Chapter

Preparation of Financial Statements – Not for profit organization

Meaning of Not-for-Profit Organisation

• There are certain organisations which are set up for providing service to its members and the public in general.
Such organisations include clubs, charitable institutions, schools, religious organisations, trade unions,
welfare societies and societies for the promotion of art and culture.
• These organisations have service as the main objective and not the profit as is the case of organisations in
business. Normally, these organisations do not undertake any business activity, and are managed by trustees
who are fully accountable to their members and the society for the utilization of the funds raised for meeting
the objectives of the organisation.
• Examples of such organisations are schools, colleges, public hospitals, literacy societies for promoting
sports, arts, culture, etc.

➢ NPO can be registered as a Trust under Trust Act or as a Society under Societies Registration Act or as
Non-profit Company under section 8 of the companies act 2013.
➢ Section 12A of Income Tax Act’1961: 12A registration is a one-time registration which is granted by the
Income Tax Department to trusts and other not for profit organisations. The purpose of the registration is
to be exempted from the payment of income tax.

Meaning and Characteristics of Not-for-Profit Organisation

1. Such organisations are formed for providing service to a specific group or public at large such as education,
health care, recreation, sports and so on without any consideration of caste, creed and colour. Its sole aim is
to provide service either free of cost or at nominal cost, and not to earn profit.

2. These are organised as charitable trusts/societies and subscribers to such organisation are called members.

3. Their affairs are usually managed by a managing/executive committee elected by its members.

4. The main sources of income of such organisations are: (i) subscriptions from members, (ii) donations, (iii)
legacies, (iv) grant-in-aid, (v) income from investments, etc.

5. The funds raised by such organisations through various sources are credited to capital fund or general fund.

6. The surplus generated in the form of excess of income over expenditure is not distributed amongst the
members. It is simply added in the capital fund.

7. The Not-for-Profit Organisations earn their reputation on the basis of their contributions to the welfare of the
society rather than on the customers’ or owners’ satisfaction.

Prepared by: Raman Luthra

Chartered Accountant
 8. The accounting information provided by such organisations is meant for the present and potential
contributors and to meet the statutory requirement.

Final Accounts or Financial Statements

The Not-for-Profit Organisations are also required to prepare financial statements at the end of each accounting
period. Although these organisations are non-profit making entities and they are not required to make Trading and
Profit & Loss Account but it is necessary to know whether the income during the year was sufficient to meet the
expenses or not. Not only that they have to provide the necessary financial information to members, donors, and
contributors and also to the Registrar of Societies. For this purpose, they have to prepare their final accounts at the
end of the accounting period and the general principles of accounting are fully applicable in their preparation as
stated earlier, the final accounts of a ‘not-for-profit organisation’ consist of the following:

i. Receipt and Payment Account (Cash and bank Account)

ii. Income and Expenditure Account, and
iii. Balance Sheet.

Receipt and Payment Account (Cash and bank Account)

It is an account that shows the summary of all cash and bank transactions occurred during an accounting period. It
starts with the opening balances of cash and bank and ends with the closing balances of cash and bank. This account
is a Real Account and lays the basis for the preparation of Income and Expenditure Account and the Balance Sheet.

Dr. Receipts and Payments Account for the year ended … Cr

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

Prepared by: Raman Luthra

Chartered Accountant
 To Receipts on Account of Special … Building …
Fund, i.e., Match Fund, Prize Fund, … By Balance c/d (Closing Balance): Cash in …
etc. Hand …
To Balance c/d (Bank Overdraft)
Cash at Bank*
…
… …

Income and Expenditure Account

It is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared
on accrual basis in case of the business organisations. It includes only revenue items and the balance at the end
represents surplus or deficit. The Income and Expenditure Account serves the same purpose as the profit and loss
account of a business organisation does. All the revenue items relating to the current period are shown in this account,
the expenses and losses on the expenditure side and incomes and gains on the income side of the account.

Dr. Income and Expenditure Account for the period ended… 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 … … Less: Advance at the end … …
To Audit Fees … By Entrance Fees …
To Printing and Stationery … By Donations …
To Honorarium … By Sale of Old Newspapers …
To Telephone Expenses … By Hall Rent …
To Repairs … By Sundry Receipts …
To Depreciation … By Deficit …
To Sports Material Used … (excess of expenditure over income)*
To Surplus
(Excess of income over expenditure)
… …

Prepared by: Raman Luthra

Chartered Accountant
 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.
Any surplus or deficit in the Income and Expenditure Account is transferred to Capital Fund, where, Capital Fund =
Total Assets – Total Liabilities.

Name of the Organisation

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

Prepared by: Raman Luthra

Chartered Accountant
Multiple Choice Questions

1. [Question]

Particulars As at 1st April, 2020 As at 31st March, 2021

Creditors for Sports Materials 2,000 1,300
Stock of Sports Materials 3,000 500

During 2020–21, the payment made to these creditors was 10,800. There were no cash purchases of sports
material. Calculate stock of sports material consumed?

a) 10,100
b) 10,800
c) 12,100
d) 12,600
e) 13,100

Answer: d

2. [Question] Total receipt of subscription of Not-for-profit organization in FY20-21 is INR 10,00,000. Out of
total receipt, subscription for FY 19-20 is INR 1,00,000 and advance subscription for FY 21-22 is INR 1,50,000.
Calculate amount of subscription to be recorded as Income by Not-for-profit organization for FY 20-21.

a) INR 7,50,000
b) INR 8,50,000
c) INR 9,00,000
d) INR10,00,000
e) INR 12,50,000

Answer: a

3. [Question] In 2018–19, the actual salaries paid amounted to 10,000. Ascertain the amount chargeable to
Income and Expenditure Account for the year ending on 31st March, 2019 from the following:

Particulars Amount
Prepaid Salaries on 31st March, 2018 1,000
Prepaid Salaries on 31st March, 2019 500
Outstanding Salaries on 31st March, 2018 1500
Outstanding Salaries on 31st March, 2019 2000

a) 10,000
b) 10,500
c) 11,000
d) 11,500
e) 12,000

Answer: c

Prepared by: Raman Luthra

Chartered Accountant