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Financial Statements of Non-Profit Organisations


Non Profit Organisations- means, as the name clear that the motive of creation of these organizations are non-profit making. The aims of these organisations are not to earn profits but to render services to its members and to the public. This includes Hospitals, Libraries, Schools, Clubs, Religious institutions, charitable institutions and Societies etc., their primary motive of providing services.

The funds to start a not-for-profit organization come from their own founding members or from a special contribution from a third party. The main source of income of such organisations is membership subscriptions, donations and grants etc., they do not prepare Trading and Profit & Loss Account, but they have to maintain proper accounts, this is also a legal requirement.

So, the Income and Expenditure account is maintained for which is similar to profit and loss account of a profit seeking entity, to know whether their current incomes are sufficient to meet their current expenses. A balance sheet is also prepared in order to show the financial position of the organization on the last date of the accounting year.

They may also undertake trading activities in order to earn some profit. Such profit is also used for the furtherance of the goals of the organization.

Characteristics of Non-Profit Organisations-
  • The Primary aim of these organisations is to provide services either free of cost or at nominal rates.
  • These Organisations do not have capital, only have capital fund.
  • These Organisations are treated as separate entity i.e. not affected by admission of new members and the death or insolvency of an existing member.
  • The major source of their incomes usually are
  • Subscription from their members
  • Donations
  • Government Grants or non-Government grants etc.
  • Income from Investments etc.
  • Current year’s surplus is not distributed amongst the members.
  • These organisations do not prepare Trial Balance.
  • All transactions are recorded in Cash Book
  • These Organisations do not prepare Trading and Profit & Loss Account, at the end of the accounting period they prepare Receipts and Payments Account, Income and Expenditure Account and a Balance Sheet.
Financial Statements of Non-Profit Organisations consists of-
  • Receipts and Payments Account- Receipts and Payments Account is a real account which shows summary of the Cash Book over a certain period of time. All cash and bank transactions, taken from the cash book are shown under suitable headings and titles, such as subscriptions, salaries, rent, electricity charges etc. On the debit side, all receipts and on the credit side, all payments are recorded. Any transactions which are not recorded in the Cash Book will not be entered in the Receipt and Payment Account also.
  • Income & Expenditure Account- Income & Expenditure Account is similar to the Profit & Loss Account of a profit seeking entity and is prepared to ascertain whether the current incomes are in excess of current expenditure or vice versa. It is prepared as a part of final accounts of non-trading concerns and is equivalent to profit and loss account prepared by for-profit business enterprises. Hence, all expenses and losses of a revenue nature are recorded on its debit side while all incomes and gains of a revenue nature, if revenues of a non-trading concern exceed its expenditures, it shows surplus i.e. “excess of income over expenditure” and if the expenditures exceed income, the account shows a deficit balance i.e. “excess of expenditure over income”.
  • Balance Sheet- Just as in profit seeking concerns, a Balance Sheet is to be prepared even by non-profit organisations to show the financial position on the last date of the accounting year. The organizations prepare its balance sheet so that they can know the financial position of their organization. It is prepared by taking assets and liabilities and also fund based items.
See the related post : How to save Income Tax
Keep in mind the following points relating to Non-Profit Organisations-
  • Subscription- It is the main source of income of non-profit entities. It will be appearing on the debit side of Receipts and Payments Account and out of it the subscription belonging to the current year will be posted to the credit side of Income and Expenditure Account.
  • Donations- Donations received may be for specific purpose or not, Specific donations are received for a specific purpose and has to be utilized for said purpose only i.e. donation for construction of building etc. It is capitalized and shown on the liability side of the Balance Sheet or General donations are not for specific purpose.
  • Sale of Old Assets- It appears on the debit side of Receipts and Payment Account. It is a capital receipt and as such should not be transferred to Income and Expenditure Account. However the profit or loss on the sale of an asset must be taken to the Income and Expenditure Account.
  • Sale of Old Newspapers etc. - It appears on the debit side of Receipts and Payments Account and is transferred to the credit side of Income and Expenditure Account.
  • Payment of Honorarium- The amount paid to persons who are not the employees of the institution is called honorarium and is debited to the Income and Expenditure Account.
  • Life Membership Fees- In order to become the member of an organization for the whole of the life, some members pay the fee in lump sum i.e. once in their life time. Hence, it is not credited to the Income and Expenditure Account but added to the Capital Fund or shown separately on the liabilities side.
  • Endowment Fund- It is a fund arising from a gift etc., the income of which is devoted for a specific purpose. It is a capital receipt because it provides a permanent income to the institution. It should be shown on the liabilities side as a separate item.


Payal on 3/27/2023 2:57:57 PM says:
This is so help full in in account subject ☺️👌
chisola kalilande J on 5/14/2022 9:50:23 PM says:
helpful however i wanted demonstration on how to prepare subscription account
Omokaro Adesuwa on 11/28/2021 4:46:46 PM says:
A really detailed work on accounting for not for profit organization
RAMS AHMED ABEID on 5/10/2021 9:19:43 AM says:
very useful material

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