Key Notes: Accounting for Not-for-Profit Organizations | Accountancy Class 12 - Commerce PDF Download

Introduction to Not-for-Profit Organizations (NPOs):

Definition: 

• NPOs are organizations formed for social, charitable, religious, cultural, or educational purposes, not for profit.
• Examples: NGOs, clubs, religious institutions, schools, etc.

Characteristics of NPOs:

• Non-profit motive.
• Existence beyond the life of the members.
• Ownership by members or a governing body.
• Limited liability of members.
• Absence of transferability of membership.
• Voluntary membership.

Accounting for NPOs:

Receipts and Payments Account:

• A summary of cash transactions during a specified period.
• Includes both capital and revenue items.
• Opening and closing balances of cash and bank are recorded.
• Helpful in ascertaining the cash position of the NPO.

Income and Expenditure Account:

• Similar to the Profit and Loss Account for businesses.
• Records revenue (income) and expenses for a specific accounting period.
• Distinguishes between capital and revenue items.
• Surplus (excess of income over expenditure) or deficit (excess of expenditure over income) is calculated.

Balance Sheet of NPO:

• Shows the financial position at a particular point in time.
• Includes assets, liabilities, and capital.
• Assets are recorded at their book value.
• Liabilities represent outstanding dues.
• Capital represents accumulated surplus.

Distinction between Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet:

• Receipts and Payments Account is a real account.
• Income and Expenditure Account is a nominal account.
• Balance Sheet is a summary of the financial position.

Treatment of Specific Items:

• Subscription: Usually treated as revenue, but if received in advance, it's treated as a liability until earned.
• Donations: Treated as income unless they are for acquiring specific assets (then treated as capital).
• Legacies: Treated as capital.
• Entrance Fees: Usually treated as capital, but if used for a specific purpose, treated as revenue.
• Life Membership Fees: Treated as capital.

Preparation of Income and Expenditure Account:

• Start with the opening balance of income and expenditure.
• Add incomes and gains, and subtract expenses and losses.
• Adjustments for accrued and prepaid items.
• The closing balance is the surplus/deficit, which is transferred to the balance sheet.

Preparation of Balance Sheet:

• Assets and liabilities are listed.
• Capital represents accumulated surplus or deficit.
• Capital = (Opening Capital + Surplus) or (Opening Capital - Deficit).

Adjustments for Outstanding and Prepaid Expenses:

• Outstanding Expenses: Expenses that are due but not paid are added to the relevant expense item.
• Prepaid Expenses: Expenses paid in advance are subtracted from the relevant expense item.

Treatment of Depreciation:

• Depreciation on assets is charged to the Income and Expenditure Account.
• Accumulated Depreciation is not deducted from the asset's value in the Balance Sheet.

Treatment of Funds:

• Specific Funds: Used for specific purposes and cannot be used for other activities.
• General Funds: Used for general purposes of the organization.
• Opening and closing balances of funds are shown in the Balance Sheet.

Audit and Compliance:

• NPOs are often subject to audits to ensure proper utilization of funds and compliance with regulations.

Conclusion

• Accounting for Not-for-Profit Organizations involves the preparation of Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet. 
• It is essential for transparency and accountability in managing the financial affairs of NPOs.