Financial Statements of Not-for-Profit Organisations

Figure 1: Not-for-profit organisations prepare Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet.

Learning Outcomes

Understand the meaning of Not-for-profit organisations and distinction between a profit-making organisation and a Not-for-profit organisation.
Accounting for Not-for-profit organisations.
Understand the meaning and technique of preparation of Receipts and Payments Account and Income and Expenditure Account and understand the distinction between the two Accounts.
Learn the technique of preparing Balance Sheet of Not-for-profit organisations.
Understand the different adjustments and their accounting treatment in the books of Not for profit organisations.

Introduction

A non-profit organization is a legal accounting entity that is operated for the benefit of the society as a whole, rather than for the benefit of a sole proprietor or a group of partners or shareholders.
The main motive behind the non-profitable organization is to render service to the society or the members of the organisation.

KNOWLEDGE NUGGET

Non-profit organisations: Public hospitals, clubs, temples, churches, educational institutions
Financial Statements: Receipts and Payments Account, Income and Expenditure Account, Balance Sheet
Surplus: Excess of income over expenditure
Deficit: Excess of expenditure over income

Non-profit making organisations such as public hospitals, public educational institutions, clubs, Temples, churches etc., as a part of their final accounts prepare Receipts and Payments Account and Income and Expenditure Account to show periodic performance and Balance Sheet to show financial position at the end of the period.
Non-profit organizations registered under section 8 of the Companies Act, 2013 are required to prepare their Income and Expenditure account and Balance Sheet as per the Schedule III to the Companies Act, 2013.

2. Nature of Receipts and Payments Account

A Receipts and Payments Account is a summary of the cash book without date column.
The receipts are entered on the left hand side, and payments on the right hand side.
"The main point to be noted here is that—receipts and payments account is not based on the accrual system of book keeping as it records all the receipts and payments whether capital or revenue, pertaining to the current, previous or future periods."

Features:

It is the summary of the cash and bank transactions like cash book.
All the receipts (capital or revenue) are debited, similarly, all the expenditures (capital or revenue) are credited.
It starts with opening cash and bank balances and also ends with their closing balances.
This account is usually not a part of the double entry system.
Surplus or deficit for an accounting period cannot be ascertained from this account.

ILLUSTRATION 1

The receipts and payments for the Swaraj Club for the year ended March 31, 2022 were: Entrance fees ₹300; Membership Fees ₹3,000; Donation for Club Pavilion ₹10,000, Foodstuff sales ₹1,200; Salaries and Wages ₹1,200; Purchase of Foodstuff ₹800; Construction of Club Pavilion ₹11,000; General Expenses ₹600; Rent and Taxes ₹400; Bank Charges ₹160. Cash in hand — April 1st ₹200, March 31st ₹350; Cash in Bank — April 1st ₹400; March 31st ₹590.

Swaraj Club — Receipts and Payments Account for the year ended 31st March, 2022

Receipts	Amount (₹)	Payments	Amount (₹)
To Balance b/d — Cash in hand	200	By Salaries and Wages	1,200
To Cash with bank	400	By Purchase of Foodstuff	800
To Entrance Fees	300	By Club Pavilion (Construction)	11,000
To Membership Fees	3,000	By General Expenses	600
To Donation for Club Pavilion	10,000	By Rent and Taxes	400
To Sales of foodstuff	1,200	By Bank Charges	160
		By Balance c/d — Cash in hand	350
		By Balance c/d — Cash in bank	590
Total	15,100	Total	15,100

2.1 Limitations of Receipts and Payments Account

Increase in cash and bank balances does not truly represent the surplus for the year.
It does not take into account other important transactions such as outstanding subscription or those collected in advance.
It includes items relating to all periods and of all types whether capital or revenue.
Surplus or deficit cannot be ascertained from this account.

3. Income and Expenditure Account

The income and expenditure account is equivalent to the Profit and Loss Account of a profit making business enterprise.
It is prepared by following accrual principle.
Only items of revenue nature pertaining to the current period of account are included.
Profit is termed as Surplus (excess of income over expenditure) and loss is termed as Deficit (excess of expenditure over income).

Features:

It is a revenue account prepared at the end of the accounting period.
It is prepared by matching expenses against the revenue of that period concerned.
Both cash and non-cash items, such as depreciation, are taken into consideration.
All capital expenditures and incomes are excluded.
Only current years' income and expenses are considered.
Surplus/deficit is taken to the balance sheet and is added/deducted respectively with the capital fund.

3.1 Main Sources of Income

Subscriptions
Ordinary donations
Membership fees or entrance fees
Recurring grants from local authorities
Income from investments

3.2 Distinction between Receipts and Payments Account and Income and Expenditure Account

Receipts and Payments Account	Income and Expenditure Account
Elementary form of account — summary of cash book	Resembles Profit and Loss Account
Includes all receipts and payments (capital & revenue)	Includes only revenue items of current period
Includes receipts/payments of current, previous & future periods	Includes only items of current accounting period
Not based on accrual system	Based on accrual principle
Does not show surplus/deficit	Shows surplus or deficit

3.3 Preparation of Income and Expenditure Account from Receipts and Payments Account

(i) Compute the opening balance of the Accumulated Fund or Capital Fund.
(ii) Open ledger accounts for items of income and expenditure with accruals or outstanding.
(iii) Post from Receipts & Payments Account to Income and Expenditure Account.
(iv) Transfer the balance of Income and Expenditure Account to Accumulated Fund/Capital Fund.
(v) Post receipts and payments of capital nature to appropriate asset or liability account.
(vi) Prepare a Balance Sheet with all balances left over after transfers.

4. Balance Sheet

A Balance Sheet is the statement of assets and liabilities of an accounting unit at a given date.
In not for profit organizations, the excess of total assets over total outside liabilities is known as Capital Fund.
The Capital fund represents the amount contributed by members, through legacies, special donations, entrance fees and accumulated surplus over the years.

4.1 Accounting Treatment of Some Special Items

4.1.1 Donations

Specific Donation: Received for specific purpose — capitalized and shown on liabilities side.
General Donation: Not for specific purpose — shown on credit side of Income and Expenditure Account.

4.1.2 Entrance and Admission Fees

Normally considered capital receipts and credited to Capital Fund.
If amount is small or rules provide, may be included in Income and Expenditure Account.

4.1.3 Subscription

Should be allocated over the period of their accrual.
Outstanding subscriptions are shown as assets in Balance Sheet.
Subscriptions received in advance are shown as liabilities in Balance Sheet.

4.1.4 Life Membership Fee

Capital receipt — added to capital fund or general fund.

TREATMENT OF IMPORTANT ITEMS

Donation: General → I&E A/c; Specific → Capitalised
Entrance Fees: Capitalised (unless stated otherwise)
Legacy: Capitalised — added to Capital Fund
Life Membership Fees: Capitalised
Endowment Fund Donation: Only income from donation is used
Sale of Old Newspapers: Income — credit side of I&E A/c
Sale of Fixed Assets: Capital receipt; profit/loss in I&E A/c
Honorarium: Payment to non-employees — expense

4.2 Preparation of Balance Sheet

Opening capital fund is calculated by deducting liabilities from assets in the beginning of the year.
Cash and bank balance is shown on the assets side.
Fixed assets are adjusted for purchases, sales, and depreciation.
Liabilities are adjusted for any increase or decrease.

5. Educational Institutions

5.1 Sources of Finance

(1) Donation from Public
(2) Fees (tuition fees, term fees, admission fees, laboratory fee)
(3) Grants received from the Government

5.2 Specific Items

5.2.1 Donation from Public

Received either for recurring or non-recurring purposes.
In cash or in kind (land, building, shares, securities, furniture).

5.2.2 Capitation fees or admission fees

Collected from parents/guardians of students seeking admission.

5.2.3 Laboratory and Library deposit

Remain with the institution till the student finally leaves.

5.2.4 Use of Term Fees

A separate account maintained; surplus carried over to next year.

5.2.5 Recurring grants

Maintenance Grants received in instalments throughout the year.

5.2.6 Use of grant-in-aid

Detailed list of items of expenditure admissible for grant-in-aid includes staff salaries, leave allowance, rent, taxes, insurance, printing, stationery, etc.

Summary

A non-profit organization is a legal accounting entity operated for the benefit of the society.
Financial Statements of such organizations consists of:
- 1. Receipts and Payments Account
- 2. Income and Expenditure Account
- 3. Balance Sheet
A Receipts and Payments Account is a summary of the cash book.
The Income and Expenditure Account is equivalent to the Profit and Loss Account and is based on the accrual principle.
Non-profit organizations registered under section 8 of the Companies Act, 2013 prepare Income and Expenditure Account and Balance Sheet as per Schedule III.
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are sources of incomes for non-profit organizations.
Educational institutions are quite different from other not-for-profit organisations in terms of sources of finance and items of expenditure.

Test Your Knowledge

True and False

1. The Receipts and payment account for a non-profit organization follows the accrual concept of accounting. False
2. Both the revenue and capital nature transactions are recorded in the Income and expenditure account. False
3. Sale of grass by a sports club is to be treated as sale of an asset. False
4. Subscriptions outstanding for the current year are disclosed under the Fixed assets side of the Balance sheet. False
5. Receipts and payments account gives the details about the expenses outstanding for the year. False
6. Adjustments in the form of additional information shall be adjusted in the final accounts of a Non-profit organisation only in one place. False
7. Tournament expenses incurred are more than the Tournament fund, then the excess to be shown as an asset in the closing Balance sheet. False
8. For Non-profit organisation, Excess of income over expenditure in the Income and Expenditure account is termed as profit. False
9. Surplus of non-profit organizations is distributed among its members. False
10. Tournament fund, building fund, library fund is based on the fund based accounting. True
11. Subscription fees refers to the one-time fees paid by the members to get admission for the benefits of the club. False
12. Token payment made to a person, who voluntarily undertakes a service which would normally be paid in case of profitable organization is termed as Honorarium. True
13. An Insurance company is an example of non-profit organization. False
14. Part amount of entrance fees which is to be capitalized shall be disclosed in the income and expenditure account. False
15. Both the income and expenditure of the current and the previous year are recorded in the Income and Expenditure account. False
16. Amount received as donation by a Non-profit organisation under the will of a deceased person is termed as legacy. True
17. Where a Non-profit organisation has a separate trading activity, the profit/loss from the trading account shall be transferred to Income and Expenditure Account at the time of consolidation. True
18. Not for profit concerns concentrate their efforts to maximize the profit earning avenues. False
19. All the receipts are of revenue nature in case of Non-profit organisation. False
20. There is opening balance of Income and expenditure account. False

Multiple Choice Questions

1. Scholarship granted to students out of specific funds provided by Government will be debited to	(a) Income and Expenditure Account. (b) Receipts and payments Account. (c) Funds granted for Scholarship account.
2. In case of NPO, excess of total assets over liabilities is known as	(a) Profits. (b) Surplus. (c) Capital Fund.
3. General donations and legacies are credited to	(a) Receipts and Payments Account. (b) Income and Expenditure Account. (c) Capital Fund.
4. Interest on prize funds is	(a) Credited to Income and Expenditure Account. (b) Credited to Receipts and Payments Account. (c) Added to prize fund.
5. Special aids are	(a) Treated as capital receipts. (b) Treated as revenue receipts. (c) Both (a) and (c).
6. If there exist a specific sports fund, the expenses incurred in relation to sports activities will be taken to	(a) Income and Expenditure Account (b) Receipt and Payment Account (c) Sports fund

High-Yield Interactive Quiz — Financial Statements of Not-for-Profit Organisations

Q1. The Income and Expenditure Account of a non-profit organisation is similar to:

Correct Answer: B. The income and expenditure account is equivalent to the Profit and Loss Account of a profit making business enterprise.

Q2. Receipts and Payments Account is based on:

Correct Answer: B. Receipts and Payments Account is not based on the accrual system as it records all the receipts and payments whether capital or revenue, pertaining to the current, previous or future periods.

Q3. In case of NPO, excess of income over expenditure is termed as:

Correct Answer: B. Profit is termed as Surplus — excess of income over expenditure in non-profit organisations.

Q4. General donation received by a non-profit organisation is shown in:

Correct Answer: B. General donation (not for specific purpose) is shown on the credit side of Income and Expenditure Account.

Q5. Specific donation (e.g., Building Fund) is shown in the Balance Sheet as:

Correct Answer: B. Specific donation is capitalized and shown on the liabilities side of the Balance Sheet.

Q6. Subscriptions received in advance are shown in the Balance Sheet as:

Correct Answer: B. Subscriptions received in advance are shown as liabilities in the Balance Sheet.

Q7. Entrance fees are normally considered as:

Correct Answer: B. Entrance fees are normally considered capital receipts and credited to Capital Fund.

Q8. Excess of expenditure over income in Income and Expenditure Account is called:

Correct Answer: C. Deficit is excess of expenditure over income in non-profit organisations.

Q9. Which of the following is NOT a source of income for a non-profit organisation?

Correct Answer: D. Capital introduced by owner is not a source of income for non-profit organisations as they do not have owners.

Q10. Life membership fee is treated as:

Correct Answer: B. Life membership fee is a capital receipt and is added to capital fund or general fund.

Q11. Payment made to a person who is not an employee but provides services is called:

Correct Answer: C. Honorarium is paid to someone for receiving services from persons who are not the employees of the Not for Profit Organisation.

Q12. Amount received by a non-profit organisation under the will of a deceased person is termed as:

Correct Answer: C. Amount received as donation by a non-profit organisation under the will of a deceased person is termed as legacy.

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