Accounting: Not-For-Profit Organisations: Introduction and Characteristics of Not-For-Profit Organisations (For CBSE, ICSE, IAS, NET, NRA 2022)

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An Introduction

We need many goods or services in our daily life and we can most of them by paying some money, from organisations which work for profit. There are people who do not afford their daily needs. There are some organisations which work for the betterment of the society. They render their services for free i.e.. not for profit.

Not-For-Profit Organisation

Not-for-Profit Organisation (NPOs) is an organization which works for the benefit of the society, by rendering free services to its members and general public.

Not-For-Profit Organisation

Examples: Charitable institutions, Welfare Societies, Public Libraries, Schools, Hospitals, Sports Club etc.

Main Objective of NPO: To help their community members and public in general.

Main Sources of Income

  • Admission fees
  • Subscriptions fees
  • Donations
  • Grant-in-aid by governments etc.

Characteristics of NPOS

  • Their objective is not to earn profit but to serve the society.
  • These do not buy or sell any goods for profit. Hence, they do not get any income from sale of goods or services.
  • The main sources of income are admission fees, subscription fees, donations, grant-in-aid etc.
  • These are managed by group of people i.e.. managing committee who were elected members.
  • NPO is also a separate entity and distinct from its members
  • NPOs also maintain accounts for their activities as like profit organizations do.
  • NPOs also follow the accounting principles and procedures.
  • Surplus of NPOs do not distributed among its members.

Financial Statements Prepared by NPOS

  • Receipts and Payments Account
  • Income and Expenditure Account
  • Balance Sheet

What is Need of Accounting in NPOS?

Not-for-Profit organisations do not trade in goods or provide services with a profit motive. So, they need not maintain all kinds of accounting books as profit-motive organisations do. Anyhow, NPOs need to maintain certain accounts in order to meet these objectives –

  • To evaluate their performance in terms of achieving their goals for which they were created.
  • To know whether they are using the funds efficiently, effectively or not.
  • To meet the requirements of the government.
  • For obtaining grants from governments and other groups or individuals.
  • To submit annual reports to the Registrar with whom they are registered.
  • To provide information regarding its activities to the members and general people.

Receipts and Payments Account

It is a summarized cash book for a given period. It will be used to prepare Income and Expenditure Account and Balance Sheet of a NPO.

Features of Receipts and Payments Account:

  • It is prepared at the end of the year by considering all cash transactions.
  • It records all receipts on debit side and all payments on credit side.
  • It contains information under various heads.
  • It records both receipts and payments in cash whether they are capital in nature or revenue in nature.
  • It records all occurred transactions in this year irrespective of the period they relate to.
  • It begins with opening balance and ends with closing balance.
  • It serves the purpose of Trial Balance and useful to prepare additional financial statements i.e.. Income and Expenditure A/c and Balance Sheet, along with additional information.

Note: Very small NPOs prepare only Receipts and Payments Account. They do not prepare Income and Expenditure Account and Balance Sheet.

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