CHAPTER 8Accounting for Financial Statements ofNot-for-Profit OrganizationsLEARNING OBJECTIVES PDF Download

 Page 1


CHAPTER  8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING  OBJECTIVES
After studying the chapter, you will be able to:
? state the meaning of Not-for-profit organizations.
? differentiate between Not-for-profit and other business
organizations.
? explain the concept of fund accounting.
? understand the fund-based accounting entities.
? understand the types and mode of receipts, payments and
transfers by Government.
? prepare receipt and payment account.
? prepare financial statements of Not-for-profit organizations.
Page 2


CHAPTER  8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING  OBJECTIVES
After studying the chapter, you will be able to:
? state the meaning of Not-for-profit organizations.
? differentiate between Not-for-profit and other business
organizations.
? explain the concept of fund accounting.
? understand the fund-based accounting entities.
? understand the types and mode of receipts, payments and
transfers by Government.
? prepare receipt and payment account.
? prepare financial statements of Not-for-profit organizations.
ACCOUNTANCY 338
Accounting is always done with respect
to an entity.  An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc.  On the basis of the
objectives to be achieved accounting
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
turers, wholesalers, retailers, service
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctor’s lawyer, engineers, architects,
professional advisors, etc.
Not-for-profit entities: The objective of
such entities is to provide services to the
people without any intentions to seek
profit.  The main objective of these entities
may be social, educational, religious,
cultural or charitable. These entities may
be in the form of sports club, social or
literary club, religious institutions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
charitable institutions like orphanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members.  These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants.  For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have studied about
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not-for-profit organizations.  Not-for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accrual Accounting. This chapter is
divided into two parts. Part I deals
with Accounting for Governmental
Organi-zations and Part II deals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
service and carry on activities in the
interest of society.  Thus, the interest of
society is considered to be of prime
importance because it is desirable to make
available certain services which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
deprived people or for promotion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zations grow in any society with the
Page 3


CHAPTER  8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING  OBJECTIVES
After studying the chapter, you will be able to:
? state the meaning of Not-for-profit organizations.
? differentiate between Not-for-profit and other business
organizations.
? explain the concept of fund accounting.
? understand the fund-based accounting entities.
? understand the types and mode of receipts, payments and
transfers by Government.
? prepare receipt and payment account.
? prepare financial statements of Not-for-profit organizations.
ACCOUNTANCY 338
Accounting is always done with respect
to an entity.  An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc.  On the basis of the
objectives to be achieved accounting
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
turers, wholesalers, retailers, service
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctor’s lawyer, engineers, architects,
professional advisors, etc.
Not-for-profit entities: The objective of
such entities is to provide services to the
people without any intentions to seek
profit.  The main objective of these entities
may be social, educational, religious,
cultural or charitable. These entities may
be in the form of sports club, social or
literary club, religious institutions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
charitable institutions like orphanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members.  These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants.  For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have studied about
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not-for-profit organizations.  Not-for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accrual Accounting. This chapter is
divided into two parts. Part I deals
with Accounting for Governmental
Organi-zations and Part II deals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
service and carry on activities in the
interest of society.  Thus, the interest of
society is considered to be of prime
importance because it is desirable to make
available certain services which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
deprived people or for promotion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zations grow in any society with the
STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS  339
growth of its collective social
consciousness, which propels the people
to ameliorate the hardships and sufferings
of the common people.  It is for these
reasons that during the last decade a large
number of Non-Governmental
Organizations (NGOs) have flourished.  A
not-for-profit organization does not
restrict itself from earning surplus from
its activities.  Rather such surplus is used
for the furtherance of the activities
emanating from the objectives for which
the organization was created.
Not-for-profit organizations are those
organizations, which operate with the
purpose of achieving the objectives for
which they are created and not necessarily
for profit motive.  It can be defined as “an
entity that provides, without profit, a
service beneficial to society and that has
an equity interest that cannot be sold or
traded.”  According to Emerson O. Henke,
the term “without profit” in case of Not-
for-profit organizations is not intended to
imply that such an organization cannot
plan or realize profit, but it implies that
the activities pursued are not solely
governed by the profit motive.  Hence, in
normal course of activities a Not-for-profit
organization can have excess of revenues
over expenditure, called surplus.  When
such addition takes place to the net assets,
it is used to implement and enlarge the
services of the organization.  Equity to
Not-for-profit organizations is provided
by membership contributions, alloca-
tions, contributions, grants or membership
solicitations.  It is to be noted that this is
true only in c ase of Non-Governmental
Not-for-profit organizations such as clubs,
hospitals, colleges, sports-boards (such as
Cricket Control Board), Museums,
Temples, Gurudwaras, Wakf Boards and
Churches. In case of Not-for-profit
organizations in Government sector
(Universities, Research Institutions,
Scientific Institutions, Municipal
Corporations) do not have equity in
the same sense as that in the case
of commercial enterprises.  Since there is
no equity in Government sector,
financing is done through tax-collections,
surpluses from Public enterprises and
borrowings.
  ENTITIES
COMMERCIAL ENTITIES
MANUFACTURING
MINING
FARMING/FISHING
TRADING
AGENCY SERVICES
FINANCING, Banking, Insurance
PROFESSIONALS
NOT-FOR-PROFIT ENTITIES
GOVERNMENTAL NON-GOVERNMENTAL
• CENTRAL
• STATE
• LOCAL
• UNIVERSITIES
• INSTITUTIONS
• COLLEGES
• SCHOOLS
• TRUSTS
• HOSPITALS
• CLUBS
• RELIGIOUS
INSTITUTIONS
• PRIVATE
EDUCATIONAL
INSTITUTIONS
?
?
?
?
?
(Contd. at Page 440)
Page 4


CHAPTER  8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING  OBJECTIVES
After studying the chapter, you will be able to:
? state the meaning of Not-for-profit organizations.
? differentiate between Not-for-profit and other business
organizations.
? explain the concept of fund accounting.
? understand the fund-based accounting entities.
? understand the types and mode of receipts, payments and
transfers by Government.
? prepare receipt and payment account.
? prepare financial statements of Not-for-profit organizations.
ACCOUNTANCY 338
Accounting is always done with respect
to an entity.  An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc.  On the basis of the
objectives to be achieved accounting
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
turers, wholesalers, retailers, service
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctor’s lawyer, engineers, architects,
professional advisors, etc.
Not-for-profit entities: The objective of
such entities is to provide services to the
people without any intentions to seek
profit.  The main objective of these entities
may be social, educational, religious,
cultural or charitable. These entities may
be in the form of sports club, social or
literary club, religious institutions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
charitable institutions like orphanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members.  These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants.  For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have studied about
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not-for-profit organizations.  Not-for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accrual Accounting. This chapter is
divided into two parts. Part I deals
with Accounting for Governmental
Organi-zations and Part II deals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
service and carry on activities in the
interest of society.  Thus, the interest of
society is considered to be of prime
importance because it is desirable to make
available certain services which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
deprived people or for promotion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zations grow in any society with the
STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS  339
growth of its collective social
consciousness, which propels the people
to ameliorate the hardships and sufferings
of the common people.  It is for these
reasons that during the last decade a large
number of Non-Governmental
Organizations (NGOs) have flourished.  A
not-for-profit organization does not
restrict itself from earning surplus from
its activities.  Rather such surplus is used
for the furtherance of the activities
emanating from the objectives for which
the organization was created.
Not-for-profit organizations are those
organizations, which operate with the
purpose of achieving the objectives for
which they are created and not necessarily
for profit motive.  It can be defined as “an
entity that provides, without profit, a
service beneficial to society and that has
an equity interest that cannot be sold or
traded.”  According to Emerson O. Henke,
the term “without profit” in case of Not-
for-profit organizations is not intended to
imply that such an organization cannot
plan or realize profit, but it implies that
the activities pursued are not solely
governed by the profit motive.  Hence, in
normal course of activities a Not-for-profit
organization can have excess of revenues
over expenditure, called surplus.  When
such addition takes place to the net assets,
it is used to implement and enlarge the
services of the organization.  Equity to
Not-for-profit organizations is provided
by membership contributions, alloca-
tions, contributions, grants or membership
solicitations.  It is to be noted that this is
true only in c ase of Non-Governmental
Not-for-profit organizations such as clubs,
hospitals, colleges, sports-boards (such as
Cricket Control Board), Museums,
Temples, Gurudwaras, Wakf Boards and
Churches. In case of Not-for-profit
organizations in Government sector
(Universities, Research Institutions,
Scientific Institutions, Municipal
Corporations) do not have equity in
the same sense as that in the case
of commercial enterprises.  Since there is
no equity in Government sector,
financing is done through tax-collections,
surpluses from Public enterprises and
borrowings.
  ENTITIES
COMMERCIAL ENTITIES
MANUFACTURING
MINING
FARMING/FISHING
TRADING
AGENCY SERVICES
FINANCING, Banking, Insurance
PROFESSIONALS
NOT-FOR-PROFIT ENTITIES
GOVERNMENTAL NON-GOVERNMENTAL
• CENTRAL
• STATE
• LOCAL
• UNIVERSITIES
• INSTITUTIONS
• COLLEGES
• SCHOOLS
• TRUSTS
• HOSPITALS
• CLUBS
• RELIGIOUS
INSTITUTIONS
• PRIVATE
EDUCATIONAL
INSTITUTIONS
?
?
?
?
?
(Contd. at Page 440)
ACCOUNTANCY 340
PRIMARY MOTIVES is carry on the above mentioned
activities and thereby bring financial gain to the
owner(s)
PROPRIETORSHIP or interest of the owner(s) or
owners equity represents the proprietors investment
in the business which consists of the original money
put into the business plus the profits not withdrawn
RESULT OF ENTITY’S ACTIVITIES is profit, which
represents the difference between sales revenue and
other incomes, if any, over the cost of sales and financial
charges.  The profit and may either be withdrawn, or
retained in the business.
ACCOUNTING STATEMENT prepared to serve the
information needs of decision makers include all or
some of the following:
(i) Manufacturing or Production a/c
(ii) Profit & Loss Account
(iii) Balance Sheet
PRIMARY MOTIVES is to provide services to the
members or to the society at large.  Profits arising out
of any trading activities are used to further service
objectives.
PROPRIETORSHIP or interest of the members is
known as Capital Fund or Accumulated Fund which
represents the Accumulated surplus of subscriptions,
donations and profits from trading and social activities
over expenses.
RESULT OF ENTITY’S ACTIVITIES is the surplus,
which represents the excess of revenue income over
revenue expenditure during a period, and indicates the
extent of utilization of incomes for the pursuit of service
objects.  It increases the Accumulated Fund of the
members and cannot be withdrawn by them.
ACCOUNTING STATEMENTS prepared to serve the
information needs of decision makers include
(i) Receipt & Payment Account,
(ii) Income & Expenditure Account,
(iii) Balance Sheet.
8.2 Distinction between Not-for-Profit and Commercial Entities
A Not-for-profit organization can be differentiated from a profit seeking organization
on the following basis:
Exhibit : 8.1
Basis Commercial entity Not-for-Profit entity
1. Primary motive
2. Ownership
3. Distributions of profit.
4. Result
To carry on the activities for earning
profits.
Proprietors of business are owners and
hence, entitled to share the profits.
Profits are distributed among the
owners.
Result of the entity’s activities is called
profit, which is the difference between
sales and other incomes, if any, over the
expenses. The profit either be
withdrawn or retained in a business.
Excess of expenses over incomes is
called loss.
To provide services to the members or
to the public at large. Profits earned out
of any trading activities are used to
further the service objectives.
Subscribers to the membership of the
Not-for-profit entity are called the
members.
Profits are not distributed among the
members.
Result of the entity’s activities is called
the surplus, which is the excess of
income over expenses.  It increases the
Capital Fund and cannot be withdrawn
by the members.  The excess of
expenses over incomes is called deficit.
Page 5


CHAPTER  8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING  OBJECTIVES
After studying the chapter, you will be able to:
? state the meaning of Not-for-profit organizations.
? differentiate between Not-for-profit and other business
organizations.
? explain the concept of fund accounting.
? understand the fund-based accounting entities.
? understand the types and mode of receipts, payments and
transfers by Government.
? prepare receipt and payment account.
? prepare financial statements of Not-for-profit organizations.
ACCOUNTANCY 338
Accounting is always done with respect
to an entity.  An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc.  On the basis of the
objectives to be achieved accounting
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
turers, wholesalers, retailers, service
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctor’s lawyer, engineers, architects,
professional advisors, etc.
Not-for-profit entities: The objective of
such entities is to provide services to the
people without any intentions to seek
profit.  The main objective of these entities
may be social, educational, religious,
cultural or charitable. These entities may
be in the form of sports club, social or
literary club, religious institutions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
charitable institutions like orphanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members.  These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants.  For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have studied about
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not-for-profit organizations.  Not-for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accrual Accounting. This chapter is
divided into two parts. Part I deals
with Accounting for Governmental
Organi-zations and Part II deals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
service and carry on activities in the
interest of society.  Thus, the interest of
society is considered to be of prime
importance because it is desirable to make
available certain services which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
deprived people or for promotion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zations grow in any society with the
STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS  339
growth of its collective social
consciousness, which propels the people
to ameliorate the hardships and sufferings
of the common people.  It is for these
reasons that during the last decade a large
number of Non-Governmental
Organizations (NGOs) have flourished.  A
not-for-profit organization does not
restrict itself from earning surplus from
its activities.  Rather such surplus is used
for the furtherance of the activities
emanating from the objectives for which
the organization was created.
Not-for-profit organizations are those
organizations, which operate with the
purpose of achieving the objectives for
which they are created and not necessarily
for profit motive.  It can be defined as “an
entity that provides, without profit, a
service beneficial to society and that has
an equity interest that cannot be sold or
traded.”  According to Emerson O. Henke,
the term “without profit” in case of Not-
for-profit organizations is not intended to
imply that such an organization cannot
plan or realize profit, but it implies that
the activities pursued are not solely
governed by the profit motive.  Hence, in
normal course of activities a Not-for-profit
organization can have excess of revenues
over expenditure, called surplus.  When
such addition takes place to the net assets,
it is used to implement and enlarge the
services of the organization.  Equity to
Not-for-profit organizations is provided
by membership contributions, alloca-
tions, contributions, grants or membership
solicitations.  It is to be noted that this is
true only in c ase of Non-Governmental
Not-for-profit organizations such as clubs,
hospitals, colleges, sports-boards (such as
Cricket Control Board), Museums,
Temples, Gurudwaras, Wakf Boards and
Churches. In case of Not-for-profit
organizations in Government sector
(Universities, Research Institutions,
Scientific Institutions, Municipal
Corporations) do not have equity in
the same sense as that in the case
of commercial enterprises.  Since there is
no equity in Government sector,
financing is done through tax-collections,
surpluses from Public enterprises and
borrowings.
  ENTITIES
COMMERCIAL ENTITIES
MANUFACTURING
MINING
FARMING/FISHING
TRADING
AGENCY SERVICES
FINANCING, Banking, Insurance
PROFESSIONALS
NOT-FOR-PROFIT ENTITIES
GOVERNMENTAL NON-GOVERNMENTAL
• CENTRAL
• STATE
• LOCAL
• UNIVERSITIES
• INSTITUTIONS
• COLLEGES
• SCHOOLS
• TRUSTS
• HOSPITALS
• CLUBS
• RELIGIOUS
INSTITUTIONS
• PRIVATE
EDUCATIONAL
INSTITUTIONS
?
?
?
?
?
(Contd. at Page 440)
ACCOUNTANCY 340
PRIMARY MOTIVES is carry on the above mentioned
activities and thereby bring financial gain to the
owner(s)
PROPRIETORSHIP or interest of the owner(s) or
owners equity represents the proprietors investment
in the business which consists of the original money
put into the business plus the profits not withdrawn
RESULT OF ENTITY’S ACTIVITIES is profit, which
represents the difference between sales revenue and
other incomes, if any, over the cost of sales and financial
charges.  The profit and may either be withdrawn, or
retained in the business.
ACCOUNTING STATEMENT prepared to serve the
information needs of decision makers include all or
some of the following:
(i) Manufacturing or Production a/c
(ii) Profit & Loss Account
(iii) Balance Sheet
PRIMARY MOTIVES is to provide services to the
members or to the society at large.  Profits arising out
of any trading activities are used to further service
objectives.
PROPRIETORSHIP or interest of the members is
known as Capital Fund or Accumulated Fund which
represents the Accumulated surplus of subscriptions,
donations and profits from trading and social activities
over expenses.
RESULT OF ENTITY’S ACTIVITIES is the surplus,
which represents the excess of revenue income over
revenue expenditure during a period, and indicates the
extent of utilization of incomes for the pursuit of service
objects.  It increases the Accumulated Fund of the
members and cannot be withdrawn by them.
ACCOUNTING STATEMENTS prepared to serve the
information needs of decision makers include
(i) Receipt & Payment Account,
(ii) Income & Expenditure Account,
(iii) Balance Sheet.
8.2 Distinction between Not-for-Profit and Commercial Entities
A Not-for-profit organization can be differentiated from a profit seeking organization
on the following basis:
Exhibit : 8.1
Basis Commercial entity Not-for-Profit entity
1. Primary motive
2. Ownership
3. Distributions of profit.
4. Result
To carry on the activities for earning
profits.
Proprietors of business are owners and
hence, entitled to share the profits.
Profits are distributed among the
owners.
Result of the entity’s activities is called
profit, which is the difference between
sales and other incomes, if any, over the
expenses. The profit either be
withdrawn or retained in a business.
Excess of expenses over incomes is
called loss.
To provide services to the members or
to the public at large. Profits earned out
of any trading activities are used to
further the service objectives.
Subscribers to the membership of the
Not-for-profit entity are called the
members.
Profits are not distributed among the
members.
Result of the entity’s activities is called
the surplus, which is the excess of
income over expenses.  It increases the
Capital Fund and cannot be withdrawn
by the members.  The excess of
expenses over incomes is called deficit.
STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS  341
8.3  Concept of Fund Accounting
Government and Not-for-profit organi-
zations are required to organize their
accounting systems on a fund basis.  A
fund is defined as an independent fiscal
and accounting entity with a self-
balancing set of accounts recording cash
and/or other resources together with
liabilities, obligations, reserves, and
equities which are segregated for the
purpose of specific activities to achieve
certain objectives in accordance with
special regulations, restrictions and
limitations.  Thus, each type of fund is a
sub accounting entity for the purpose of
internal as well as external reporting of
financial estimates, budgets and
performances to the stakeholders. Not-for-
profit organization uses it,  which are
legally responsible for ensuring that
certain funds are used only for such
specific purpose for which the same have
been contributed by the donors.  Hence,
there is a need for separate accountability
whenever, a Not-for-profit organization
receives such restricted contributions.
8.3.1  Features of Fund Accounting
Following are the features of fund
accounting:
1. This system of accounting is used by
Not-for-profit organizations of both
types, viz., Governmental and Non-
Governmental.
2. Each fund is a separate entity for
accounting and accountability.
3. Each fund has to balance for income
received and expenditure made in
accordance with the restrictions
placed on their use.
4. Budget approval and appropriation is
the basis of income generation and
spending.
5. Despite restrictions being placed on
the use of specific funds, there will
always be a general fund from which
organizational expenses will be
passed.
6. In addition to fund accounting
entities, there will be memo-account
groups which disclose the assets
required and liabilities incurred.  In
case of large borrowings, organization
may choose to crate “Debt Fund”. It
is to be noted that cash generated to
raising of debt is treated as revenue.
In order to better understand the
mechanism of accounting under Fund
Accounting System, the relationship of
various accounts can be expressed as
follows:
Assets + Expenditure + Encumbrances +
Estimated revenues + Interfund Claims =
Basis Commercial entity Not-for-Profit entity
5. Accounting
Statements
The accounting statements are prepared
to serve the information needs of the
users include all or some of the
following:
(i) Manufacturing Account
(ii) Profit and Loss Account
(iii) Balance Sheet.
The accounting statements prepared to
serve the information needs of the users
include:
(i) Receipts and Payments
Account,
(ii) Income and Expenditure
Account and
(iii) Balance Sheet.