Not for Profit

Organisations
o0o0o0o0o0o0o0o0o0o0o0o0o0o0o0o0o0o0o
NPos
o
 Activities

Activities to earn profits Social Activities

For both the two activities … accounts are required to be maintained…

Accounts for Accounts for

activities to earn social
profits activities
 The Accounts relating to the activities to earn
profits consists of –

Trial Balance Trading A/c

Profit & Loss A/c Balance Sheet

 The accounts relating to the social
activities consists of –

Trial Balance
(may be or may not be Receipts & Payments A/c
prepared)

Income & Expenditure Balance Sheet

A/c (Fund based accounting)
 NPO means …

Not for Profit Organisation

NPOs are …
• separate legal entities
• promoted or created by Individuals/Enterprises
• but not owned by them.
Their main objective is …
• public welfare
• not to earn profits
• but to work for the society – for social causes.
May be owned by …
• Any anyone.
• Those who have started it, become members of the NPO.
Examples of NPOs ……
• Schools
• Colleges
• Educational Institutions
• Medical Institutions
• Clubs / Societies
• Public welfare organizations
Accounts to be prepared by NPOs are ……
• Three accounts are important for any organization…
1. That gives position of Cash
Receipts & Payments A/c…..
• Similar to Cash A/c
• But only inflow of Cash and outflow of Cash.
• Cash includes Bank (for any no of PY).
• Only cash transactions are recorded
• No credit transactions will be there
• Entries are made only on Cash-basis, not accrual basis.
2. That gives Surplus/Deficit of this PY -
Income & Expenditure A/c …..
• Gift, grants etc and expenses (only for this PY),
• similar to P&L A/c.
• If Income is greater that Expenses… called Surplus.
• If Expenditure is greater that Income….. called Deficit
• Both cash and credit transactions are recorded
• Accrual basis of accounting is followed while preparing Income &
Expenditure A/c.
3. That gives the details of its Assets and
Liabilities ….
similar to the Balance Sheet

• Also called Fund based accounting

Receipts & Payments A/c
for the year ending 31st March, 2022, (PY 2021-22), may have
….
Date Particulars Amount Date Particulars Amount
To Revenue Receipts
(e.g. Rental Income)
To Capital Receipts
(e.g. sale of Assets)
Receipts & Payments A/c
for the year ending 31st March, 2022, (PY 2021-22), may have
….
Date Particulars Amount Date Particulars Amount
To Revenue Receipts By Revenue Expenses
(e.g. Rental Income) (e.g. Electricity bills)
To Capital Receipts By Capital Expenses
(e.g. sale of Assets) (e.g. acquired a Building)
Revenue receipts will move on to the …..
Income & Expenditure A/c
for the year ending 31st March, 2022, (PY 2021-22), may have
….
Date Particulars Amount Date Particulars Amount
To Rental Income
(of 2021-22, the current PY)
Revenue Expenses will move on to the …..
Income & Expenditure A/c
for the year ending 31st March, 2022, (PY 2021-22), may have
….
Date Particulars Amount Date Particulars Amount
By Electricity Bill paid
(of 2021-22, the current PY)
Capital receipts will move on to the …..
Balance Sheet as on 31st March, 2022,
(PY 2021-22), ….
Liabilities Amount Assets Amount
Capital receipts
Capital expenses will move on to the …..
Balance Sheet as on 31st March, 2022,
(PY 2021-22), ….
Liabilities Amount Assets Amount
Capital Expenses
INFLOWs that are found in the NPOs ……

• 1.Subscription … To stay as a member of a Club/Association and be a

part of this NPO, one has to be pay a Subscription.
• It does not create a long-term obligation of the NPO. It comes into as
regular basis from the members. If anyone wants to remain a
member, he pays annual/monthly subscription.
• This inflow of ‘Subscription’ will be seen as income in the ‘Income &
Exp. A/c’.
• The Assessing Officers will have to be note that this will never go in
the Balance Sheet. An income which is to be charged to tax.
Income & Expenditure A/c
for the year ending 31st March, 2022, (PY 2021-22), will have
….
Date Particulars Amount Date Particulars Amount
By Subscription INFLOW
Income & Expenditure A/c for the year ended 31st
March, 2022, (PY 2021-22), may have adjustments ….
Date Particulars Amount Date Particulars Amount
By Subscription (total)
Less: Outstanding Subscription
(of 2020-21, if received in 2021-
22)
Balance
Less: Advance Subscription
(of 2022-23, if received in 2021-
22)
Balance XXX
Income & Expenditure A/c
for the year ended 31st March, 2022, (PY 2021-22), may have
adjustments ….
Date Particulars Amount Date Particulars Amount
By Rental Income (total)
Less: Outstanding Rental income
(of 2020-21, if received in 2021-
22)
Balance
Less: Advance Rental Income
(of 2022-23, if received in 2021-
22)
Balance XXX
2.Life Membership fees …..

• A member may wish to be a part of the Club/Association for the whole of

his life.
• He is not going to pay the monthly subscription every month.
• He says that he will pay it one time.
• So, the club/Association has made him a member .
• It is irregular in nature. Very few people take life-membership.
• A long-term obligation has been created on the Club/Association to
provide him services throughout his life.
• Hence, the Life Membership fees received by the NPO is not to charged to
tax of the PY. It will go in the Balance Sheet.
Balance Sheet as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Life Membership Fees INFLOW

3. Endowment Fund –

• Suppose a gift/money is received for a specific purpose.

• Say a charitable trust receives money from Mr. X.
• While giving money, Mr. X has said to the trust that it will have to be used
only for ‘education of children’.
• Therefore, such an ‘inflow’ creates an obligation on the NPO and that too,
for a specific purpose, will be shown in the Balance Sheet, as its liability.
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Life Membership Fees INFLOW

Endowment Fund INFLOW
5.Donation -
The NPOs receive two types of Donations.

It receives general ‘INFLOW’ of donation.

Another ‘’INFLOW’ of donation for a specific purpose. For example, Mr. X

has made donation that the amount will have to be used for constructing a
school building. It is similar to the ‘Endowment Fund’. The word ‘Donation’
is not to be found in the Income Tax Act. Rather, u/s. 12(1) of the ‘Act’ we
find the words ‘any Voluntary Contribution’ received by a charitable-trust is
an income of the said trust u/s.11.
Therefore, the Assessing Officer has to note that such Donation or Voluntary-
contribution are required to be charged to tax.

But, it is also to be noted here that if the charitable trust/NPO received any
Donation from a donor, say Mr.X with a specific direction that the said
amount will become part of the corpus of the trust/institution, the said
‘INFLOW’ will be in the Balance Sheet as its liability of the charitable
trust/NPO.
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Life Membership Fees INFLOW

Endowment Fund INFLOW

Corpus Donation INFLOW

6. Legacy –

- If the NPO gets a property of say Mr.X as as result of the Will signed by Mr.X, it is called
‘Legacy’.

- After the death of Mr.X, his property will be with the NPO.

- Now, legacy can be of two types. One, general Legacy, the other specific-Legacy.

- The Assessing Officer will be have to note that if it is General nature of Legacy, it will go in
the Income & Expenditure A/c. as income. This nature of legacy will be a chargeable
income for the PY. On the other hand, if legacy is received by the NPO with a specific
purpose, just like Endowment Fund, it is be shown in the Balance Sheet as its liability.
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Life Membership Fees INFLOW

Endowment Fund INFLOW

Corpus Donation INFLOW

Legacy (with a specific purpose) IFLOW
Fund–based accounting - of Balance Sheet
Let’s say, the Receipts & Payments A/c of a Club has
……
Receipts & Payments A/c ….

Date Particulars Amount Date Particulars Amount

To Donation for Cricket 500000 By Expenses incurred for 510000
Tournament Fund Cricket Tournament
As the Donation has been received for a specific FUND
……
• Here, the Cricket Tournament Fund
• Not for immediate obligation to hold the tournament
• Hence should be a Capital Receipt
• Is shown in Balance Sheet
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Donation received for Cricket INFLOW

Tournament Fund
Balance Sheet
as on 31st March, 2022,may have ….
Liabilities Amount
Assets Amount

Donation received for Cricket

Tournament Fund 500000
Now, expenses incurred for the Cricket Tournament
in the Receipts & Payments A/c …
Receipts & Payments A/c ….

Date Particulars Amount Date Particulars Amount

To Donation for Cricket 500000 By Expenses incurred for 510000
Tournament Fund Cricket Tournament
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Donation received for Cricket

Tournament Fund 500000
Less : Expenses incurred
(Max.from the Fund 500000
The NPO has actually incurred Rs.10000 more ………
Income & Expenditure A/c
for the year ended 31st March, 2022, (PY 2021-22), may have
adjustments ….
Particulars Amount Particulars Amount
To Expenses for Cricket Tournament 10000
(510000 – 500000)
Balance Sheet
as on 31st March, 2022,may have ….

Liabilities Amount
Assets Amount

Donation received for Cricket

Tournament Fund 500000
Less : Expenses incurred
(Max.from the Fund 500000
Balance in the Fund NIL
Surplus !!
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses 800000 By Subscriptions received 500000
To Salary 100000 By Donations 200000
By Grants 200000
Surplus (As income > expenses) 100000 By Interests on FDs 100000
Total 1000000 Total 1000000
Taxability of ‘Surplus’ !!
‘Surplus’ of NPOs are governed by the …..

Principles of Mutuality
As the surplus is ploughed back into the same socially
useful activities, the NPO cannot be said to be
carrying out commercial activities in the nature of
trade, commerce or business.
The fact that the carrying on of socially useful
activities results in a surplus does not mean that
the NPO exists for profit.
‘Profit’ means that owners have a right to withdraw
the surplus for any purpose including personal
purpose.
There are no owners in an NPO.
As such the question of withdrawing the ‘Surplus’
does not arise.
NPOs of public importance are covered
u/s.10(23C) of the Income Tax Act, 1961
 Area of Activities

Education Medical
 In the Area of :

Education
 Solely educational purpose NPOs :

Govt. Educational Other than Govt.

Organization Educational Organization
 Solely educational purpose NPOs :

Govt. Educational
Organization
Not for Profit …… u/s.10(23C)(iiiab)
• Wholly Govt. financed
• University
• Other educational Institutions
• No requirement of registration by the Deptt.
• Income is Exempt
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Govt Grant received Any amount
To Salary

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Govt Grant received Any amount
To Salary

Surplus (As income > expenses) XXX

Total Total

Exempt Income
Solely educational purpose NPOs :

Other than Govt.

Educational Organization
Not for Profit …… u/s.10(23C)(iiiad)
• Other than Govt.
• University
• Other educational Institutions
• If aggregate annual receipts is upto 5 Cr.
• No requirement of registration by the Deptt.
• Income is Exempt
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Aggregate of Receipts 5 Crores
To Salary

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Aggregate of Receipts 5 Crores
To Salary

Surplus (As income > expenses) XXX

Total Total

Exempt Income
Area of Activities

Medical
 Solely medical purpose NPO :

Govt. medical Other than Govt.

Organizations medical Organizations
 Solely medical purpose NPOs :

Govt. medical
Organizations
Not for Profit …… u/s.10(23C)(iiiac)
• Wholly Govt. financed
• Hospital & other Institutions
• For reception and treatment of mental
defectiveness/convalescence/requiring medical
attention or rehabilitation
• No requirement of registration by the Deptt.
• Income is Exempt
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Govt Grant received Any amount
To Salary

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Govt Grant received Any amount
To Salary

Surplus (As income > expenses) XXX

Total Total

Exempt Income
Solely medical purpose NPOs:

Other than Govt.

medical Organizations
Not for Profit …… u/s.10(23C)(iiiae)
• Hospital & other Institutions
• For reception and treatment of mental
defectiveness/convalescence/requiring medical
attention or rehabilitation
• If aggregate annual receipts is upto 5 Cr.
• No requirement of registration by the Deptt.
• Income is Exempt
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Aggregate of Receipts 5 Crores
To Salary

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Aggregate of Receipts 5 Crores
To Salary

Surplus (As income > expenses) XXX

Total Total

Exempt Income
A different angle !!
Surplus of Trusts !!
 Trusts
….. Which are established for :

Charitable purpose
 Trusts
….. Which are established for :

Charitable purpose OR
 Trusts
….. Which are established for :

Charitable purpose OR Religious purpose

These Trusts may …..
 These Trusts may …..

Have income from a

property held under the
Trust
 These Trusts may …..

Have income from a Receive Voluntary

property held under the contributions
Trust
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

By Income from the Property Any Amt

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

By Income from the Property Any Amt

By Voluntary Contributions received Any Amt

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Income from the Property Any Amt
To Salary etc
By Voluntary Contributions received Any Amt

Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Income from the Property Any Amt
To Salary etc
By Voluntary Contributions received Any Amt
To Surplus XXX
Total Total
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Income from the Property Any Amt
To Salary etc
By Voluntary Contributions received Any Amt
To Surplus XXX
Total Total

Exempt Income
Income & Expenditure A/c for the year ….

Particulars Amount Particulars Amount

To Expenses By Income from the Property Any Amt
To Salary etc
By Voluntary Contributions received Any Amt
To Surplus XXX
Total Total

Exempt Income , subject to conditions

We shall discuss these
conditions in due course ….