CHAPTER 1

FINANCIAL STATEMENTS OF
NOT FOR PROFIT ORGANISATIONS
Meaning of NFPOs
Not- for Profit Organisation are the organizations which are formed
not to earn profits, but to render services to its members and to the
public. Such organizations include clubs, hospitals, libraries,
religious institutions etc.
Features of NFPOs
1. Separate legal entity
Its name and entity is different from the people who have
contributed towards the capital.
2. Service motive rather than profit motive
They are established with the purpose of service to its members
or society. Profit is not in consideration for individuals.
3. Management by elected person
The executive committee or the managing committee is elected
by its members.
4. Efficiency is judged by welfare
The efficiency of the organisation is judged by the welfare done
to the society; the surplus is not distributed among the members
but is adjusted in the capital fund of such organisations.
5. Source of funds
The organisation raises its funds from the contribution made by
its members known as subscriptions, special donations, legacies
etc.
6. Re-investment of surplus
The surplus always remains in the organisation and is reinvested
in the organization. It is available for the welfare of the society's
objectives.
7. Basis of reputation
It does not depend on any ones satisfaction but how well they
contribute to the welfare of the society.

Differences Between
NFPOs and Profit Earning Organisations
No. Basis NFPOs Profit Earning Org.

1 Primary motive To provide services is to earn profit

Capital v/s do not maintain any Maintain a Capital

2
capital funds Capital Account. Account.

Receipts and Manufacturing A/c

Financial Payment A/c, Trading A/c,
3 statements Income &
includes: Expenditure A/c, P& L A/c,
Balance Sheet Balance sheet

The net result shown

The net result shown
Surplus v/s by P&L A/c is either
4 by I&E A/c is either
profit Net Profit or Net
Surplus or Deficit.
Loss.
 FINAL ACCOUNTS OF
NOT-FOR-PROFIT ORGANISATIONS
The final accounts of a ‘not-for-profit organisation’ consist of
the following:
I. Receipt and Payment Account
The Receipt and Payment Account is the summary of cash
and bank transactions which helps in the preparation of Income
and Expenditure Account and the Balance Sheet.

FEATURES OF RECEIPT & PAYMENT ACCOUNT

1. It is a real account i.e. it is a summarized copy of Receipt &
Payment of cash.
2. The form of Receipt & Payment Account is similar to cash
book, where receipts are recorded under Debit Side and
Payments are recorded under Credit Side.
3. It records all Receipts & Payments irrespective of the
distinction between capital & revenue items.
4. Only actual Receipts & Payments during the accounting
period are recorded in this account.
5. The opening balance in this account means cash in hand/bank
in the beginning of the accounting period and the closing
balance relates to cash in hand/bank at the end of the
accounting period.
 II. Income and Expenditure Account
It is a statement that records the income and expenditure of an
organization such as a charity, whose main purpose is not the
generation of profit. Income and Expenditure Account is akin to
Profit and Loss Account.
FEATURES OF INCOME & EXPENDITURE ACCOUNT
1. Nature of account:
It is a nominal account and the rule of nominal account i.e. “Debit
all Expenses or Losses and Credit all Income and Gains” is
followed.
2. Nature of items recorded:
Only items of revenue nature are recorded. All items of capital
nature are ignored while preparing it.
3. Omission of Opening Balance:
No opening and closing balance of cash and bank recorded.
4. Adjustments:
This account is prepared in the manner in which a Profit and Loss
Account is prepared. All adjustments relating to current year are
taken into consideration while preparing the income and
expenditure account.
5. It records Income & Expenditure of current period:
It excludes all items of income and expenditure which do not
pertain to the current year. All items relating to previous years and
future years are excluded while preparing it.
6. Purpose:
The closing balance of this statement reveals surplus or deficit.
Excess of credit side is surplus and excess of Debit side is deficit.
Surplus is added to capital fund and deficit is deducted from it.
III. 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. There will be a Capital Fund or General
Fund in place of the Capital and the surplus or deficit as per
Income and Expenditure Account which is either added to or
deducted from the capital fund, as the case may be.

THIS CLASS NOTES ARE PREPARED ONLY FOR THE

STUDENTS OF CHAVARA VIDYAPEETH, NARSINGHPUR,
MADHYA PRADESH

Mr. Arun Kizhakkeyil-8770997743

Monday, April 19, 2021