A Not-for-Profit Organisation (NPO), also known as a Non-Trading Organisation, is an entity established with the primary objective of providing services to society rather than earning profits. It is a separate legal entity and is not owned by any individual or business. The main aim of such organisations is to promote social, educational, religious, cultural, or charitable welfare and to serve their members or the general public.
These organisations include schools, hospitals, literary societies, charitable trusts, and clubs. Their main sources of income are donations, subscriptions, legacies, life membership fees, entrance fees, and voluntary contributions from individuals. Although NPOs may carry out some trading activities such as running a canteen or providing facilities to members, any surplus or profit generated is not distributed among members. Instead, it is used to further the objectives for which the organisation was established.
Features of Not-for-Profit Organisation:
1.Separate Legal Entity: A Not-for-Profit Organisation (NPO) is a separate legal entity established by individuals or organisations. Although it is promoted by them, it is neither owned nor controlled by any individual or enterprise.
2.Social Objectives: NPOs are formed to serve society rather than earn profits. Their primary objectives include education, healthcare, charity, environmental protection, cultural development, and other social welfare activities.
3.Forms of Organisation: NPOs may operate as charitable hospitals, educational institutions, clubs, trusts, charitable societies, foundations, or other similar organisations.
4.Management: These organisations are managed by elected members, governing committees, or trustees who oversee their activities and ensure that the organisation fulfils its social mission.
5.Non-Profit Motive: The main aim of an NPO is to provide services for the benefit of society, not to earn profits. Although an NPO may generate income through business or trading activities, any surplus is used solely to achieve its objectives and is not distributed among its members. Example:
An organisation promoting rural culture may encourage villagers to produce handicrafts and sell them in urban markets. The profits earned are reinvested in activities that support and preserve rural culture rather than being shared among members.
6.Sources of Funding: NPOs mainly receive funds through donations, grants, subscriptions, membership fees, entrance fees, legacies, and voluntary contributions. These funds are used to carry out social projects and meet administrative and operating expenses.
7.Accounting System: NPOs maintain proper books of accounts using the double-entry system of accounting. Their financial statements generally include the Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet. These records ensure transparency, help meet legal requirements, and support applications for government grants and financial assistance..
Financial Statement of Not-for-Profit Organisation:
Not-for-Profit Organisations (NPOs) generally maintain their books of accounts using the double-entry system of accounting. However, small NPOs with limited operations may not be in a position to maintain complete books under this system. Instead, they prepare a Cash Book, from which the Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet are prepared to present the financial position and performance of the organisation. The financial information summarized in these statements is used by members, donors, and government authorities to meet statutory requirements and to obtain financial grants or other forms of assistance
The financial activities of NPOs are recorded in the form of:
1. Receipt and Payment A/c,
2. Income & Expenditure A/c, and
3. Balance Sheet
1. Receipt and Payment A/c: It is a classified summary of the Cash Book that records all cash receipts and cash payments of a Not-for-Profit Organisation (NPO) under appropriate heads. It is a real account prepared on the cash basis of accounting for a specific accounting period. It includes all cash transactions, whether they are of a capital or revenue nature, regardless of the accounting period to which they relate. Since it is prepared on a cash basis, only actual cash and bank transactions are recorded.
All cash receipts are entered on the debit side, while all cash payments are recorded on the credit side of the account. The opening balance shows the cash in hand and cash at bank at the beginning of the accounting period, and the closing balance shows the cash in hand and cash at bank at the end of the period. Thus, the Receipts and Payments Account provides a clear summary of the organisation's cash position and serves as the basis for preparing the Income and Expenditure Account and the Balance Sheet.
2. Income and Expenditure A/c: It is similar to the Profit and Loss Account of a profit-making business. It is prepared from the Trial Balance when complete books of accounts are maintained or from the Receipts and Payments Account along with additional information. It is a nominal account prepared on the accrual basis of accounting and records only revenue incomes and revenue expenses relating to the current accounting period, whether they have been received or paid or not.
The Income and Expenditure Account is prepared at the end of the accounting period to determine the surplus or deficit of a Not-for-Profit Organisation. All revenue incomes are credited, while all revenue expenses are debited. If the total income exceeds the total expenditure, the excess is called a surplus; if expenditure exceeds income, it is called a deficit. The surplus is added to the Capital Fund, whereas the deficit is deducted from the Capital Fund in the Balance Sheet.
3. Balance Sheet: It is a statement that shows the financial position of a Not-for-Profit Organisation (NPO) on a particular date. It is prepared in the same manner as the Balance Sheet of a business organization and includes Assets, Liabilities, and the Capital Fund. The surplus or deficit determined from the Income and Expenditure Account is transferred to the Capital Fund. If the opening balance of the Capital Fund is not given, it is calculated by finding the excess of total assets over total liabilities at the beginning of the accounting period. Thus, the formula for calculating the Capital Fund is Capital Fund = Assets − Liabilities
While preparing the Balance Sheet following points should be considered:
1. Assets appearing on the previous year's Balance Sheet should be adjusted for sale during the year, if any, or purchase during the year and depreciation.
2. On purchase of a new asset, the payment made will be shown in Receipt & Payment A/c and then the scrutinized value of the asset shall be shown in the asset side of the balance sheet.
3. If any loan is raised, it shall be shown in the receipt side of Receipt & Payment A/c and the value(less repayment, if any) shall be shown on the liabilities side of the balance sheet.
4. Special receipts like donations for the building are directly shown on the liabilities side of the Balance Sheet.
5. The liabilities of the previous year's Balance Sheet shall be scrutinized for any payment if made (Information from Receipt & Payment A/c should be taken) and the net value shown in the Balance Sheet.
6. Adjustments made on the accrual basis of accounting shall also be shown in Balance Sheet, i.e., outstanding expenses and advance income are shown on the liability side, and prepaid expenses and accrued income will be shown on the Asset Side of the Balance Sheet.
7. The net amount of the advances shall be shown in the Balance Sheet, i.e., payment of advances shall be shown on the Payment Side, and recovery of advances shall be shown on the Receipt Side of Receipt & Payment A/c and the difference between them is shown in the Balance Sheet