Usually, every business undertakes economic activities with a motive to earn a profit. But, there are some organizations which work with a motive to provide service to its members as well as to the general public. The trustees of these organizations are fully accountable to the members and the public. Hence, Accounting for Non-Profit Organizations become necessary. Examples of such organisations are charitable institutions, religious organisations, clubs, educational institutions, trade unions, etc.
Meaning, Characteristics, and Accounting for Non-Profit Organizations
Not-for-Profit Organisations are organisations which are set up for the welfare of the society or for the promotion of art and culture in the society. These are usually set up as a charitable institution with the service motive. The trustees manage these organisations. The members of the organisation elect the trustees. The Not-for-Profit Organisations raise funds from its members as well as from the general public for meeting their objectives.
The main motive of these organisations is to provide service. However, they may earn profits in the due course. Generally, these organisations do not manufacture, purchase or sell goods or provide services. Thus, they do not need to prepare Trading and Profit and Loss A/c. They credit the funds received to the Capital Fund or General Fund A/c.
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Characteristics of Not-for-Profit Organizations
- Service Motive: These organisations have a motive to provide service to its members or a specific group or to the general public. They provide services free of cost or at a bare minimum price as their aim is not to earn the profit. They do not discriminate among people on the basis of their caste, creed or colour. Examples of services provided by them are education, food, health care, recreation, sports facility, clothing, shelter, etc.
- Members: These organisations are formed as charitable trusts or societies. The subscribers to these organisations are their members.
- Management: The managing committee or the executive committee manages these organisations. The members elect the committee.
- Source of Income: The major sources of income of not-for-profit organisations are subscriptions, donations, government grants, legacies, income from investments, etc.
- Surplus: The surplus generated in the due course is distributed among its members.
- Reputation: These organisations earn their reputation or goodwill on the basis of the good work done for the welfare of the public.
- Users of accounting information: The users of the accounting information of these organisations are present and potential contributors as well as the statutory bodies.
Accounting for Non-Profit Organisations
As we know that the not-for-profit organisations do not trade in goods or provide services with a profit motive. But, they also require to keep proper records of incomes, expenses, assets, and liabilities. Their major source of income is donations, subscriptions, grants, etc. Therefore, most of their transactions are in cash or through the bank account.
They need to keep proper books firstly because they are accountable to the members and the contributors and secondly because the law requires them to maintain proper books so that the government can keep proper control over the grants. Also, proper accounting reduces the risk of fraud and embezzlement. In addition to the ledgers and cash book, they are also required to maintain a stock register. Also, in a Stock register, a complete record of all fixed assets and consumables is maintained.
In accounting for non-profit organizations, instead of maintaining a Capital A/c, these organizations maintain Capital Fund or General Fund A/c. They credit this account with the surplus, life membership fees, donations, legacies, etc.
The not-for-profit organisations also require to prepare the final accounts or the financial statements at the end of the accounting year as per the accounting principles. The final accounts of these organisations consist of:
- Receipts and Payments A/c: It is the summary of the cash and bank transactions. It helps in the preparation of Income and Expenditure A/c and Balance Sheet. We also need to submit it to the Registrar of Societies along with Income and Expenditure A/c and Balance Sheet.
- Income and Expenditure A/c: It is similar to the Profit and Loss A/c and ascertains the surplus or deficit if any.
- Balance Sheet: We prepare it in the same manner as the Balance Sheet of concerns with a profit motive.
Solved Example For You
Q: Ashraya is an organisation that works for the welfare and betterment of street children. It sponsors their food and clothing. It also provides basic education to children. The sources of its income are donations, subscriptions and government grants. Identify the type of organization stating the reasons thereof. Also, mention the accounting procedure that it shall follow.
Ans: Ashraya is a non-profit organization. It works for the welfare of children and society. Also, the sources of its income are donations, grants, and subscriptions from the members. Hence, it is clear that it works on a service motive and not for profit.
However, non-profit organizations also need to maintain proper books of accounts. The financial statements help them in acquiring donations from the present and future contributors. Also, the financial statements help them to receive grants from various authorities.
The following are the financial statements that they prepare at the end of the year:
- Receipts and Payments A/c
- Income and Expenditure A/c
- Balance Sheet