Introduction to Non Profit Accounting
There are many organisations which are not run with the objective of earning profit. In this article we will learn how to do accounting for non profit organisations (which we sometimes refer to as Non Profit Accounting). Examples of non profit organisations are:
- Sports and Social Clubs
- Unions and Associations
- Co-operative Societies
- Charitable Institutions etc.
They are made to render services to the society or their members. They do not distribute any share of profit or dividend to members. They usually conduct an Annual General Meeting of members.
In Spite of having a non profit motive, these organisations do have financial transactions which need to be accounted for. These records are then used to present summarised reports to its members at its annual general meeting.
How Records Are Maintained In Non Profit Organisations?
The revenue of non profit seeking organisations is usually generated from members’ subscriptions, donations, fees etc. Expenditure is incurred in providing services to its members for participation and enjoyment.
Unless an organisation is very large, complete double entry system is not followed. Mostly, the accounting for non profit organisations is done by maintaining a system of incomplete records (i.e under Single Entry System).
In non profit accounting, a Cash Book is maintained to record the receipts and payments during a period. No other books of accounts is maintained.
Which Accounts Are Prepared by Non Profit Organisations?
In Non Profit Accounting, generally the following accounts are prepared at period end:
- Receipts and Payments Account (A substitute of Cash and Bank Account)
- Income and Expenditure Account (A Substitute of Profit and Loss Account); and
- Balance Sheet
Receipts and Payments Account
- It is an account which contains summary of all the Cash and Bank transactions made by the organisation during a particular financial period.
- It starts with opening balances of Cash and Bank.
- All receipts in cash and via cheques (i.e. through the bank account) are debited.
- All payments via cash and cheques are credited.
- It ends with the closing cash and bank balances.
- All cash and bank transactions are recorded in this account. No distinction is made between capital and revenue items. No adjustment is made for outstanding and prepaid amounts as per the accrual concept.
Income and Expenditure Account
- This account is prepared in place of Profit and Loss Account. The name Profit and Loss Account cannot be used here since the organisation does not have profit motive.
- This account is prepared on accrual basis. All revenue expenses related to the particular period are debited and revenue incomes of the same period are credited.
- All expenses and incomes of capital nature are excluded.
- If the incomes exceed the expenses, i.e. the balance is of credit nature, then it is called Surplus (instead of profit). If the expenses exceed the incomes, i.e. the balance is of debit nature, it is called Deficit (instead of Loss).
- The Surplus or Deficit is transferred to Capital Fund in the balance sheet.
The Balance Sheet is prepared in the same way as that of a trading concern. There is no notable difference.
Some Important Points To Be Noted
- Donation received for a specific purpose should be credited to a Special Fund. Example, if donation is received for construction of a building, it should be credited to Building Fund account.
- For other donations, rules of the concern should be followed.
- If nothing is mentioned, donations of non-recurring nature should be credited to Capital Fund. Donations of recurring nature should be credited to Income and Expenditure Account.
- Legacy is a kind of donation received according to a will made by a deceased person. If legacy is received for specific purpose then it is to be credited to a special fund. Otherwise it may be added to the capital fund.
Entrance or Admission Fees
- The rules made by the concern for treatment of admission fees should be seen.
- If there are no rules, such fees may be added with Capital Fund.
- However, if such fees are of small amounts and cover the expenses of admission only, it may be credited to Income and Expenditure Account.
- Members usually pay subscription to continue their membership with the concern. The subscription may be annual or lifetime.
- Annual subscription should be credited to Income and Expenditure Account on accrual basis.
- Life Membership Subscription is usually credited to a separate account and is shown as a liability. An amount is apportioned out of it every year on proportionately and credited to the Income and Expenditure Account. This amount is also deducted from the liability.
- The balance of life membership subscription of a member is carried forward till it is fully exhausted.
- If any member dies beforehand, the balance of his life membership subscription is transferred to Capital Fund .
How to Prepare Accounts for a Non-Profit Organisation
As discussed above, you will have to prepare the Income and Expenditure Account and the Balance Sheet at the end of a particular period. In some cases, the Receipts and Payments Account may also have to prepared.
However in most of the cases the Receipts and Payments Account would be provided with information about Assets and Liabilities and other adjustments. This is because all concerns generally maintain records of all cash and bank transactions.
So preparation of Receipts and Payments Account is not an issue. The main task is to prepare an Income and Expenditure Account and a Balance Sheet from the given Receipts and Payments Account.
So, How to Convert a Receipts and Payments Account into Income and Expenditure Account?
Follow these steps:
- Exclude opening and closing balances of cash in hand and cash at bank.
- Eliminate all items of receipts and payments of capital nature.
- Exclude all revenue receipts and payments relating to the previous and future periods.
- Make adjustments for all accrued incomes and expenses.
- Make suitable provisions for depreciation, bad debts etc.
How to Prepare a Balance Sheet
- First check whether the opening Capital Fund is given or not. If not given then we will have to prepare an opening Balance Sheet in the workings. Record opening cash and bank balances as given in the Receipts and Payments Account. Also record other opening assets and liabilities as given in the information. The excess of assets over liabilities will give us the Capital Fund.
- Prepare the closing Balance Sheet at the end of the period with
- Closing Cash and Bank balances as given in the Receipts and Payments Account.
- Other closing assets and liabilities as given in the information.
- Capital Receipts and Payments not considered in the Income and Expenditure Account.
- Make other adjustments asked for.
- Add Surplus to or deduct Deficit (as derived from the Income and Expenditure Account) from Opening Capital Fund to arrive at the Closing Capital Fund.
So that was all about Non Profit Accounting. The more you practice problems from this topic, the more you will master it.