NOT FOR PROFIT ORGANIZATIONS

12th BOOK KEEPING BY AJAYSANTHOSH MOURYA

Not-for-Profit organizations refer to those organizations which:

a)         are  formed  for  the  purpose  of  promoting  commerce,  art,  science, religion, charity or any other useful object.

b)        intend to spend their income in promoting their objectives, and c)        prohibit the payment of any dividend to their members.

Examples of Not for Profit Organisation.

1. Sports Clubs                  2. charitable Hospitals    3. Social Clubs

4. Charitable Schools        5. Charitable Schools/ Colleges

6. Temples/ Churches/ Gurudwaras/ Masjids

Difference between a Profit seeking organization and a Not-for- profit Organization

Basis of Distiction	Profit Seeking Organisation	Not-for-Profit Organisation
1. Primary Motive	The primary motive of such an entity is to earn profit	The  Primary  motive  of  such an entity is to provide services
2.Owner's  Fund  Vs. Capital Fund	Interest  of  owners  is  known as owner's fund which represents the owner's investments plus accumulated reserves and surplus	Interest of members is known as capital fund which represents the accumulated surplus of subscriptions, donations and net profits from activities  carried  on  by  such an entity.
3.    Net    result    of activities	The net result of the activities of such an entity is known as the profit/loss.	The net result of the activities of such an entity is known as the surplus/deficit.
4. Accounting Statements	The accounting statements of such type of entity include	The accounting statements of such an entity include:
	a)  a Manufacturing A/C	a)  a Receipts  and Payments
	b)  a Trading A/c	b)  a Trading A/c
	c)  a Profit and Loss A/.c	c)  an Income and Expenditure
	d)  a Balance Sheet	d)  a Balance Sheet

Fund based Accounting

Fund based accounting essentially involves preparation of financial statements fund wise and consolidation of those statements to represent the financial results/ position of the organisation as a whole.

What is meant by Revenue Fund in a Not-for – Profit Organisation ?

Revenue funds essentially record normal revenue transactions.   In other words, revenue funds are received to meet operating expenses.   The accrual basis of accounting is used to recognize revenue and expense in the revenue fund for Operating Funds).   However, the use of revenue fund may be restricted or unrestricted.

What is meant by Special Funds in a Not-for-Profit Organisation?

Special  funds  essentially  record  transactions  of  capital  nature.  There  funds account for those resources which may not be currently expended.

What is meant by Receipts & Payments Account ?

The 'Receipts & Payment Account' is an asset account ( or Real Account) which shows all receipts and payments ( whether Capital or Revenue or relating to Previous or Current or following accounting year)  along with the Cash & Bank balances in the beginning and at the end of an accounting period.

What is meant by Income & Expenditure Account ?

An  Income  and  Expenditure  Account  is  a  final  account  like  Profit  &  Loss Account, which shows the classified summary of revenue incomes, revenue expenses and losses for current accounting period along with surplus ( i.e. the excess of income over expenditure)  or deficit ( i.e. exceess of expenditure over income)  which is transferred to the Capital Fund.

Differences between Receipts & Payments Account and Income & Expenditure Account

Basis of Distinction	Receipts & Payments Account	Income      &      Expenditure Account
1. Nature of Account	It is a real account	It is a nominal account
2. Basic Structure	It is basically a summarised Cash Book.	It  is  like  a  Profit  &  Loss Account.
3. Object	It is prepared to present a summary of   cash   transactions   during   an accounting period	It is prepared to ascertain the net  results  of  all  the transactions during an accounting period.
4. Opening Balance	Opening balance represents cash or bank balances ( or Bank Overdraft) in the beginning of the accounting period.	It has no opening balance
5. Items of Debit side	It  is  debited  with  all  the  sums received.	It is debited with the expenses and losses .
6. Items of Credit side	It is credited with all the sums paid out.	It is credited with the incomes.
7. Closing Balance	Closing balance represents cash or bank balance {or bank overdraft} at the end of the accounting period.	Its closing balance Represents either net Surplus or net deficit.
8. Treatment of Closing balance	Its closing balance is Carried forward in the same Account of the next period.	Its      closing      balance      is transferred to the capital fund in the balance sheet.
9. Non-cash ltems	Non-cash items are not Shown in this account.	Non-cash     items     such     as depreciation, bad debts, Etc., are shown.
10.Period to which Items relate	It    records    the    receipts    and payments whether they relate to previous, current or following accounting period.	It records only those incomes. expenses and losses which relate to current accounting period.
11.nature of items Recorded-revenue Vs. capital	It    records    the    receipts    and payments  whether  of  capital  or revenue nature.	It     records     the     incomes, expenditures   and   losses   of revenue nature.

Differences between Profit and Loss Account and Income & Expenditure Account.
 

Basic of Distinction	Income & Expenditure Account	Profit & Loss Account
1. Object	The    main   object    of Income and Expenditure Account is to  ascertain  excess  of income   over expenditure of excess of expenditure  over income.	The main object of Profit and Loss Account is to ascertain net profit or net loss
2. Who Prepares ?	This account is prepared by non-profit organisations	This account is prepared by trading institutions.
3. Basis of Preparation	This account is prepared on the basis of Receipts and Payments Account and other information	This  account  is  prepared  on  the basis of trial balance.
Preparation	on the basis of Receipts and Payments Account and other information	basis of trial balance.
4. Balance	The   balance   of   this account          represents surplus or deficit.	The    balance    of    this    account represents net profit or net loss.

  
Method of calculating the current year's income by way of subscription

Statement showing Computation of Subscriptions Income for the Current Year

                   Particulars                                                                                 Rs.

A.   Subscriptions received during the current year                                          xx
B.   Add :
               (i) Outstanding Subscriptions at the end of current year    xx          
               (ii) Advance subscriptions in the beginning of current year xx            xx
C.   Less 
               (i) Outstanding subscriptions in the beginning of current year   xx 
               (ii) Advance subscriptions at the end of current year               xx     xx 

              Subscription Income to be credited to Income & Expenditure

Account ( A+B-C)                                                              xx

How will you account for Life Membership Fees ?

Life Membership may be treated in any one of the following ways : -

(a)       These  subscriptions  may  be  treated  as  a  capital  receipt  and  thus  be transferred to a " Life membership Fund Account" which shall be shown in the Balance Sheet till the membership ceases when the same may be transferred to the Capital Fund Account.

(b) These subscriptions may be treated as deferred revenue receipts and thus be transferred to Life Membership Fund Account. In such a case, an amount representing the normal annual subscription is treated as a revenue receipt and thus transferred out of Life Membership Fund Account to Income & Expenditure Account and the balance appears in the Balance Sheet till the amount is exhausted or till the memberships ceases, whichever is earlier.

How will you account for Entrance Fee/ Admission Fee ?

The entrance fees may be accounted for in any of the following three ways:

1.   It may be treated exclusively as a revenue receipt and thus, be transferred to the credit of Income & Expenditure Account.

2.   It may be treated exclusively as a capital receipt and thus, be added to the

Capital Fund on the liabilities side of the Balance Sheet.

3.   Some portion of Entrance Fee ( say 40% ) may be treated as a revenue receipt and thus, be transferred to the credit of Income & Expenditure Account and remaining portion ( say 60% ) may be treated as a capital receipt and thus, be added to the Capital Fund on the liabilities side of the Balance Sheet.

• How will you account for Donation & Legacies ? 

Types of Donations and Legacies	Accounting Treatment
(a) General Donations and Legacies	(a) These donations & legacies are treated as(a) These donations & legacies are treated as revenue receipts and thus, are transferred to the credit of Income & Expenditure Account.
(b) Specific Donations	(b) These donations & legacies are treated as capital receipts and thus, are transferred to a ' Special Fund Account' (e.g., expenditure on the construction of building out of Building Fund) should  be  shown  on  the  assets  side  of  the Balance Sheet and an equal amount should be transferred from that Special Fund to the Capital Fund.