UNIT 1.

FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANISATIONS

LEARNING OBJECTIVES:
1. Identify the need for, and nature of accounting records relating to not-for –profit organisations.
2. List the principal financial statements prepared by not-for-profit organisations.
3. Prepare the receipts and Payments account and Income and Expenditure account.
4. Prepare Income and Expenditure account and Balance sheet from the given Receipts and
Payments account.
5. Explain treatment of some peculiar items of Receipts and Payments such as subscriptions
from members, special funds, legacies, sale of old assets, etc.

MEANING:
Not-for-profit organisations refer to the organisations that are used for the welfare of the society
and are set up as charitable institutions which function without any profit motive. They also have to
prepare the financial statements at the end of each accounting period and ascertain their income and
expenditure and the financial position and submit them to the statutory authority called Registrar of
societies.

MAIN CHARECTERISTICS:
1. They are formed for providing service.
2. They are organised as charitable trusts and managed by executive committee elected by the
Members.
3. The main sources of income are
1. Subscriptions
2. Donations
3. Legacies
4. Grant-in–aid
5. Income from investment etc.
4. The surplus generated is not distributed to the members but added to capital fund.

ACCOUNTING RECORDS:
1. Receipts and Payments account
2. Income and Expenditure account
3. Balance Sheet.

RECEIPTS AND PAYMENTS ACCOUNT:

It is a summary of cash and bank transactions. It gives the summarized picture of various receipts
and payments. It includes receipts of all nature (Capital, Revenue, Current year, previous year and next
year) It does not show non-cash items. It starts with opening balance of cash and bank and ends with
cash balance and bank / bank overdraft balance.

FEATURES:
Following are the features of Receipts and Payments Account:
1. Nature: It is a summary of cash receipts and payments and hence, it an Asset Account/Real
Account
2. Recording: It provides the summary of all cash and bank transactions in a chronological
order.
3. Basis of Preparing: It is prepared on cash basis, i.e., it records only cash inflow and outflow.
Accrued and outstanding transactions are not recorded in this account.
 4. Capital and Revenue: It records all the transactions whether capital or revenue.
5. Period: It records all the cash and bank transactions irrespective of whether they relate to
current, previous or succeeding accounting periods.
6. Opening and Closing Balances: Opening balance of this account is the cash in hand/ bank at
the beginning of the accounting year and the closing balance shows cash in hand/bank at the
end of the accounting period.
7. Adjustment: Adjustments for accrued, outstanding items and depreciation is not required to be
made in this account.
8. Purpose: The purpose of preparing this account is to show amount received and paid under
various heads during the accounting year and also to know the cash position of the entity.

FORMAT

RECEIPTS AND PAYMMENT ACCOUNT for the period ended……………………

Dr. Cr.
Receipts Amount Payments Amount
To Balance b/d (Opening Balance): By Balance b/d (Opening Balance)
Cash in Hand … (in case of Bank Overdraft)
Cash at Banks … By Salaries …
To Subscriptions: By Rent …
For Previous Year … By Postage Expenses …
For Current Year … By Newspapers and Magazines, etc. …
For Next Year … … By Repairs …
To General Donations … By Audit Fee
To Entrance/Admission Fees … By Maintenance Expenses …
To General Grants … By Insurance …
To Sale of Newspaper, Grass, etc. … By Secretary’s Honorarium …
To Sale of Old Used Sports … By Honorarium …
Materials … By Municipal Tax …
To Interest on Investments … By Prize Distributed …
To Income from Concerts/Lectures … By Office Expenses …
To Dividends … By Expenses on Show …
To Rent Received … By Miscellaneous Payments …
To Interest Received … By Purchase of Fixed Assets (e.g., …
To Miscellaneous Receipts … Furniture) …
To Life Membership Fees … By Sports Equipment …
To Subscriptions for Specific … By Investments
Purpose … By Books …
To Donation for Specific Purpose … By Loan (Repayment) …
To Legacies … By Building …
To Endowment Fund … By Balance c/d (Closing Balance): …
To Sale of Fixed Assets Cash in Hand …
To Receipts on Account of Special Cash at Bank*
Fund, i.e., Match Fund, Prize …
Fund, etc.
To Balance c/d (Bank Overdraft)* …
… …
*Either of the two will appear.

# If the receipts side is more than the payments side then, Closing balance of cash and bank will
appear on the credit side of this account.

#If the payments side is more than the receipts side then, Closing balance of bank will appear (as Bank
overdraft) on the debit side of this account.
Limitations of Receipts and Payments Account:
1. It follows cash basis of accounting and therefore, does not show incomes and expenses on
accrual basis.
2. It is not capable of showing whether the NPO is able to meet its day-to-day expenses out of
its income or not as the credit transactions are ignored.

3. It is not a perfect substitute of Trial Balance as this account fails to reveal the closing
balances of all accounts.

Example:
From the following particulars taken from the cash book of a health club, prepare receipts
and Payments account:
Particulars Rs.
Opening balance:
Cash in hand 5,000
Cash at bank 25,000
Subscriptions 1,65,000
Donations 35,000
Investment purchased 80,000
Rent paid 20,000
General expenses 21,500
Postage and stationery 2,000
Courier charges 1,000
Sundry expenses 2,500
Closing cash in hand 12,000

Receipts and Payments account for the year ending……..

Receipts Rs. Payments Rs.
To Balance b/d By Investment purchased 80,000
Cash 5,000 By rent paid 20,000
Bank 25,000 By general expenses 21,500
To Subscriptions 1,65,000 By postage and stationery 2,000
To Donations 35,000 By courier charges 1,000
By sundry expenses 2,500
By Balance c/d cash 12,000
bank 91,000
2,30,000 2,30,000

Difference between Receipts and Payments Account and Cash Book:

Sr. Basis Receipts and Payments Cash Book

No. Account
1 Statement It can be regarded as statement It can be regarded as an account
vs. Account rather than an account. Unlike as it works both as Journal as
ordinary accounts, it does not well as ledger and its balances
show Date and Ledger Folio are directly shown in the Balance
columns. Sheet.
 2 Period It is prepared at the end of the It is written on daily basis.
accounting period.
3 Date It does not require the It requires the date-wise
transactions to be written date- recording of the transactions.
wise. Even date column is not
present in the R&P A/c
4 Institutions It is prepared by the Not-for- It is prepared by all types of
Profit Organisation. Organisation be it a commercial or
Not-for-Profit organisation.
5 Side It has receipts and payments It is divided into debit and credit
side instead of debit and credit. side.
6 Ledger It does not have column for It has a separate column for
Folio ledger folio. Ledger Folio.

INCOME AND EXPENDITURE ACCOUNT:

It is the summary of income and expenditure. It resembles a profit and loss account. It includes
only revenue items relating to the current period and the balance at the end represents deficit or surplus.
It is prepared on accrual basis.

STEPS IN THE PREPARATION OF INCOME AND EXPENDITURE ACCOUNT:

1. Go through the Receipts and Payments accounts thoroughly.
2. Exclude opening and closing balance of cash and bank
3. Exclude capital receipts and payments
4. Consider revenue items of current year only
5. Consider the adjustments such as depreciation, provision for bad and doubtful debts, profit or
loss on sale of asset, outstanding and prepaid expenses, Accrued incomes and Income Received
in advance.

FEATURES:
1. Nature: It is a Nominal Account and therefore, all revenue expenses and losses
incurred are recorded on the debit side and all revenue incomes and gains
earned are recorded on the credit side of this account.
2. Basis of Recording: It follows the accrual basis of accounting to ascertain Surplus or
Deficit arising after meeting all revenue expenses against all revenue
incomes at the end of an accounting period
3. Period: It records only those expenses and incomes which relate to the current
accounting period.
4. Opening and Closing Balances: It has no opening balance, however, balance at the
end is either surplus or deficit which is then transferred to Capital Fund in the
Balance Sheet.
5. Adjustments: Since, it follows accrual basis of accounting, all the adjustments are to
be given effect which are necessary to record the incomes, gains, expenses
and losses relating to the current accounting period.
 FORMAT
Income and Expenditure Account for the period ended………...
Dr. Cr.
Expenditure Amount Income Amount
To Salaries … By Subscriptions …
Add: Outstanding at the end … Add: Outstanding at the end …
… Advance in the beginning …
Less: Outstanding at the beginning … … …
To Rent … Less: Outstanding at the beginning …
To Insurance Premium … Less: Prepaid … …
To Audit Fees … Less: Advance at the end … …
To Printing and Stationery … By Entrance Fees …
To Honorarium … By Donations …
To Telephone Expenses … By Sale of Old Newspapers …
To Repairs … By Hall Rent …
To Depreciation … By Sundry Receipts …
To Sports Material Used By Deficit
… (Balancing
To Surplus (excess of expenditure over income)* Figure)
(excess of income over expenditure)* (Balancing
Figure)

… …

*Either of the two will appear

Expenditure side to record: All revenue expenses for current period (after making adjustment for
outstanding and prepaid expenses)
Income side to record: All revenue income for current period (after making adjustments for outstanding
and advance income)

Some important terms:

Capital Expenditure:
1. It is an expenditure, which benefits the organisations for more than one accounting period.
2. It results in the acquisition of assets which are used for the furtherance of activities carried on
by the NPO.
3. Examples include cost of land, building, furniture and any addition thereto.
Revenue Expenditure:
1. It is an expenditure, the benefits of which expire within the accounting period.
2. In case of an NPO, such expenditure means expenditure incurred for social or charitable
activities carried on by the NPO.
3. Examples include Materials used, rent, insurance, salaries, honorariums paid, etc.
Revenue Receipts:
1. Any income received from the activities carried out by organisation is termed as revenue
receipts.
2. Examples include Subscription from members, General Donations, Rent Received, etc.
Capital Receipts:
1. Receipts other than revenue receipts are termed as Capital Receipts.
2. Receipts from donor for the specified purpose are also termed as Capital Receipts.
3. Examples include Life Membership Fee, Corpus Donations, Furniture Fund, etc.
DIFFERENCE BETWEEN RECEIPTS & PAYMENTS ACCOUNT AND INCOME & INCOME
AND EXPENDITURE ACCOUNT:

Sr. Basis Not-for-Profit Organisation Profit Earning Organisation

no. (Business Firm)
1 Purpose To render services Its purpose is to earn profits.
2 Formation & Formed by Promoters and managed Formed by Entrepreneur(s) and
Management by Trustees managed by Owners or Managers
3 Funds It raises funds by way of Membership It receives funds from the
Fee, Donations, and Surplus from proprietor, partners in the form of
Operations which are shown in the capital (in case of proprietorship
books as General and partnership) and from
Or Capital Funds. shareholders in the form of Share
Capital (in case of Companies).
Profits which are not distributed to
partners and shareholders are
shown as reserves.
4 Financial Final accounts are prepared every Final accounts prepared comprises
Statements year that comprises of Receipt and of Trading, Profit and Loss Account
Payment Account, Income and and Balance Sheet.
Expenditure Account and Balance
Sheet.
5 Surplus/Profit Excess of income over expenditure in Excess of credit side over the debit
the Income and Expenditure side of the Profit and Loss Account
Account is termed as Surplus/Profit. is termed as Net Profit.

Difference between Income and Expenditure Account and Profit and Loss Account:

Sr. Basis Income and Expenditure Account Profit and Loss Account
no.
1 Object Its main object is to determine surplus, Its main object is to determine net profit
i.e., excess of income over expenditure or net loss.
or deficit i.e., excess of expenditure
over income.
2 Prepared It is prepared by Not-for-Profit It is prepared by Business
By Organisations. enterprises.
3 Method If an organisation maintains a complete It is prepared from Trial Balance and
set of books, this account is prepared other information.
from Trial Balance. If complete set of
books is not maintained, it is prepared
from Receipt and Payment Account and
the additional information
available.
4 Balance Balance in this account is termed as Balance in this account is termed as
either a surplus or a deficit. either net profit or net loss.
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. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side
and the liabilities on the left hand side. However, 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/deducted from the capital fund, as the case may be. It is also a common practice to add some of the
capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.
Besides the Capital or General Fund, there may be other funds created for specific purposes or to
meet the requirements of the contributors/donors such as building fund, sports fund, etc. Such funds are
shown separately in the liabilities side of the balance sheet.
Sometimes it becomes necessary to prepare Balance Sheet as at the beginning of the year in
order to find out the opening balance of the capital/general fund.

The following procedure is adopted to prepare the Balance Sheet:

1. Take the Capital/General Fund as per the opening balance sheet and add surplus from the
Income and Expenditure Account. Further, add entrance fees, legacies, life membership fees,
etc. received during the year.
2. Take all the fixed assets (not sold/discarded/or destroyed during the year) with additions (from the
Receipts and Payments account) after charging depreciation (as per Income and Expenditure
account) and show them on the assets side.
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.
 Format of Balance Sheet of a Not-for-Profit Organisation.
Name of the Organisation
Balance Sheet as at …
Liabilities Amount Assets Amount

Capital Fund or General or Corpus Fund: Fixed Assets:

Opening Balance … Building: …
Add: Surplus (or Less: Deficit) … … Opening Balance
Building Fund: Add: Additions …
Opening Balance … Less: Depreciation … …
Add: Donation for Building … Furniture:
…
Income from Building Fund Investment … Opening Balance …
Sports Fund: Add: Additions …
… Less: Depreciation ...
Opening Balance
… Sale … …
Add: Donation for Sports Fund
… Current Assets:
Income on Sports Fund Investment …
Less: Sports Prize Awarded …
Cash in Hand …
Current Liabilities: Cash at Bank …
Outstanding Expenses: … Subscriptions in Arrear …
Rent … Accrued Interest ...
Salaries … … Investments:
Electricity/Water Charges … Building Fund Investments …
Subscriptions Received in Advance Sport Fund Investments …
Prepaid Expenses:
Insurance …
Rent …
… …

ACCOUNTING TREATMENT OF SOME IMPORTANT ITEMS:

1. ENTRANCE FEES: It is the amount paid by a person at the time of becoming a member of a
nonprofit organisation. It is treated as a revenue receipt and is credited to Income and
Expenditure account. If it is specified as to be capitalized then it should be entered in Liabilities
side of Balance Sheet.

2. LIFE MEMBERSHIP FEES OR LIFE SUBSCRIPTION: It is the amount received from a member
in lump sum and he is given the membership of the organisation for the whole life. It is treated as a
capital receipt and added to the capital fund on the liabilities side of the Balance sheet.

3. DONATIONS: Donation is the amount received from a person, firm, company by way of gift.
Donation received may be a general donation or specific donation.

1. General Donation: It is treated as an income and is credited to the Income and Expenditure
Account
2. Specific Donation: It will be capitalized and is shown on the liabilities side of Balance
Sheet.
*Note: In the absence of any information about the nature of donation it should be treated as
general Donation.
4. LEGACIES: It is the amount received as per the will of a deceased person who may or may not
specify the use of the amount. Legacies, use of which is specified are specific legacy and is shown in the
balance sheet as liability. If the use is not specified it is considered as revenue nature and credited to
income and expenditure account.

5. SUBSCRIPTION: It is the major source of income of a not-for –profit organisation. Subscriptions are
the amount paid by the members of such organisations to maintain their membership.

* Subscription income for the current year is shown in the Income and Expenditure account. It is
calculated as follows:
Particulars Amoun
Subscription received during year as shown in Receipts and Payments Account …
Add: Outstanding at the end of the year …
Received in advance in the beginning of the year … …
…
Less: Outstanding at the beginning of the year …
Received in advance at the end of the year … …
Subscriptions to be shown in the Income and Expenditure A/c …

Accounting Format
Subscription Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs Rs
Outstanding Subscription A/c ××× Advance Subscription A/c (in the ×××
(in the beginning) beginning)
Advance Subscription A/c ××× Bank A/c
(at the end) (Subscription received during the ×××
Income and Expenditure A/c ××× year)
Outstanding subscription A/c
(Balancing Figure) (at the end) ×××

** Subscription o/s at the end of the year is an asset and the subscription received in advance is a
liability

6. GOVERNMENT GRANT: Not-for-organisations may receive grants from government, corporate,

national and international agencies. If the grant is received for any specific purpose then the grant is
capitalized and shown on the liability side of balance sheet. If the grant is not marked for any specific
purpose such as maintenance grant, then it is treated as income and is credited to income and
expenditure account.

7. INTEREST ON GENERAL FUND INVESTMENTS: it is treated as revenue receipt and hence

credited to Income and Expenditure account.

8. FUND BASED ACCOUNTING: It refers to an accounting system in which receipts and incomes
relating to a particular fund are credited to that particular fund and expenses related to that fund are
credited to that particular fund are debited to it. (Prize Fund, Tournament Fund, Building Fund etc.)
 *INTEREST ON SPECIFIC FUND INVESTMENT: It is added to the respective fund (e.g. Interest
on building fund investment is added to Building Fund)

Example: Treatment of Tournament Fund

Liabilities Amount Assets Amount

Rs Rs
Tournament Fund 40,000
Sale of Ticket for 10,000
Tournament

Donation for
Tournament 2,000
Less: Tournament
Expenses (12,000) 40,000

Example: Building Fund

Liabilities Amount Assets Amount

Rs Rs
Capital Fund 8,00,000 Construction of Building 2,00,000
in progress
Add: Construction of 2,00,000 10,00,000
Building in progress

Building Fund 7,00,000

Donation 1,00,000
Less: Construction of
Building in progress (2,00,000) 6,00,000

9. ENDOWMENT FUND: It a fund that arises from a gift and its income is devoted for a specific
purpose. It is considered as a capital receipt and is shown in the liabilities side of Balance sheet.
10. SALE OF OLD SPORTS MATERIALS: The amount so received is treated as revenue income
assuming that its book value is zero. It is shown on the credit side of Income and Expenditure account.
11. SALE OF OLD NEWSPAPERS AND MAGAZINES: The amount realized from the sale is
accounted as an income and credited to Income and Expenditure account.
12. SALE OF OLD ASSET: Any gain or loss on sale of old assets is transferred to income and
expenditure account. (Loss on expenditure side and Profit on income side)
13. HONORARIUM: This is the amount paid to those persons who are not regular employees of the
organisation, but render some useful services to the organisation. It a token payment given in honor of
the services rendered. It is shown on the debit side of the Income and Expenditure account.
14. Cost of Goods consumed: cost of material like stationary/ medicines/ sports material
Stock consumed during the year = Opening stock+ purchases – closing stock
It will appear in the expenditure side of income and expenditure account.
Goods Consumed During the Year Amount
Opening Stock of Consumable Items …
Add: Purchases during the year …

Less: Closing Stock (…)

Balance to be shown in the Income and Expenditure A/c …

Notes:
1. Opening Stock appears in Opening Balance Sheet
2. Closing Stock appears in Closing Balance Sheet
3. In case if credit purchases of consumables not provided, prepare creditors for
consumables goods account.
4. Receipts from sale of consumables, if any are accounted as revenue receipts.