Accounting for Not-for-Profit Organisation (NPO)

Understanding NPOs and their Financial Statements

A Not-for-Profit Organisation (NPO) is an entity established for rendering services to its members and to the public in general. Their main objective is not to earn profit. Examples include clubs, charitable institutions, schools, religious organisations, and trade unions. Since their primary motive is service, the final accounts they prepare are designed to show how their funds were generated and utilized for their objectives, rather than to calculate profit.

The main financial statements prepared by an NPO are:

1. Receipts and Payments Account: This is a summary of the cash book for a given period. It starts with the opening cash and bank balances and ends with the closing cash and bank balances. It records all cash receipts and payments, whether they are of capital or revenue nature, and irrespective of the accounting period they relate to (current, previous, or future). It operates on a cash basis and is a Real Account.
2. Income and Expenditure Account: This account is the equivalent of the Profit and Loss Account for a for-profit entity. It is prepared on an accrual basis to ascertain the surplus (excess of income over expenditure) or deficit (excess of expenditure over income) for the current accounting period. It only includes revenue items pertaining to the current year. It is a Nominal Account.
3. Balance Sheet: Just like any other entity, the Balance Sheet of an NPO shows its financial position (assets and liabilities) on a specific date. The key difference is the presence of a 'Capital Fund' or 'General Fund' instead of a 'Capital Account'. This fund represents the accumulated surpluses of the organisation.

Key Terminology in NPO Accounting

Subscriptions

The primary source of income for most NPOs, paid by members periodically. Only the subscription amount related to the current year is shown as income in the Income and Expenditure Account.

Donations

Funds received from the public or other entities. They can be 'General' (treated as revenue income) or 'Specific' (for a particular purpose, treated as a liability until used for that purpose).

Legacy

An amount received by an NPO as per the will of a deceased person. It is a non-recurring, large amount and is generally treated as a capital receipt, added directly to the Capital Fund.

Life Membership Fees

A lump-sum amount paid by a member to become a member for life. It is a capital receipt and is credited directly to the Capital Fund.

Entrance/Admission Fees

Fees paid by a person at the time of becoming a member. Its treatment varies: some NPOs treat it as a revenue receipt, while others treat it as a capital receipt. In the absence of specific instructions, it is usually treated as revenue income.

Capital Fund (General Fund)

This represents the accumulated surplus of income over expenditure of the NPO. It is the equivalent of the capital account in a proprietorship or partnership. It is calculated as: Total Assets - External Liabilities.

Steps to Prepare Income & Expenditure A/c from Receipts & Payments A/c

1. Step 1: Analyze the Receipts and Payments Account — Start with the given Receipts and Payments Account and all additional information (adjustments) regarding outstanding/prepaid expenses and accrued/unearned incomes.
2. Step 2: Exclude Capital Items and Balances — Ignore the opening and closing balances of cash and bank. Also, exclude all capital receipts (like legacies, life membership fees, specific donations) and capital payments (like purchase of fixed assets or investments). These will go to the Balance Sheet.
3. Step 3: Adjust Revenue Receipts for the Current Period — Take all revenue receipts (like subscriptions, general donations, rent received) from the debit side of the R&P A/c. Adjust them based on the additional information to find the amount that pertains ONLY to the current year. For example, for subscriptions: Total Received - (Received for Previous Year) - (Received for Next Year) + (Outstanding for Current Year).
4. Step 4: Adjust Revenue Payments for the Current Period — Take all revenue payments (like salaries, rent, printing) from the credit side of the R&P A/c. Adjust them to find the expense for the current year. For example, for salaries: Total Paid + (Outstanding for Current Year) - (Outstanding for Previous Year) + (Prepaid in Previous Year) - (Prepaid in Current Year).
5. Step 5: Include Non-Cash Items — Include non-cash expenses like Depreciation on assets, Loss on Sale of an Asset, or provisions for bad debts. Also include non-cash incomes like Profit on Sale of an Asset. These are not in the R&P A/c but are crucial for the I&E A/c.
6. Step 6: Determine Surplus or Deficit — Total the income side (credit) and the expenditure side (debit) of the Income and Expenditure Account. If Income > Expenditure, the difference is 'Surplus'. If Expenditure > Income, the difference is 'Deficit'. The Surplus or Deficit is then transferred to the Capital Fund in the Balance Sheet.

Worked Example: Calculation of Subscription Income

• Problem: From the following information, calculate the amount of subscriptions to be credited to the Income and Expenditure Account for the year ending 31st March, 2023.

  • Subscriptions received during the year 2022-23: ₹2,50,000
  • Subscriptions outstanding on 31st March, 2022: ₹50,000
  • Subscriptions outstanding on 31st March, 2023: ₹35,000
  • Subscriptions received in advance on 31st March, 2022: ₹25,000
  • Subscriptions received in advance on 31st March, 2023: ₹30,000

  Solution:

  We need to find the subscription income for the current year (2022-23).

  Step 1: Start with the total subscriptions received during the year.
  Total subscriptions received = ₹2,50,000

  Step 2: Adjust for outstanding subscriptions.

  • Subtract the outstanding amount from the previous year (as it's included in this year's receipts but belongs to last year's income): - ₹50,000
  • Add the outstanding amount for the current year (as it's this year's income but not yet received): + ₹35,000

  Step 3: Adjust for advance subscriptions.

  • Add the advance received in the previous year for the current year (as it belongs to this year's income): + ₹25,000
  • Subtract the advance received in the current year for the next year (as it's not this year's income): - ₹30,000

  Step 4: Calculate the final amount.
  Calculation: ₹2,50,000 - ₹50,000 (Outstanding Previous Year) + ₹35,000 (Outstanding Current Year) + ₹25,000 (Advance Previous Year) - ₹30,000 (Advance Current Year)
  = ₹2,30,000

  Final Answer: The amount of subscriptions to be credited to the Income and Expenditure Account for the year ending 31st March, 2023, is ₹2,30,000.

Exam Tips and Common Mistakes

1. Confusing Capital vs. Revenue Items: This is the most common error. Remember, recurring items (subscriptions, salaries, rent) are revenue. Non-recurring, long-term items (purchase of building, life membership fees, legacy) are capital. Only revenue items go into the Income & Expenditure Account.

2. Forgetting Non-Cash Expenses: The Receipts & Payments Account only shows cash transactions. Students often forget to include non-cash items like depreciation on fixed assets or loss on sale of assets in the Income and Expenditure Account. Always check the additional information for these adjustments.

3. Incorrect Treatment of Special Funds: If there is a 'Tournament Fund' or 'Building Fund', all incomes related to it (e.g., interest on Tournament Fund Investments) and all expenses related to it (e.g., tournament expenses) must be adjusted within that fund on the Liabilities side of the Balance Sheet. They should NOT be shown in the Income & Expenditure Account.

4. Calculation of Consumables: When calculating the cost of consumables (like stationery or sports materials consumed), use the formula: Opening Stock + Purchases - Closing Stock. Be careful to calculate the 'Purchases' figure correctly if payments to creditors and opening/closing creditors are given.

Board Exam Tip: Always prepare working notes for complex calculations like 'Subscriptions for the year' and 'Cost of consumables'. This shows your method clearly and can fetch you partial marks even if the final answer is incorrect.

Practice Questions with Solutions

• Q: How will the following items be treated while preparing the financial statements of a club for the year ending 31st March 2023?

  • Tournament Fund as on 1st April 2022: ₹80,000
  • Tournament Fund Investments: ₹80,000
  • Income from Tournament Fund Investments: ₹8,000
  • Tournament Expenses: ₹12,000

  A: Step 1: A 'Tournament Fund' is a specific fund. All incomes and expenses related to the tournament must be adjusted within this fund itself, not in the Income and Expenditure Account.
  Step 2: The opening balance of the fund is ₹80,000. Add the income earned on its investments to it: ₹80,000 + ₹8,000 = ₹88,000.
  Step 3: Subtract the tournament expenses from the fund balance: ₹88,000 - ₹12,000 = ₹76,000.
  Final Answer: On the Liabilities side of the Balance Sheet, 'Tournament Fund' will be shown at ₹76,000. 'Tournament Fund Investments' of ₹80,000 will be shown on the Assets side.

• Q: From the following data, calculate the amount of stationery consumed during the year 2022-23.

  • Stock of Stationery on 1.4.2022: ₹3,000
  • Creditors for Stationery on 1.4.2022: ₹2,000
  • Amount paid for stationery during 2022-23: ₹10,800
  • Stock of Stationery on 31.3.2023: ₹500
  • Creditors for Stationery on 31.3.2023: ₹1,300

  A: Step 1: First, calculate the credit purchases of stationery for the year. We can prepare a Creditors for Stationery Account or use the formula: Purchases = Amount Paid + Closing Creditors - Opening Creditors. Purchases = ₹10,800 + ₹1,300 - ₹2,000 = ₹10,100.
  Step 2: Now, calculate the stationery consumed using the formula: Consumed = Opening Stock + Purchases - Closing Stock.
  Step 3: Substitute the values: Stationery Consumed = ₹3,000 + ₹10,100 - ₹500.
  Final Answer: The amount of stationery consumed to be debited to the Income and Expenditure Account is ₹12,600.

• Q: A club received ₹20,000 as entrance fees during the year 2022-23. According to the club's policy, 40% of the entrance fees is to be capitalized. How will you show this item in the final accounts?
  A: Step 1: Calculate the portion of entrance fees to be capitalized (treated as a capital receipt). Capitalized Amount = 40% of ₹20,000 = ₹8,000.
  Step 2: This capitalized portion is added to the Capital Fund in the Balance Sheet.
  Step 3: The remaining portion is treated as revenue income. Revenue Amount = ₹20,000 - ₹8,000 = ₹12,000. (or 60% of ₹20,000).
  Final Answer: ₹12,000 will be credited to the Income and Expenditure Account. ₹8,000 will be added to the Capital Fund on the liabilities side of the Balance Sheet.

• Q: Calculate the Opening Capital Fund of a Sports Club from the following information as on 1st April 2022.

  • Cash in Hand: ₹5,000
  • Bank Balance: ₹25,000
  • Furniture: ₹60,000
  • Outstanding Subscriptions: ₹7,000
  • Bank Loan: ₹40,000
  • Outstanding Salaries: ₹3,000

  A: Step 1: The Opening Capital Fund is calculated by preparing an Opening Balance Sheet. It is the balancing figure (Assets - Liabilities).
  Step 2: List all assets on 1st April 2022. Assets = Cash in Hand (₹5,000) + Bank Balance (₹25,000) + Furniture (₹60,000) + Outstanding Subscriptions (₹7,000). Total Assets = ₹97,000.
  Step 3: List all liabilities on 1st April 2022. Liabilities = Bank Loan (₹40,000) + Outstanding Salaries (₹3,000). Total Liabilities = ₹43,000.
  Step 4: Calculate the Capital Fund. Capital Fund = Total Assets - Total Liabilities. Capital Fund = ₹97,000 - ₹43,000 = ₹54,000.
  Final Answer: The Opening Capital Fund as on 1st April 2022 is ₹54,000.

Frequently Asked Questions