Accounts of non for profit organizations in accounting
Meaning of non for profit organization
There are certain associations which are formed not to earn profit but to provide services to its members and to public. Such organization include clubs, hospitals, libraries ,schools ,religious institutes,charitable institutes and literacy societies. Etc. These nonprofit seeking entities exist with a primary motive of providing service. Such as club provide sports and recreational facilities a hospital renders medical services a literacy society promotes and culture and association may also be formed to protect the right of its members .Though the main source of income such organization is membership subscription donation and grants. They may also undertake trading activities in order to earn profit .such profit is also used for the furtherance of the goals of the organization.
As main aim of this organization is not earn profit they do no prepare trading and profit and loss a/c
Features of non profit organization
Main objective is provide service
such organization provide service to a specific group or the public at large hen main aim these organization is to provide service either free of cost or at normal rates and not to earn profit examples are education ,health etc.
Form of organization
These organizations are set up as charitable trusts or societies and subscribers to these organization are called members.
Separate entity form its members
Not for profit organization are treated as separate entity distinct form its members .In other words its is not effected by admission of new members and the death or insolvency of an existing members.
Managed by elected members
These organization are usually managed by a managing or executive committee elected by its members.
Major sources of income
The major sources of their income usually are subscription form its members, donation, financial assistance from government in the form of grant in aid and income from investment.
Surplus not distributed among its members
Current years surplus in the form of excess of income over expenditure is not distributed amongst its members .it is added to capital fund.
These organization also have to maintain proper accounts to meet the legal requirement and to exercise proper control utilization these foods.
Form of accounts
They prepare their financial statement at the end of each accounting period in the form of receipt and payment accounts, income and expenditure accounts and balance sheet.
Financial Statement of Non for Profit Organization
Not for profit organization also prepare their financial statement more or less on the line of profit seeking organization .The financial statement of not for profit organization includes the following statement
- The receipt and payment accounts.
- The income and payment accounts.
- The balance sheets.
Receipt and payment accounts
This accounts is merely a summary of the transaction appearing in the cash book According to William pickles receipt and payment accounts is nothing more than a summary of cash book (cash or bank transaction) over certain period analyzed and classified under suitable headings. It is the form of accounts most preparing the results of the year’s working.
Thus, Receipt and Payment Account gives summarized picture of various receipts and payments, irrespective of whether they pertain to the current period, previous period or succeeding period or whether they are of capital or revenue nature. It may be noted that this account does not show any non-cash item like depreciation.
The opening balance in Receipt and Payment Account represents cash in hand/cash at bank which is shown on its receipts side and the closing balance of this account represents cash in hand and bank balance as at the end of the year, which appear on the credit side of the Receipt and Payment Account. However, if it is bank overdraft at the end it shall be shown on its debit side as the last item. Let us look at the cash book of Golden Cricket Club given in the example to show how the total amount of each item of receipt and payment has been worked out.
Steps in the preparation of Receipt and Payment Account
- Take the opening balances of cash in hand and cash at bank and enter them on the debit side. In case there is bank overdraft at the begining of the year, enter the same on the credit side of this account.
- Show the total amounts of all receipts on its debit side irrespective of their nature (whether capital or revenue) and whether they pertain to past, current and future periods.
- Show the total amounts of all payments on its credit side irrespective of their nature (whether capital or revenue) and whether they pertain to past, current and future periods.
- None of the receivable income and payable expense is to be entered in this account as they do not involve inflow or outflow of cash.
- Find out the difference between the total of debit side and the total of credit side of the account and enter the same on the credit side as the closing balance of cash/bank. In case, however, the total of the credit side is more than that of the total of the debit side, show the difference on the debit as bank overdraft and close the account.
Income and expenditure accounts
It is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared on accrual basis in case of the business organisations. It includes only revenue items and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves
the same purpose as the profit and loss account of a business organization does. All the revenue items relating to the current period are shown in this account, the expenses and losses on the expenditure side and incomes and gains on the income side of the account. It shows the net operating result in
the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess of expenditure over income), which is transferred to the capital fund shown in the balance sheet.
Special Features of Income and expenditure Accounts
- Nature of item recorded in it: Only items of revenue nature are recorded in it .All items of capital nature are ignored while preparing it.For example amount received from the sale of furniture will be recorded in it.
- Nature of Accounts: It is nominal account and hence the rule of nominal account ie debit all expense or losses and credit all income and gains is followed while preparing it.
- Omission of opening and closing balance of cash : No opening and closing balance of cash and bank are recorded in it.
- Adjustment : This accounts is prepared in the same manner in which a profit and loss account is prepared .As such all adjustment relating to the current year such as depreciation ,outstanding expenses prepaid expenses earned income etc. are taken into consideration while preparing the income and expenditure accounts.
- It record income and expenditure of current year or period:
- It excludes all item s of income and expenditure which do not pertain to the current period .In other words all items to previous year and future year excluded while preparing it.
- Purpose :
This closing balance of this statement reveals surplus or deficit .If the credit side exceeds the debit side it reveals surplus on the other hand. If the debit side exceeds the credit side it reveals deficit. The surplus is added to capital fund and the deficit is deducted from it.
Steps in the Preparation of Income and Expenditure Account
Following steps may be helpful in preparing an Income and Expenditure Account from a given Receipt and Payment Account:
- Persue the Receipt and Payment Account thoroughly.
- Exclude the opening and closing balances of cash and bank as they are not an income.
- Exclude the capital receipts and capital payments as these are to be shown in the Balance Sheet.
- Consider only the revenue receipts to be shown on the income side of Income and Expenditure Account. Some of these need to be adjusted by excluding the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet received.
- Take the revenue expenses to the expenditure side of the Income and Expenditure Account with due adjustments as per the additional information provided relating to the amounts received in advance and those not yet received.
- Consider the following items not appearing in the Receipt and Payment Account that need to be taken into account for determining the surplus/ deficit for the current year :
(a) Depreciation of fixed assets.
(b) Provision for doubtful debts, if required.
(c) Profit or loss on sale of fixed assets
‘Not-for-Profit’ Organizations prepare Balance Sheet for ascertaining the financial position of the organization. The preparation of their Balance Sheet is on the same pattern as that of the business entities. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side. However, there will be a Capital Fund or General Fund in place of the Capital and the surplus or deficit as per Income and Expenditure Account which
is either added to/deducted from the capital fund, as the case may be. It is also a common practice to add some of the capitalized items like legacies, entrance fees and life membership fees directly in the capital fund.
Besides the Capital or General Fund, there may be other funds created for specific purposes or to meet the requirements of the contributors/donors such as building fund, sports fund, etc. Such funds are shown separately in the liabilities side of the balance sheet.
Some times it becomes necessary to prepare Balance Sheet as at the beginning of the year in order to find out the opening balance of the capital/general fund.
Preparation of Balance Sheet
The following procedure is adopted to prepare the Balance Sheet:
- Take the Capital/General Fund as per the opening balance sheet and add surplus from the Income and Expenditure Account. Further, add entrance fees, legacies, life membership fees, etc. received during the year.
- Take all the fixed assets (not sold/discarded/or destroyed during the year) with additions (from the Receipts and Payments account) after charging depreciation (as per Income and Expenditure account) and show them on the assets side.
- Compare items on the receipts side of the Receipts and Payments Account with income side of the Income and Expenditure Account. This is to ascertain the amounts of: (a) subscriptions due but not yet received:
(b) incomes received in advance; (c) sale of fixed assets made during the year; (d) items to be capitalized (i.e. taken directly to the Balance Sheet) e.g. legacies, interest on specific fund investment and so on.
- Similarly compare, items on the payments side of the Receipt and Payment Account with expenditure side of the Income and Expenditure Account. This is to ascertain the amounts if:
(a) Outstanding expenses;
(b) prepaid expenses;
(c) Purchase of a fixed asset during the year;
(d) Depreciation on fixed assets;
(e) stock of consumable items like stationery in hand;
(f) Closing balance of cash
in hand and cash at bank as, and so on
Important items relating to nonprofit organization
It is the main source of income of a non profit organization .It will be appearing on the debit side of receipt and payment account and out of it the subscription belonging to the current year will be posted to the credit side of income and expenditure account.
Life membership fees:-
In order to become the member of an organization for the whole of the life some of the members pay the fee in lump sum ie once in their life time.It is receipt of non recurring nature capital receipt since the members will not be required to pay the fees annually. Hence it is not credited to the income an expenditure account but added to the capital fund or shown separately on the liabilities side.
It is fund arising from a bequest or gift ,the income of which is devoted for a specific purpose. Thus it is a capital receipt because it provides a permanent income to the institution.It should be shown on the liabilities side as a separate item.
Entrance fees /admission fees:-
Is is received from the new members apart from the amount of annual subscriptions.Some people favour capitalizing the entrance fee on the ground that it is collected once for all and as such it is not of the recurring nature.
However there are other who argue that though it is paid by each member only once it is received fairly regularly every year an as such should be treated as revenue income.
It may be classified as specific donation and general donation.
a) Specific donation
When donation received is to be utilized for specific purpose ie. Donation for building or donation for providing a swimming pool is is capitalized and shown in the liabilities side of balance sheet.
It can be classified under two head
a) General donation of big amount :
It is shown on the liabilities side of the balance sheet because is non-recurring in nature as the donation of huge amount cannot be expected every year.
b) General donation of small amount
It is shown on the credit side of the income and expenditure account because small donation can be expected every year.
Whether the amount of donation is big or small depends on the size and nature of the institutions.
It is amount which is nonprofit entity receives as per the will of deceased person .It appears on the debit side of the receipt and payment account. This amount is not of recurring nature, and as such it is treated as capital receipt and shown on the liabilities side.
Sale of old assets
It appears on the debit side of receipt and payment account. It is a capital receipt and as such should be transferred to income and expenditure account. However the profit or loss on the side of an asset must be taken the income and expenditure account. For example : if the book value of furniture appearing in the book is 9000 out of which furniture of 1000 is self for Rs 400 the loss of Rs 600 will be taken to the debit side of income and expenditure account .
Sale of Old newspaper and sports materials
It appears on the debit side of receipt and payment accounts an dis transferred to the credit side of income and expenditure account due to the fact that selling the old newspaper and used sports materials like old bats ,balls etc is regular features of any non profit seeking institution.
Payment of honorarium
The amount paid to person who are not the employees of the institutions is called honorarium and is debited to the income and expenditure accounts.