Accounting in not-for-profit organizations differs from accounting in many other areas, as it involves the financial activities of entities that operate for reasons other than profit. These organizations include such organizations as organizations that seek to deliver services and benefits to their members or the public. The main accounting practices of not-for-profit organizations include managing donations, grants, and service fees; ensuring conformity to donor restrictions; and preparation of financial statements like Receipts and Payments Account, Income and Expenditure Account, and Balance Sheet.
Characteristics of Not-for-Profit Organisations
Not-for-profit organisations refer to the kinds of organisations that operate for welfare to society, like educational institutions, hospitals, clubs, or charitable organizations. Thus, service provision becomes their basic objective rather than profit-making. Main features are:
- Service Orientation: The primary objective is to provide services to a particular community or society in general.
- No Profit Motivation: Some activities will be’surplus-generating’, but surplus funds are ploughed back into the objectives of the organisation.
- Source of Finance: Apart from fundraising and holding charity events, most NPOs raise the majority of their finance from grants, donations, and membership subscriptions.
- Legal Separation: The majority of NPOs have a separate legal personality from that of their members, thus, they have a legal identity, which means they can acquire assets and make contracts.
Financial Statements in Not-for-Profit Organisations
NPOs require to maintain financial accounts and statements to provide transparency to the stakeholders and proper use of funds.
Receipts and Payments Account
This is a cash and bank working account for a complete year with all cash flows recorded without capital-revenue distinction between receipts and payments.
Features
- Cash Basis: Cash basis records as it aggregates cash inflows and outflows.
Non-profit Transactions Incorporated: It can include gifts, subscription fees, grants, subscriptions, etc. - No opening and closing balances: Reflects the net effect of cash transactions for a specific period but no net surplus or deficit for the period exists.
Income and Expenditure Account
It is an accrual-based statement, playing the role of a profit and loss account for not-for-profit organizations. The statement accrues revenue as well as expenditure for the period to ascertain the surplus or deficit.
Features
- Accrual Basis: Cash as well as credit transactions accounting for outstanding expenses as well as income.
- Distinguishes Revenue Items: The statement takes into consideration only the revenue items that include subscription fees, donations (unrestricted), and expenses related to the activities of the NPO.
- Surplus/Deficit: The surplus or deficit balance is remitted to the capital fund, otherwise known as a general fund.
Balance Sheet
It is, in a nutshell, the balance sheet that is a snapshot view of NPO’s financial position at the close of the financial year, summarizing assets and liabilities.
Features:
- Capital Fund: In NPOs instead of capital, there is a capital fund that includes accumulated surpluses across time, donations, or grants.
- Assets and Liabilities: The balance sheet shall enumerate fixed assets, be it buildings or equipment and current assets, and the corresponding liabilities, which include loans or unpaid expenses.
Accounting Treatment of Specific Items
Several specific items are unique to not-for-profit organisations. Their accounting treatments are crucial to maintaining transparency and accuracy.
Subscription Fees
The membership or subscription fees form one of the principal sources of income for a not-for-profit. Subscription fees may be collected monthly, quarterly, or annually.
- Advance Subscription: The advance subscription fee received must be carried as a liability on the balance sheet until it is due for receipt.
- Outstanding Subscription: The subscription dues that could not be collected towards the close of the financial year are treated as an asset.
Donations
Donation can be brought under this head as general and specific donations.
- General Donations: This includes an unrestricted donation where NPO can use the same as per their discretion. These are recorded as revenue income.
- Specific Donations: This kind of restricted funds given to an NPO for particular purposes, like construction of a building, and can be used for that purpose only. Liability account has to be prepared for such a head until it is spent on that particular purpose.
Legacies
Legacy income is the amount left behind by individuals through their will. Generally, these are accounted as receipts on capital unless specified by the donor.
Endowment Funds
Endowment funds involve contributions whereby the organisation retains the principal amount but only utilises the income arising from the fund. Such amounts are classified under liabilities.
Importance of Accounting for Not-for-Profit Organisations
Proper accounting of an organization is essential to ensure that the not-for-profit organizations are transparent, they maintain the trust of donors and ensure compliance with law. It helps them in:
- Accountability: The money is used as the donors and grantors intend to use it.
- Transparency: Financial information should be communicated clearly to the stakeholders, including public.
- Decision-making: Helps management to know its financial strength and is able to take decisions on resource allocation.
- Compliance: Fulfill legal requirements; it may involve filing some reports to government bodies and fulfilling conditions attached to grants.
Conclusion
Accounting for not-for-profit organisations is critical to maintaining transparency, trust, and accountability. By carefully tracking donations, grants, subscriptions, and other income, and through preparing financial statements such as Receipts and Payments Account, Income and Expenditure Account, and the Balance Sheet, NPOs can ensure they effectively manage their resources. Accurate accounting helps the organisation achieve its mission while complying with legal obligations.
Accounting for Not for Profit Organisation FAQs
What is the difference between the Receipts and Payments Account and the Income and Expenditure Account?
The Receipts and Payments Account records all cash transactions on a cash basis, whereas the Income and Expenditure Account is prepared on an accrual basis, adjusting for outstanding and prepaid amounts.
How are specific donations treated in accounting for not-for-profit organisations?
Specific donations are treated as liabilities and are used only for the purpose they were given. They are transferred to the income statement once utilised.
What is an endowment fund in a not-for-profit organisation?
An endowment fund is a type of donation where the principal amount must remain intact, and only the income generated from the fund can be used.
How are subscriptions handled in not-for-profit organisation accounting?
Subscriptions are recorded as revenue. But any advance or outstanding subscriptions are treated as liabilities or assets in the balance sheet.
Why is transparency important in accounting for not-for-profit organisations?
Transparency ensures that stakeholders and donors trust the organisation, knowing that their funds are being used appropriately and as intended.
