CHAPTER #2

Accounting for
Non-Profit Organizations

Prepared by: Asadullah Sharifi

Lecturer at Maiwand University, Kabul
Definition and Explanation

 What is non-profit organization?

 There are certain organizations which are
formed not to earn profits but to render
services to their members and to the public.
Such organizations are clubs, hospitals,
libraries, colleges, charitable/religious
institutions, literary societies etc.
 These non-profit seeking entities exist with a
primary motive of providing service.
Conti…
 Services such as a club provides sports and
recreational facilities; a hospital renders medical
services; a literary society promotes art and
culture; and an association may also be formed to
protect the rights of its members.
 Though the main source of income of such
organizations is membership subscriptions,
donations and grants etc., they may also
undertake trading activities in order to earn
some profit which is also used for the furtherance
of the goals of the organization.
Conti…
 As the main aim of these organizations is not
to earn profits, they do not prepare Trading
and Profit and Loss A/c. But still they would
like to know whether their current incomes are
sufficient to meet their current expenses. For
this purpose they prepare an Income and
Expenditure Account which is similar to a
Profit and Loss A/c of profit seeking entity.
 A Balance Sheet is also prepared in order to
show the financial position of the non-profit
organization.
Final Accounts of non-profit
organizations
 Non-Profit Organizations also prepare their
final accounts more or less on the lines of the
profit seeking organizations, which include the
following statements:
1. The Receipts and Payments Account
2. The Income and Expenditure Account
3. The Balance Sheet
Receipts and Payments Account
 Receipts and payments account is a mere
summary of transactions appearing in Cash
Book.
 William Pickles: “Receipts and Payments
Account is nothing more than a summary of the
Cash Book (Cash and Bank transactions) over a
certain period, analyzed and classified under
suitable headings.”
 As such Receipts & Payments A/c is prepared at
the end of the year from Cash Book.
 Special Features of R&P a/c
1. It is real account and hence the rule of real
account i.e., ‘Debit what comes in and Credit what
goes out’ is followed while preparing it.
2. It starts with opening balance of cash in hand
and cash at bank.
 Cash in hand always shows a debit balance and
will, therefore, be written on its debit side.
 Cash at bank may show a debit or favorable
balance, in which case it will be written on its debit
side. In case, it is an overdraft or unfavorable, it
will be placed on the credit side. Likewise, it is
balanced at the end of the year by entering the
closing balance of cash in hand and at bank, on
the credit side.
 Conti…
3. All cash receipts are shown on the debit side
irrespective of their nature (whether capital nature or
revenue nature) and of the period (previous year, current
year or next year).
4. Likewise, all cash payments are shown on its credit
side, irrespective of their nature and relation to the
previous, current or next year.
5. Only the actual receipts and payments of cash is
recorded. Non-cash items such as depreciation,
outstanding expenses and accrued incomes are ignored.
6. This account does not tell us whether the current
incomes exceed the current expenditure or vice versa. In
order to ascertain the net income or loss of a particular
Format of Receipt and Payment
Account

Receipts $ Payments $
Example
Receipts $ Payments $

To Balance b/d 1,240 By general expenses 550

To Annual subscription 1,630 By salaries and wages 550
To Life membership fees By furniture 800
250 By rent, rates & taxes 500
To Entrance fees 240 By printing & stationary 125
To interest on securities 180 By Repairs 150
To sundry receipts By Balance c/d 915
50

3,590 3,590
Income and Expenditure
Account
 Income and expenditure account is similar to
Profit and Loss A/c of a profit seeking entity and
is prepared to ascertain whether the current
incomes are in excess of current expenditure or
vice versa. Or, it reveals the surplus or deficit
arising out of the organization’s activities during
a particular period.
 It is provided in the same manner as P&L A/c
and the end product will show a surplus or
deficit.
Special Features of Income and
Expenditure A/c:
1. It is a nominal account and hence the rule of nominal
account, i.e., ‘Debit all expenses or losses and credit all
income and gains’ is followed while preparing it.
2. No opening and closing balance of cash and bank are
recorded in it.
3. This account is prepared in the same manner in which a
P&L A/c is prepared. As such all adjustments relating to
current year such as depreciation, outstanding expenses,
prepaid expenses, earned income etc. are taken into
consideration while preparing it.
4. Only items of Revenue nature are recorded in it. All
capital nature items are ignored.
Example
Nursing Society
Income and Expenditure
Account
Expenditures $ Incomes $

To Salaries of nurses 656 By

To Board, laundry Subscriptions 1,115 1,015
and domestic help 380 Less Wrong 270
To Rent, rates and taxes 200 inclusion 100 1,000
To Car expenses 840 By Fees from non members 38
To Drugs and incidental 670 By Municipal grant 551
exp. 128 By Interest
To Outstanding expenses By Deficit

2,874 2,874
DIFFERENCE:
Basis of the Difference Receipts & Payments A/c
Nature It is summary of Cash Book
Sides Debit side records receipts
and Credit side records
payments
Types of Account It is real account
Opening Balance It starts with opening balance
of cash and bank
Closing Balance Closing cash in hand/at bank
or overdraft at bank
Capital and Revenue Records receipts and
items payments of both items
Period of Income & All receipts and payments
Expenses irrespective of the period.
Balance Sheet No need as all items are
included
Transfer of Closing Balance To next year R&P A/c
Income & Expenditure A/c
It is like a P&L A/c of profit
seeking entity
Debit side is expenses
and on Credit side income
& gains
It is nominal account
It has no opening balance
Indicates either surplus or
deficit
Income and expenditure
of only revenue nature
Incomes & expenditures
of the current year only
It is a must for remaining
capital items
To Capital Fund in B/S
Balance Sheet
 Just as in profit seeking concerns, a Balance
Sheet is to be prepared even by non-profit
organizations to show the financial position
on the last date of the accounting year.
 It is prepared from the balance remaining
after the transfer of all revenue incomes and
expenditures to the Income & Expenditure A/c
 In other words, it contains only Capital Items,
i.e., Assets, Liabilities and the Capital Fund.
 Format of Balance Sheet in a Non-
Profit Organization

Liabilities $ Assets $

Outstanding Salaries 2000 Cash in hand 4000

Capital Fund (Balancing 8000 Outstanding Subscriptions 1500
Figure) Investment 1500
Furniture 1000
Sports Equipment 2000

10000 10000
Some important items relating to
Non-Profit Organizations
 Subscriptions: It is the main source of
Income of a non-profit entity.
 Life-Membership Fees: The fee paid in order
to become the permanent member of the
entity. It is a receipt of non-recurring nature
(Capital receipt) since the members will not be
required to pay the fee annually. Hence, it is
not credited to the Income and Expenditure A/c
but added to Capital Fund or shown separately
on the liabilities side.
Conti…
 Endowment Fund: Eric L. Kohler, “It is a fund arising from a
bequest or gift, the income of which is devoted for a specific
purpose.” Thus it is a capital receipt as it provides a
permanent income to the institution and shown in Liability
Side of B/S.
 Entrance Fees: Received from new members apart from the
annual subscription amount. There are arguments for
entrance fees to be considered as capital item because it is
collected once for all and as such it is not of the recurring
nature. However, some argue that it is paid fairly regularly
every year and as such should be treated as revenue
income. (In the absence of specific instructions in
examination, it is treated as revenue income)
 Payment of Honorarium: The amount paid to persons who
are not employee of the institution for conducting Lectures,
Seminars, Conferences etc., is called honorarium and is
debited to the Income & Expenditure A/c.
Conti…
 Donations: are classified into categories;
1. Specific Donation: when donation is received
for a specific purpose, i.e., donation for building or
for providing a swimming pool, it is capitalized on
the liability side of Balance Sheet.
2. General Donation: It can be of two types;
a- General Donations of Big Amount:- It is non-
recurring in nature as such donations of huge
amount cannot be expected every year so it is
shown on the liability side of Balance Sheet.
b- General Donations of Small Amount:- Shown
on credit side of Income & Expenditure A/c
because small donations are expected every year.
Conti…
 Legacy: It is the amount received as per the will of a
deceased person. It appears on the debit side of Receipts &
Payments A/c. This amount is not of a recurring in nature,
and as such it is treated as capital receipt and shown on the
liability side.
 Sale of Old Assets: appears on the debit side of Receipts &
Payments A/c. It is capital receipt and as such should not be
transferred to Income & Expenditure A/c. However the profit
earned or loss suffered on sale of an asset must be
considered.
 Sale of Old Newspapers and Sports Materials: Shown on
the debit side of Receipts & Payments A/c and transferred to
Credit side of Income & Expenditure A/c due to the fact that
sale of these items are of regular feature.
 Numerical Questions
(1)
 Following is the receipts and payments account of Modern Club
for the year ending 31st December, 1993:
Receipts Rs. Payments Rs.
To Balance b/d on 1-1-1993 2300 By Match Expenses 6800
To Subscriptions 56400 By Rent 9600
To Interest 300 By Salaries 24000
To Donation 6000 By Sundry Expenses 3600
To Donations for Building Fund 50000 By Investments Purchased 30000
To Match Fund 10000 By Newspapers 750
To Miscellaneous receipts 430 By Sports Equipment 32000
To Sale of Grass 100 By Balance c/d 31-12-1993 18780

125530 125530
 Additional Details
 Subscription at the end of 1992 were Rs. 4000 and at
the end of 1993 were Rs. 6000. Salaries Outstanding on
31st December, 1992 and on 31st December, 1993 were
Rs. 2000 and Rs. 2500 respectively.
 On 31st December, 1992, the Club had Investments
worth Rs. 12000, Furniture Rs. 10000 and Sports
equipment valued at Rs. 20000.
 Prepare Income & Expenditure A/c for the year
ended 31st December, 1993 and a Balance Sheet as
on that date after depreciating furniture by 20% and
sports equipment by 25%.
 Solution
Balance Sheet
As on 41st Dec., 1992

Assets Rs. Liabilities Rs.

Cash in hand 2300 Outstanding Salaries 2000
Outstanding Subscription 4000 Capital Fund (Balancing Figures) 46300
Investments 12000
Furniture 10000
Sports Equipment 20000

48300 48300
 INCOME AND EXPENDITURE ACCOUNT
for the year ending 31st Dec. 1993

EXPENDITURE Rs. INCOME Rs.

To Rent 9600 By Subscriptions 56400
To Salaries 24000 Less: Outstanding Subscription
Less: Outstanding 2000 for 1992 4000
for 1992 52400
Add: Outstanding 2500 24500 Add: Outstanding Subscription
for 1993 for 1993 6000 58400
To Sundry Expenses 3600 By Interest 300
To Newspapers 750 By Donation 6000
To Depreciation on: By Miscellaneous receipts 430
Furniture 2000 By Sale of Grass 100
Sports Equipment(1) 13000 15000
To Excess of Income over
expenditure (Surplus) 11780

65230 65230
 Balance Sheet
as on 31st December, 1993

Assets Rs. Liabilities Rs.

Cash in Hand 18780 Outstanding Salaries 2500
Outstanding Subscriptions 6000 Match Fund 10000(2)
Investments Less: Match Expenses 6800 3200
12000 42000
Add: Additions 30000 Donation for Building Fund (3) 50000
Furniture 10000 8000 Capital Fund 46300
Less: Depreciation 2000 Add: Surplus 11780 58080
Sports Equipment
20000
Add: Additions 32000 39000
52000
Less: Depreciation
13000 11378 11378
0 0
 Notes
(1)Since of the date of purchase of Sports
Equipment is not given, depreciation will be
charged for the full year.
(2)Since a “Match Fund” is given in the question,

“Match Expenses” will be deducted from it and

the balance will appear on the liability side of
the B/S.
(3)“Donation for the Building” will be shown on the
liabilities side, because it has been received for
a specific purpose.
 (2)
Following is the Receipts and Payments A/c of
Star Club for the year ended 31st Dec., 1993

Receipts Rs. Payments Rs.

To Balance b/d on 1-1-1993 4400 By Salaries 18200

To Subscriptions 46100 By Rent 15000
To Interest 2500 By Printing and Stationery 7300
To Tournament Fund 12000 By Expenses on Charity Show 16100
To Donation 6000 By Tournament Expenses 7500
To Donation for Building 20000 By Investment purchased 10000
extension By Furniture 6000
To Receipts from advertisement 5200 By Balance c/d 31-12-1993 16100
in the year book

96200 96200
 Additional Information
 Subscriptions outstanding on 31st Dec., 1992
were Rs. 4500 and on 31st Dec., 1993 were
Rs. 6000. Rent outstanding at the beginning of
the year was Rs. 1000 and in the end was Rs.
1500. Furniture was purchased on 1st April,
1993.
 On 1st January, 1993 the Club had Furniture
valued Rs. 8000 and Investments valued Rs.
15000.
 Prepare Income & Expenditure A/c for the year
ended 31st Dec., 1993 and a B/S as on that
date, after depreciating furniture by 10% p.a.
 (3)
Prepare I&E A/c and B/S as on 31st Dec., 1993.

Receipts Rs. Payments Rs.

To Balance b/d (Cash in Hand) 6000 By Salaries 15400

To Subscriptions (Including Rs. By Rent 12300
600 received in advance) 40000 By Stationery 700
To Interest on Investments (Cost By Postages 400
of Investment Rs. 50000) 6000 By Bicycle 1800
To Bank Interest 200 By Govt. Bonds 12500
To Sale of furniture (Book value By Balance c/d (Cash in hand) 19600
Rs. 5000) 2400
To Life Membership fees 8100

62700 62700
 Additional Information
 Subscriptions include Rs. 3200 for the last
year; rent includes Rs. 900 paid for the last
year. Subscriptions outstanding of the current
year are Rs. 4500. Rent outstanding for the
month of Dec., 1993 is 1000 and a payment
for stationery is also due for Rs. 250.
 On 1-1-1993, Club had land valued Rs. 50000
and furniture valued at Rs. 15000.
THE END
Thank you!