9/22/2021 Accounting: Not For Profit Organisations: Introduction and Characteristics of Not For Profit Organisations- FlexiPrep

FlexiPrep
Accounting: Not-For-Profit Organisations: Introduction and
Characteristics of Not-For-Profit Organisations (For CBSE, ICSE,
IAS, NET, NRA 2022)
Get unlimited access to the best preparation resource for competitive exams : get
questions, notes, tests, video lectures and more- for all subjects of your exam.

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.

1 of 4
9/22/2021 Accounting: Not For Profit Organisations: Introduction and Characteristics of Not For Profit Organisations- FlexiPrep

©FlexiPrep. Report ©violations ＠https://tips.fbi.gov/

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.
2 of 4
9/22/2021 Accounting: Not For Profit Organisations: Introduction and Characteristics of Not For Profit Organisations- FlexiPrep

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.

3 of 4
9/22/2021 Accounting: Not For Profit Organisations: Introduction and Characteristics of Not For Profit Organisations- FlexiPrep

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.

Developed by: Mindsprite Solutions

4 of 4