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Accountancy > Accounting for Not-for-Profit Organisations > Meaning, Characteristics and Accounting for Non Profit Organizations
Accounting for Not-for-Profit Organisations

Meaning, Characteristics and Accounting for Non Profit Organizations

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.

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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.

Browse more Topics under Accounting For Not For Profit Organisations

Characteristics of Not-for-Profit Organizations

  1. 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.
  2. Members: These organisations are formed as charitable trusts or societies. The subscribers to these organisations are their members.
  3. Management: The managing committee or the executive committee manages these organisations. The members elect the committee.
  4. Source of Income: The major sources of income of not-for-profit organisations are subscriptions, donations, government grants, legacies, income from investments, etc.
  5. Surplus: The surplus generated in the due course is distributed among its members.
  6. Reputation: These organisations earn their reputation or goodwill on the basis of the good work done for the welfare of the public.
  7. 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:

  1. 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.
  2. Income and Expenditure A/c: It is similar to the Profit and Loss A/c and ascertains the surplus or deficit if any.
  3. 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
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misriya
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misriya

is sport expenses included

Agathiyan
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Agathiyan

How to solve income and expenditure

Harsh
Guest
Harsh

To help the receipts and payments account

Harsha
Guest
Harsha

Sir are u going to take class now sir

Bernice Boadi
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Bernice Boadi

Bernice Boadi

Junaid khan
Guest
Junaid khan

Yes

Harsh
Guest
Harsh

Yes

Harsha
Guest
Harsha

Accounts class

Justus Khainga Osama
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Justus Khainga Osama

ofcourse yes

Sudarshini
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Sudarshini

Is sports material are included

vinay
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vinay

if the organisation is sports club the sports equipment is included in the balance sheet not the sports material
if its not a sports club then sports material is included in the balance seet

Ganesh
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Ganesh

No, sports materials is recurring natures so it is appear on I&E a/c

Priyanka
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Priyanka

No this is include in income and expenditure acc

Agathiyan
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Agathiyan

How to solve income and expenditure

vinay
Guest
vinay

the recurring expenses during the accounting period are considered in the income and expenditure

Sruthi
Guest
Sruthi

Where the match expenses will appear

Harsh
Guest
Harsh

In the match fund in the closing balance sheet

anthony kilonzo
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anthony kilonzo

Hi Sruthi u have done a good work keep it up,, your work is presentable,,,,,,

Harshit
Guest
Harshit

If government grant not a specific purpose so how to adjust in income and expenditure account

Nivya Felix
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Nivya Felix

Is purchase and sale of asset are taken?

brohammed saifullah aboodie
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brohammed saifullah aboodie

hola minions

Denis
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Denis

I would like to know whether accrued expenses are included in income and expenditure account

Rithika
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Rithika

Yes, accrued incomes and expenses are included in income and expenditure account.

Rithika
Guest
Rithika

Are credit transactions included in income and expenditure account?

Cactusqueen
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Cactusqueen

Should the costs of refreshments be added to the expenses of a sportclub?

Nedrim
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Nedrim

The above sum is wrong the left side (expenditure column) does not seem right

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