Chapter 9

Non-profit entities

Lecture 1 - 2022
Introduction to NPO

▪ Characteristics:
▪ One or more objectives (profit making is not one of them)
▪ Name of the company ends with “NPC” (Non-Profit Company) (or Non-profit organisation –
NPO if registered with the Department of Social Welfare)
▪ Legal entity
▪ Memorandum of Incorporation must set out at least one objective of company
▪ Should apply with SARS for a tax-exempt status, known as Public Benefit Organisation status
(PBO) (can issue section 18 certificates to donors)
▪ May hold shares in a profit company, not allowed to merge with a profit company
▪ Assets and income may not be distributed to members/directors, except for remuneration
purposes.
▪ Needs to comply with Companies Act (as amended) as well as Non-Profit Organisations Act.

Topic: Non-profit organisations

 Nature of the entity
▪ Register an NPC with Companies and Intellectual Property Commission (CIPC)
▪ Generate funds to achieve objectives (e.g. services to community)
▪ Main form: membership fees / donations
▪ S10 company in terms of the new Companies Act (previous Article 21 companies)
▪ Not bound by Companies act to meet stringent Accounting requirements
▪ Don’t need auditor
▪ Compile FS within 6 months after FYE
▪ Accounting officer should compile a report
▪ Income tax? > Apply to be tax exempt
▪ VAT? > Depends on the taxable supplies

Topic: Non-profit organisations

Nature of the entity
Accounting specific nature

▪ REMEMBER: Differences in equity

▪ Focus on NON-PROFIT
▪ Difference in accounting terminology: Profit vs Non-profit
▪ Capital <> Fund
▪ Profit for the year <> Surplus for the year
▪ Loss for the year <> Deficit for the year
▪ Profit or loss account <> Income and expenditure account
Accumulated and other funds
▪ What happens to profits (surpluses) or losses (deficits)?
▪ Sole proprietor > Transferred to Capital account
▪ Partnerships > Distributed after agreement through the Distribution account
▪ Companies > Retained earnings, possible distribution as ARR and dividends
▪ NPC > non-distributable, transferred to Accumulated Funds account (E)

Topic: Non-profit organisations

Different types of funds

Topic: Non-profit organisations

Example: Accumulated fund

Topic: Non-profit organisations

Example:
Special fund

Interest = R100 000 x 7.5% =

R7 500

NB! Interest income = FUND

according to instructions of
donor. Keep separately and
do not include in statement of
income and expenditure

Topic: Non-profit organisations

Example: General fund

Topic: Non-profit organisations

Accounting entries unique to a NPO
▪ Income
▪ Donations
▪ Proceeds from sales / services rendered
▪ Entrance (entry) fees
▪ Membership fees
▪ All included in Statement of income and expenditure unless specifically excluded

▪ Capitalisation of income
▪ If money is not used for general expenses (i.e. included in above), then money can be
transferred directly to Accumulated funds.

Topic: Non-profit organisations

Example: Entrance fees

Topic: Non-profit organisations

Membership fees (MF)
▪ Payable per annum (by members)
▪ If members owe money for last year > MF Receivable (A)
▪ If members have paid in advance > MF Received in advance (L)
▪ Members did not pay and fees irrecoverable > MF written off (Credit losses)
▪ Money RECEIVED in this year > Bank
▪ Income and expenditure:
▪ Closing transfer
▪ Indicates amount that SHOULD have been received (accrual concept)

Topic: Non-profit organisations

 Membership fees
Membership fees receivable Membership fees received in advance

Bank (refund) previous

Income and expenditure Bank current
next
Credit losses

Membership fees received in Membership fees receivable

advance

Topic: Non-profit organisations

Accounting process
Membership fees account

▪ Step 1: Reverse the adjustments from the previous year (MF Receivable and MF received in
advance)
▪ Step 2: Record the receipts in Bank and MF account. Refund members where needed.
▪ Step 3: At the end of the year, complete adjustments (MF receivable & MF Received in advance)
▪ Step 4: Closing transfer > Income and expenditure account

Topic: Non-profit organisations

Example: Membership fees

Topic: Non-profit organisations

Topic: Non-profit organisations
Example
Calculations:
- MF receivable (did not pay this year) = 220 (expected members: 204 +16)
– 209 (paid this year)
– 4 (paid last year, for this year)
= 7 members owe (Thus 7 x R80 = R560)
- MF written off: Owed from last year: R640, received R480.
- R640 – R480 = R160 credit losses
- Income and expenditure amount is balancing amount (in this example)

Topic: Non-profit organisations

Generating income through trading activities
- Examples: selling memorabilia, photos at events, refreshments (tuck shop), clothing, gear etc.
- How will we account for this?
- Prepare a trading account (include all expenses relevant to activity)
- Limit items to relevant items to activity
- Sales minus cost of sales minus any other item that is directly relevant to the activity

Topic: Non-profit organisations

 Trading account
Inventory (opening) Sales
Purchases Inventory (closing)
Expenses
Profit Loss

Topic: Non-profit organisations

Example: Trading account

Topic: Non-profit organisations

Example (continue)

Topic: Non-profit organisations

Thank You