanent means of
support for the organisation. Any contribution towards this fund is an item of
capital receipt and hence shown as receipt in receipts and payments account.
Since it is a capital receipt, it is not shown
in income and expenditure account. It is shown on the liabilities side of
balance sheet.
4. Donation: Donation is the
amount received from some person, firm, company or any other body by way of
gift. It is also an important item of receipt. It can be of two types:
(a) Specific
donation: It is a donation received for a specific purpose. Examples of
such donations are: donation for library, donation for building, etc. It is treated
as capital receipt. It is debited to receipts and payments account but not
shown in income and expenditure account.
(b) General
donation: It is a donation which is received not for some specific
purpose. It can be of two types:
(i) General donation of big amount: It is
treated as capital receipt. It is debited to receipts and payments account but
not shown in income and expenditure account.
(ii) General donation of small amount: It is
treated as revenue receipt. It is debited to receipts and payments account and
shown as income in income and expenditure account.
5. Legacy: It is the amount
which is received by organisations as per the will of a deceased person. It is
treated as a capital receipt and hence debited to receipts and payments
account. It is recorded in Receipts and payments
account but not considered as income because it is non-recurring in nature. It
is added with capital fund. However, legacy of small amount may be considered
as income.
6. Sale of old newspapers/periodicals: Old newspapers/periodicals
are sold and fetch some money. It is a source of revenue. This
appears in the receipts and payments account and is considered as income and
recorded in the credit side of the Income and Expenditure account. Selling old
newspapers is a routine one and is justified to consider it as income.
7. Sale
of old assets: The amount realized by the sale of old asset
is shown only in the receipt and payments account of the year in which the
assets are sold. But the profit or loss on sale of such assets is shown in the
income and expenditure account. If book value of assets sold is more than the
sale value, then there is a loss on sale of asset and such loss is debited to
income and expenditure account. Similarly, if book value of assets sold is less
than the sale value, then there is a profit on sale of asset and such profit is
credited to income and expenditure account.
8. Sale
of sports materials: The proceeds by sale of sports
materials are shown in the receipts and payments accounts. Since sale of sports
materials is the regular one for any sports club, the sales proceeds is treated
as income and shown in the credit side of the income and expenditure account.
But for other organisation it is treated as an asset.
9. Payment
of honorarium: Person may be invited to deliver lectures or
artists may be invited to give their performance. Any payment made to these
invitees is called honorarium. It is the revenue expense and is shown in the
expenditure side of the income and expenditure account. It is credited in
receipts and payments account.
10.
Entrance fees: An Entrance fee is paid by the members at the
time of enrollment. Generally it is paid every year and considered as revenue
receipts. Hence, shown as income in income and expenditure account.
11.
Government Grants: Government sometimes provides grants
to the not-for-profit organisation which is of two types:
a) Maintenance grant: Maintenance
grant is provided for the purpose of meeting day to day expenses of
not-for-profit organisation. This grant is provided annually. This grant is
debited in receipts and payments account and shown as an income in income and
expenditure account.
b) Capital grant: This grant is
provided for the purpose of acquiring fixed assets. This is capital receipts and debited to receipts
and payments account but not shown in income and expenditure account.
Q.7. What is Deferred Revenue Expenditure? What are its features?
Give Examples.
Ans:
Deferred Revenue Expenditure: Expenditures which
are of revenue in nature and incurred during one accounting period but its
benefits are expected to be derived over a number of years, such expenditures
are called deferred revenue expenditure. Such expenditure is written off to income and
expenditure account over the period of benefits realised from such expenditure.
Deferred expenditure to the extent not written is shown as an asset in balance
sheet.
Features:
a) These expenditures are not immediately written off in the year of
actual expenditure but split over a period of certain years as per the decisions
and policies of the management.
b) These expenditures to the extent not written off are treated as assets
and shown at the assets side of balance sheet.
Examples: Advertising suspense, Preliminary expenses, Loss on issue of debentures, Cost of issue of shares and debentures.
Q.8. What
is Capital fund?
Ans: In case of non trading organisations, the
fund accumulated by an NPO for running the organisation is called Capital fund.
In simple words, capital fund can be defined as the excess of assets over liabilities
of a non trading organisation. The capital fund is built up out of surplus
derived from income and expenditure account. It also includes Specific
donation, legacy, entrance fees and other collections to the extent
capitalised.
Q.9. What
are incidental trading activities?
Ans: Sometimes, NPO’s carry on trading
activities such as canteen, restaurant, chemist shop etc. to provide facilities
to its members or public in general. Such activities are called incidental
trading activities. In such cases, trading account is to be prepared to find
out profit/loss from such activities.
Q.10. What
is fund based accounting and non-fund based accounting? What are various
principles of fund based accounting? Distinguish between fund based and
non-fund based accounting.
Ans: Fund Based Accounting: In fund based
accounting separate funds are maintained for specific activities of the organisation
such as sports fund, prize fund, building fund, etc. All items related the
specific funds are recorded fund wise and consolidation of these statements or
accounts are presented in the financial results. In order to retain the fund
for specific use, such fund is invested into separate account known as sinking
fund investment account.
Principles
of Fund Based Accounting:
a) In order to keep a record for the
funds received or raised for a particular period, a separate fund account is
opened which is shown on liability side of the balance.
b) Investment of specific funds is
shown as an asset in balance sheet.
c) Incomes of specific funds
investments are added and expenses from the funds are deducted with respective
funds.
Non-fund based accounting: In non-fund
based account, no separate funds are maintained for specific activities. In
this accounting all the expenses are debited in profit and loss account and all
the incomes are credited in profit and loss account. Balance of profit and loss
account is profit or loss which is transferred to capital account.
Difference between fund based and non
fund based accounting
(Points given in difference can also
be stated as features)
|
Basis |
Fund
Based Accounting |
Non fund based
Accounting |
|
Accounting base |
It is based on
cash basis of accounting. |
It is based on accrual basis of
accounting. |
|
Followed by |
This system is
followed by not-for-profit organisations. |
This system is followed by
profit-motive organisation. |
|
Funds |
Specific funds
are used for specific purposes except for general fund. |
Funds can be used for any profit
earning purpose. |
|
Income and Expenses |
Incomes are
added and expenses are deducted with respective funds. |
Incomes and expenses are shown in
profit and loss account. |
|
Balance of fund |
Any balance
left in specific fund after completion of specific purpose is transferred to
capital fund. |
Balance of incomes and expenditure
is called profit or loss and this amount is transferred to capital account. |
Q.11. What
are various types of fund created by not-for profit organisation?
Ans:
Various types of Funds:
a)
General or Unrestricted fund: General funds are those which are
created without any specific objective and can be utilised for any purpose of
NPO. These types of funds are also called capital fund.
b)
Special or Restricted fund: Funds which are created for any
specific purpose and utilised for that specific purpose are called specific
fund. These types of funds cannot be utilised for purpose other than the
specific purpose for which it is created. Examples of Specific fund:
1) Tournament fund: Sports club and
association create these types of funds for organising tournament.
2) Endowment fund: Endowment fund is a
specific fund which is created to ensure the long-term financial health of the
not-for profit organisation. These types of funds are created by hospitals,
universities etc. for long-term growth of the organisation. This fund is shown
on liability side of the balance sheet.
3) Prize fund: This fund is created
for the purpose of distribution of prizes to the students or participants.
4) Fixed assets fund: This fund is
created for the purpose of acquiring fixed tangible assets.
5) Annuity fund: This fund is created
from the donations received for the purpose of regular annual payment to a
respected person.
Q.12.
Mention the steps involved in preparation of Income and Expenditure account and
Receipts and Payments account.
Ans: Steps
in the Preparation of Income and Expenditure Account: Following steps may
be helpful in preparing an Income and Expenditure Account from a given Receipt
and Payment Account:
1. First, The opening and closing
balances of cash and bank are ignored as they are not an income.
2. Second, Exclude the capital
receipts and capital payments as these are to be shown in the Balance Sheet.
Income and expenditure accounts include only revenue items.
3. Third, Consider only the revenue
receipts to be shown on the income side of Income and Expenditure Account with
due adjustments of income accrued and income received in advance.
4. Fourth, Take the revenue expenses
to the expenditure side of the Income and Expenditure Account with due adjustments
of prepaid expenses and outstanding expenses.
5. Last, Consider the following items
not appearing in the Receipt and Payment Account that need to be taken into
account for determining the surplus/ deficit for the current year :
(a) Depreciation of fixed assets.
(b) Profit or loss on sale of fixed
assets.
(c) Opening and Closing Stock.
Steps
in the preparation of Receipt and Payment Account:
1. Opening balances of cash in hand
and cash at bank are entered on the debit side. In case there is bank overdraft
at the beginning of the year, enter the same on the credit side of this
account.
2. Total amounts of all receipts are
shown on the debit side irrespective of their nature (whether capital or
revenue) and whether they pertain to past, current and future periods.
3. Total amounts of all payments are
shown on its credit side irrespective of their nature (whether capital or
revenue) and whether they pertain to past, current and future periods.
4. Non-cash transactions are ignored
while preparing receipts and payments account because they do not affect cash
or bank balance.
5. Finally, find the difference between
the total of debit side and the total of credit side of the account. If debits
side is more than credit side, it represents closing balance of cash/bank. In
case, however, the total of the credit side is more than that of the total of
the debit side, then the difference will be shown as bank overdraft on the
debit side.
Q.13.
Mention the steps involved in preparation of Balance sheet of an NPO.
Ans: The
following procedure is adopted to prepare the Balance Sheet:
1. Calculate opening Capital/General
Fund by preparing the opening balance sheet of the not-for-profit organisation.
Surplus is added with opening capital fund and deficit, if any, deducted with
opening capital fund. Further, entrance fees to the extent capitalised,
legacies, life membership fees, etc. received during the year is added to find
capital fund at the end.
2. All the fixed assets not sold/discarded/or
destroyed during the year are shown on the assets side of the balance sheet
after adding new additions to the assets and deducting depreciation (as per Income
and Expenditure account).
3. Compare items on the receipts side
of the Receipts and Payments Account with income side of the Income and
Expenditure Account. This is to ascertain the amounts of:
(a) Subscriptions due but not yet
received:
(b) Incomes received in advance;
(c) Sale of fixed assets made during
the year;
(d) Items to be capitalised (i.e.
taken directly to the Balance Sheet) e.g. legacies, interest on specific fund
investment and so on.
4. Similarly compare, items on the
payments side of the Receipt and Payment Account with expenditure side of the
Income and Expenditure Account. This is to ascertain the amounts if:
(a) outstanding expenses; (b) prepaid expenses; (c) purchase of a fixed asset during the year; (d) depreciation on fixed assets; (e) stock of consumable items like stationery in hand; (f) Closing balance of cash in hand and cash at bank as, and so on.
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