ICAI Notes- Financial Statements of Not-for-Profit Organizations | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


LEARNING OUTCOMES 
FINANCIAL STATEMENTS  
 OF NOT-FOR-PROFIT  
 ORGANISATIONS 
After studying this unit, you would be able to:  
? Understand the meaning of Not-for-profit-organisations and distinction 
between a profit-making organisation and a Not-for-profit-organisation. 
? Accounting for Not-for-profit-organisations. 
? Understand the meaning and technique of preparation of Receipts and 
Payments Account and Income and Expenditure Account and understand 
the distinction between the two Accounts. 
? Learn the technique of preparing Balance Sheet of Not-for-profit-
organisations. 
? Understand the different adjustments and their accounting treatment in 
the books of Not for profit organisations. 
 
 
8
CHAPTER 
   
© The Institute of Chartered Accountants of India
Page 2


LEARNING OUTCOMES 
FINANCIAL STATEMENTS  
 OF NOT-FOR-PROFIT  
 ORGANISATIONS 
After studying this unit, you would be able to:  
? Understand the meaning of Not-for-profit-organisations and distinction 
between a profit-making organisation and a Not-for-profit-organisation. 
? Accounting for Not-for-profit-organisations. 
? Understand the meaning and technique of preparation of Receipts and 
Payments Account and Income and Expenditure Account and understand 
the distinction between the two Accounts. 
? Learn the technique of preparing Balance Sheet of Not-for-profit-
organisations. 
? Understand the different adjustments and their accounting treatment in 
the books of Not for profit organisations. 
 
 
8
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
8.2 
 
 
 
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are 
some of the Sources of incomes for the non-profit organizations which have 
different treatments based on the nature of the receipts. 
1.  INTRODUCTION 
A non-profit organization is a legal accounting entity that is operated for the benefit of the 
society as a whole, rather than for the benefit of a sole proprietor or a group of partners or 
shareholders. The main motive behind the non-profitable organization is to render service to 
the society or the members of the organisation.  
There is difference in the final accounts prepared between the profit making and the non-
profitable organisations. The sources of receipts and payments also vary with the nature of 
the activity that is being carried on by the organisation. Non-profit making organisations such 
as public hospitals, public educational institutions, clubs, Temples, churches etc., as a part of 
their final accounts prepare Receipts and Payments Account and Income and Expenditure 
Account to show periodic performance (either surplus or deficit) and Balance Sheet to show 
financial position at the end of the period. In this Chapter, we shall discuss the technique of 
preparing Receipts and Payments Account, Income and Expenditure Accounts and Balance 
Sheet of not-for-profit organisations.  
The Income and Expenditure Account (non- profitable organisation) is just similar to Profit 
and Loss Account prepared for the profit making organisations but there has been different 
terminology employed for the word Profit as SURPLUS – excess of income over expenditure 
or loss as DEFICIT – excess of expenditure over income. In non-profit making organisations, 
total cash receipts and total cash payments are highlighted through Receipts and Payments 
Account. 
Financial statements of Not-for-profit-Organisations
Receipts and Payments 
Account equivalent to 
Cash Book
Income and Expenditure 
Account equivalent to Profit 
and Loss Account
Balance Sheet
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


LEARNING OUTCOMES 
FINANCIAL STATEMENTS  
 OF NOT-FOR-PROFIT  
 ORGANISATIONS 
After studying this unit, you would be able to:  
? Understand the meaning of Not-for-profit-organisations and distinction 
between a profit-making organisation and a Not-for-profit-organisation. 
? Accounting for Not-for-profit-organisations. 
? Understand the meaning and technique of preparation of Receipts and 
Payments Account and Income and Expenditure Account and understand 
the distinction between the two Accounts. 
? Learn the technique of preparing Balance Sheet of Not-for-profit-
organisations. 
? Understand the different adjustments and their accounting treatment in 
the books of Not for profit organisations. 
 
 
8
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
8.2 
 
 
 
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are 
some of the Sources of incomes for the non-profit organizations which have 
different treatments based on the nature of the receipts. 
1.  INTRODUCTION 
A non-profit organization is a legal accounting entity that is operated for the benefit of the 
society as a whole, rather than for the benefit of a sole proprietor or a group of partners or 
shareholders. The main motive behind the non-profitable organization is to render service to 
the society or the members of the organisation.  
There is difference in the final accounts prepared between the profit making and the non-
profitable organisations. The sources of receipts and payments also vary with the nature of 
the activity that is being carried on by the organisation. Non-profit making organisations such 
as public hospitals, public educational institutions, clubs, Temples, churches etc., as a part of 
their final accounts prepare Receipts and Payments Account and Income and Expenditure 
Account to show periodic performance (either surplus or deficit) and Balance Sheet to show 
financial position at the end of the period. In this Chapter, we shall discuss the technique of 
preparing Receipts and Payments Account, Income and Expenditure Accounts and Balance 
Sheet of not-for-profit organisations.  
The Income and Expenditure Account (non- profitable organisation) is just similar to Profit 
and Loss Account prepared for the profit making organisations but there has been different 
terminology employed for the word Profit as SURPLUS – excess of income over expenditure 
or loss as DEFICIT – excess of expenditure over income. In non-profit making organisations, 
total cash receipts and total cash payments are highlighted through Receipts and Payments 
Account. 
Financial statements of Not-for-profit-Organisations
Receipts and Payments 
Account equivalent to 
Cash Book
Income and Expenditure 
Account equivalent to Profit 
and Loss Account
Balance Sheet
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
8.3 
FINANCIAL STATEMENTS OF NOT FOR 
PROFIT ORGANISATIONS 
2.  NATURE OF RECEIPTS AND PAYMENTS ACCOUNT 
A Receipts and Payments Account is a summary of the cash book without date column. It is 
an elementary form of account commonly adopted by not for profit making concerns such as 
hospitals, clubs, societies, temples, churches etc., for presenting the receipts and payments 
periodically together with the cash balances at the beginning and close of the period. The 
receipts are entered on the left hand side, and payments on the right hand side i.e., the same 
way as they appear in Cash Book. "The main point to be noted here is that- receipts and 
payments account is not based on the accrual system of book keeping as it records all the 
receipts and payments whether capital or revenue, pertaining to the current, previous or future 
periods." 
Features:  
? It is the summary of the cash and bank transactions like cash book, all the receipts 
(capital or revenue) are debited, similarly, all the expenditures (capital or revenue) 
are credited.  
? It starts with opening cash and bank balances and also ends with their closing balances. 
This account is usually not a part of the double entry system as it includes all cash and 
bank receipts and payments, whether they are related to present, past or future 
periods.  
? Surplus or deficit for an accounting period cannot be ascertained from this account, 
since, it shows only the Cash/Bank position and excludes all non cash items. 
ILLUSTRATION 1 
The receipts and payments for the Swaraj Club for the year ended March 31, 2022 were: Entrance 
fees ` 300; Membership Fees ` 3,000; Donation for Club Pavilion ` 10,000, Foodstuff sales  
` 1,200; Salaries and Wages ` 1,200 Purchase of Foodstuff ` 800; Construction of Club Pavilion 
`11,000; General Expenses ` 600; Rent and Taxes ` 400; Bank Charges ` 160.
Cash in hand–April. 1st ` 200, March. 31st ` 350 
Cash in Bank–April. 1st ` 400; March. 31st ` 590 
You are required to prepare Receipts and Payment Account.
 
© The Institute of Chartered Accountants of India
Page 4


LEARNING OUTCOMES 
FINANCIAL STATEMENTS  
 OF NOT-FOR-PROFIT  
 ORGANISATIONS 
After studying this unit, you would be able to:  
? Understand the meaning of Not-for-profit-organisations and distinction 
between a profit-making organisation and a Not-for-profit-organisation. 
? Accounting for Not-for-profit-organisations. 
? Understand the meaning and technique of preparation of Receipts and 
Payments Account and Income and Expenditure Account and understand 
the distinction between the two Accounts. 
? Learn the technique of preparing Balance Sheet of Not-for-profit-
organisations. 
? Understand the different adjustments and their accounting treatment in 
the books of Not for profit organisations. 
 
 
8
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
8.2 
 
 
 
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are 
some of the Sources of incomes for the non-profit organizations which have 
different treatments based on the nature of the receipts. 
1.  INTRODUCTION 
A non-profit organization is a legal accounting entity that is operated for the benefit of the 
society as a whole, rather than for the benefit of a sole proprietor or a group of partners or 
shareholders. The main motive behind the non-profitable organization is to render service to 
the society or the members of the organisation.  
There is difference in the final accounts prepared between the profit making and the non-
profitable organisations. The sources of receipts and payments also vary with the nature of 
the activity that is being carried on by the organisation. Non-profit making organisations such 
as public hospitals, public educational institutions, clubs, Temples, churches etc., as a part of 
their final accounts prepare Receipts and Payments Account and Income and Expenditure 
Account to show periodic performance (either surplus or deficit) and Balance Sheet to show 
financial position at the end of the period. In this Chapter, we shall discuss the technique of 
preparing Receipts and Payments Account, Income and Expenditure Accounts and Balance 
Sheet of not-for-profit organisations.  
The Income and Expenditure Account (non- profitable organisation) is just similar to Profit 
and Loss Account prepared for the profit making organisations but there has been different 
terminology employed for the word Profit as SURPLUS – excess of income over expenditure 
or loss as DEFICIT – excess of expenditure over income. In non-profit making organisations, 
total cash receipts and total cash payments are highlighted through Receipts and Payments 
Account. 
Financial statements of Not-for-profit-Organisations
Receipts and Payments 
Account equivalent to 
Cash Book
Income and Expenditure 
Account equivalent to Profit 
and Loss Account
Balance Sheet
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
8.3 
FINANCIAL STATEMENTS OF NOT FOR 
PROFIT ORGANISATIONS 
2.  NATURE OF RECEIPTS AND PAYMENTS ACCOUNT 
A Receipts and Payments Account is a summary of the cash book without date column. It is 
an elementary form of account commonly adopted by not for profit making concerns such as 
hospitals, clubs, societies, temples, churches etc., for presenting the receipts and payments 
periodically together with the cash balances at the beginning and close of the period. The 
receipts are entered on the left hand side, and payments on the right hand side i.e., the same 
way as they appear in Cash Book. "The main point to be noted here is that- receipts and 
payments account is not based on the accrual system of book keeping as it records all the 
receipts and payments whether capital or revenue, pertaining to the current, previous or future 
periods." 
Features:  
? It is the summary of the cash and bank transactions like cash book, all the receipts 
(capital or revenue) are debited, similarly, all the expenditures (capital or revenue) 
are credited.  
? It starts with opening cash and bank balances and also ends with their closing balances. 
This account is usually not a part of the double entry system as it includes all cash and 
bank receipts and payments, whether they are related to present, past or future 
periods.  
? Surplus or deficit for an accounting period cannot be ascertained from this account, 
since, it shows only the Cash/Bank position and excludes all non cash items. 
ILLUSTRATION 1 
The receipts and payments for the Swaraj Club for the year ended March 31, 2022 were: Entrance 
fees ` 300; Membership Fees ` 3,000; Donation for Club Pavilion ` 10,000, Foodstuff sales  
` 1,200; Salaries and Wages ` 1,200 Purchase of Foodstuff ` 800; Construction of Club Pavilion 
`11,000; General Expenses ` 600; Rent and Taxes ` 400; Bank Charges ` 160.
Cash in hand–April. 1st ` 200, March. 31st ` 350 
Cash in Bank–April. 1st ` 400; March. 31st ` 590 
You are required to prepare Receipts and Payment Account.
 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.4 
8.4 
SOLUTION 
Swaraj Club 
Receipts and Payments Accounts 
for the year ended 31st March, 2022 
 Receipts 
` 
Payments 
` 
To Balance b/d(opening bal.)Cash 
in hand  
200 By Salaries and Wages 1,200
To Cash with bank  400 By Purchase of Foodstuff 800 
To Entrance Fees 300 By Club Pavilion (Expenditure  
To Membership Fees 
3,000
on its construction) 11,000 
To Donation of Account  By General Expenses 600 
 of Club Pavilion 10,000 By Rent and Taxes 400 
To Sales of foodstuff 1,200 By Bank Charges 160 
By Balance c/d (closing bal) Cash in 
hand  
350
    Cash in bank      590 
  15,100  15,100 
2.1 Limitations of Receipts and Payments Account 
From the study of the above account, it is apparent that the increase in the cash and bank 
balances at the end of the year, as compared to those in beginning, does not truly represent 
the surplus for the year since it does not take into account the other important transactions, 
such as cost of construction of the pavilion, which is in excess of the donation received, the 
outstanding subscription or those which were collected in advance, etc.  
Another important drawback is that the Receipts and Payments Account includes items 
relating to all periods and of all types whether capital or revenue. In order to ascertain whether 
the organisation has made surplus or deficit, there is a need to construct an account which 
considers all the relevant revenue transactions for the current period. Since the Receipts and 
payments account does not consider the above, its preparation is not favoured except where 
the activities of the organization, the results of which are to be exhibited, are simple and 
modest, involve no carry over from one period to the next and it has no assets, apart from 
cash balance and no liabilities. 
© The Institute of Chartered Accountants of India
Page 5


LEARNING OUTCOMES 
FINANCIAL STATEMENTS  
 OF NOT-FOR-PROFIT  
 ORGANISATIONS 
After studying this unit, you would be able to:  
? Understand the meaning of Not-for-profit-organisations and distinction 
between a profit-making organisation and a Not-for-profit-organisation. 
? Accounting for Not-for-profit-organisations. 
? Understand the meaning and technique of preparation of Receipts and 
Payments Account and Income and Expenditure Account and understand 
the distinction between the two Accounts. 
? Learn the technique of preparing Balance Sheet of Not-for-profit-
organisations. 
? Understand the different adjustments and their accounting treatment in 
the books of Not for profit organisations. 
 
 
8
CHAPTER 
   
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.2 
8.2 
 
 
 
Donations, Entrance and Admission Fees, Subscription, Life Membership Fee are 
some of the Sources of incomes for the non-profit organizations which have 
different treatments based on the nature of the receipts. 
1.  INTRODUCTION 
A non-profit organization is a legal accounting entity that is operated for the benefit of the 
society as a whole, rather than for the benefit of a sole proprietor or a group of partners or 
shareholders. The main motive behind the non-profitable organization is to render service to 
the society or the members of the organisation.  
There is difference in the final accounts prepared between the profit making and the non-
profitable organisations. The sources of receipts and payments also vary with the nature of 
the activity that is being carried on by the organisation. Non-profit making organisations such 
as public hospitals, public educational institutions, clubs, Temples, churches etc., as a part of 
their final accounts prepare Receipts and Payments Account and Income and Expenditure 
Account to show periodic performance (either surplus or deficit) and Balance Sheet to show 
financial position at the end of the period. In this Chapter, we shall discuss the technique of 
preparing Receipts and Payments Account, Income and Expenditure Accounts and Balance 
Sheet of not-for-profit organisations.  
The Income and Expenditure Account (non- profitable organisation) is just similar to Profit 
and Loss Account prepared for the profit making organisations but there has been different 
terminology employed for the word Profit as SURPLUS – excess of income over expenditure 
or loss as DEFICIT – excess of expenditure over income. In non-profit making organisations, 
total cash receipts and total cash payments are highlighted through Receipts and Payments 
Account. 
Financial statements of Not-for-profit-Organisations
Receipts and Payments 
Account equivalent to 
Cash Book
Income and Expenditure 
Account equivalent to Profit 
and Loss Account
Balance Sheet
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
8.3 
FINANCIAL STATEMENTS OF NOT FOR 
PROFIT ORGANISATIONS 
2.  NATURE OF RECEIPTS AND PAYMENTS ACCOUNT 
A Receipts and Payments Account is a summary of the cash book without date column. It is 
an elementary form of account commonly adopted by not for profit making concerns such as 
hospitals, clubs, societies, temples, churches etc., for presenting the receipts and payments 
periodically together with the cash balances at the beginning and close of the period. The 
receipts are entered on the left hand side, and payments on the right hand side i.e., the same 
way as they appear in Cash Book. "The main point to be noted here is that- receipts and 
payments account is not based on the accrual system of book keeping as it records all the 
receipts and payments whether capital or revenue, pertaining to the current, previous or future 
periods." 
Features:  
? It is the summary of the cash and bank transactions like cash book, all the receipts 
(capital or revenue) are debited, similarly, all the expenditures (capital or revenue) 
are credited.  
? It starts with opening cash and bank balances and also ends with their closing balances. 
This account is usually not a part of the double entry system as it includes all cash and 
bank receipts and payments, whether they are related to present, past or future 
periods.  
? Surplus or deficit for an accounting period cannot be ascertained from this account, 
since, it shows only the Cash/Bank position and excludes all non cash items. 
ILLUSTRATION 1 
The receipts and payments for the Swaraj Club for the year ended March 31, 2022 were: Entrance 
fees ` 300; Membership Fees ` 3,000; Donation for Club Pavilion ` 10,000, Foodstuff sales  
` 1,200; Salaries and Wages ` 1,200 Purchase of Foodstuff ` 800; Construction of Club Pavilion 
`11,000; General Expenses ` 600; Rent and Taxes ` 400; Bank Charges ` 160.
Cash in hand–April. 1st ` 200, March. 31st ` 350 
Cash in Bank–April. 1st ` 400; March. 31st ` 590 
You are required to prepare Receipts and Payment Account.
 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.4 
8.4 
SOLUTION 
Swaraj Club 
Receipts and Payments Accounts 
for the year ended 31st March, 2022 
 Receipts 
` 
Payments 
` 
To Balance b/d(opening bal.)Cash 
in hand  
200 By Salaries and Wages 1,200
To Cash with bank  400 By Purchase of Foodstuff 800 
To Entrance Fees 300 By Club Pavilion (Expenditure  
To Membership Fees 
3,000
on its construction) 11,000 
To Donation of Account  By General Expenses 600 
 of Club Pavilion 10,000 By Rent and Taxes 400 
To Sales of foodstuff 1,200 By Bank Charges 160 
By Balance c/d (closing bal) Cash in 
hand  
350
    Cash in bank      590 
  15,100  15,100 
2.1 Limitations of Receipts and Payments Account 
From the study of the above account, it is apparent that the increase in the cash and bank 
balances at the end of the year, as compared to those in beginning, does not truly represent 
the surplus for the year since it does not take into account the other important transactions, 
such as cost of construction of the pavilion, which is in excess of the donation received, the 
outstanding subscription or those which were collected in advance, etc.  
Another important drawback is that the Receipts and Payments Account includes items 
relating to all periods and of all types whether capital or revenue. In order to ascertain whether 
the organisation has made surplus or deficit, there is a need to construct an account which 
considers all the relevant revenue transactions for the current period. Since the Receipts and 
payments account does not consider the above, its preparation is not favoured except where 
the activities of the organization, the results of which are to be exhibited, are simple and 
modest, involve no carry over from one period to the next and it has no assets, apart from 
cash balance and no liabilities. 
© The Institute of Chartered Accountants of India
8.5 
FINANCIAL STATEMENTS OF NOT FOR 
PROFIT ORGANISATIONS 
3. INCOME AND EXPENDITURE ACCOUNT 
The income and expenditure account is equivalent to the Profit and Loss Account of a Profit 
making business enterprise. It is an account which is widely adopted by most of the Non-
profit making concerns and is prepared by following accrual principle. Only items of revenue 
nature pertaining to the current period of account are included. The preparation of the 
account, therefore, requires adjustments in relevant accounts in respect of both outstanding 
and advance items of income and expenditure. The only difference is in the terms used to 
represent the profit and loss. Profit is termed as Surplus- Excess of income over expenditure 
and loss is termed as Deficit- Excess of expenditure over income. 
Non-profit organizations registered under section 8 of the Companies Act, 2013 are 
required to prepare their Income and Expenditure account and Balance Sheet as per the 
Schedule III to the Companies Act, 2013. 
Features:  
? It is a revenue account prepared at the end of the accounting period for finding out 
the surplus or deficit of that period.  
? It is prepared by matching expenses against the revenue of that period concerned.  
? Both cash and non-cash items, such as depreciation, are taken into consideration.  
? All capital expenditures and incomes are excluded.  
? Only current years’ income and expenses are considered. This Surplus/deficit is taken 
to the balance sheet and is added / deducted respectively with the capital fund 
(opening balance). 
3.1 Main Sources of Income 
For a not for profit organisation, the sources of income, largely depend on the nature of the 
activity carried on by them. The income for a charitable hospital is different from that of a 
income received by a sports club. Broadly for the purposes of solving the illustrations, we can 
classify the sources of income as subscriptions, ordinary donations, membership fees or 
entrances fees (if the amount is normal or provided according to bye-laws of the society), 
recurring grants from local authorities and income from investments, etc.  
Any amount raised for a special activity, e.g. on sale of match tickets, is deducted from the 
expenditure of that activity and net amount is shown in the income and expenditure account. 
Any receipt of capital nature shall not be shown as income but will be credited to the Capital 
Fund or special purpose fund e.g. "Building Fund' or if the receipts is on account of sale of a 
© The Institute of Chartered Accountants of India