Hsslive Xii Ch1 Accouting For Nop Organisation Signed

ACCOUTING FOR
NOT FOR PROFIT ORGNISATION

NOT-FOR-PROFIT ORGANISATION
There are certain organisations which are set up for providing services to its members and the public in general.
Such organisations are called NOT-FOR-PROFIT ORGANISATION.
Eg: Clubs, charitable institutions, schools, religious institutions trade unions, welfare societies etc.
NOT-FOR-PROFIT ORGANISATION is defined as “a non-profit seeking entity which does not usually involve in
trading activities, but engage in rendering services to members and society ”
Features of accounting for not-for-profit organisation

1. Their main objective is to render services to its members and the public
2. They don’t normally engage in trading activities
3. They are not expected to earn profit
4. Credit transactions are not usually made
5. No trail balance is prepared
6. Do not prepare Trading, Profit & Loss a/c
7. Their affairs are manages by executive committee elected by its members
ACCOUNTING RECORDS OF NOT-FOR-PROFIT ORGANISATION

Usually NOT-FOR-PROFIT ORGANISATION follows the cash system of accounting. A NOT-FOR-PROFIT
ORGANISATION prepares three statements at the end of the accounting year, which form its final accounts. These
statements are:
1. Receipt & Payment Account
2. Income & Expenditure Account
3. Balance sheet
RECEIPT AND PAYMENT ACCOUNT
The Receipt and Payment account is a real account which is prepared at the end of an accounting year giving a
summary of all cash receipts and payments recorded in cash book. It is debited with all items of receipts and credited
with all payments. At the end of the period, the account is balanced. The final balance in this account represents the
balance of cash in hand or at the bank or overdraft.
Features of Receipt and Payment Account
1. It is a real account
2. It is a summary of cash book
3. All receipts are debited and payments are credited
4. It usually begins with opening balance of cash in hand or at bank
5. It usually ends with closing balance of cash in hand or at bank
6. It doesn’t disclose the working results of the concern
7. It includes all receipts and payments of capital and revenue nature.
8. It records all receipts and payments relating to previous, current and subsequent years.
INCOME & EXPENDITURE ACCOUNT
An Income and Expenditure account is a nominal account prepared by a non- Profit Organisation, in order to
ascertain the surplus or deficit of a particular period. It is prepared in the form of Profit and Loss account. All
expenses and losses are debited and all incomes and gains are credited. The surplus or deficit is transferred to
Capital Fund in the Balance sheet.
Features of Income &Expenditure Account

1. It is a nominal account
2. Only revenue items are recorded
3. Income and expenditure of the current year only are included.
4. Non-Cash transactions (Depreciation, Provision of bad debts, accrued income etc.) are adjusted in it.
5. There is no closing balance in this account.
6. It is prepared to find out Surplus (Income over expenditure) or Deficit (Expenditure over income)
7. The surplus or deficit is transferred to Capital Fund in the Balance sheet.
Precautions to be taken while preparing I/E a/c

1. Income and Expenditure account for the year should show the income and expenditure
for that year only.
2. If current year’s income includes income of previous year and next year, it must be
deducted.
3. If current year’s expenditure includes expenses of previous year or next year, it must be
deducted.
4. Generally we assume that outstanding expenses for the previous year must have been
paid during the current year. Similarly, outstanding income of the previous year must
have been received during the current year.
5. If any income received in advance in the previous year, it should be considered as the
income of the current year.
Preparation of Income and Expenditure Account

The following steps are followed to prepare income and expenditure account from receipt and payments
account.
1. Read the Receipt and payment account thoroughly.
2. Exclude the opening and closing balances of cash and bank
3. Exclude the capital receipts and capital payments
4. Identify the revenue incomes relating to the current year from debit side of Receipt and payment
account
5. Identify the revenue expenditure relating to the current year from credit side of Receipt and payment
account
6. Non-Cash transactions (Depreciation, Provision of bad debts, accrued income, profit or loss on sale of
fixed assets etc.) are adjusted in it.
7. Finally, the excess of income over expenditure (Surplus) or excess of expenditure over income
(Deficit) be ascertained and transferred to Capital Fund.
BALANCE SHEET
The balance sheet of a non-profit organisation is prepared for ascertaining the financial position of the
organisation. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand
side and liabilities on the left hand side.
The procedure in the preparation of balance sheet is as follows:

1. Capital fund at the beginning is ascertained by preparing a statement of affairs(Opening Balance Sheet)
2. Surplus from Income and Expenditure account must be added to the Capital Fund (Deficit must be
deducted).
3. Outstanding expenses, income received in advance etc on closing date be shown on the liability side
4. Income receivable and expenses paid in advance etc must be shown on the assets side.
5. Closing cash in hand and at bank appearing in Receipts and Payments Account must be shown on the assets side.
6. The credit balance of Receipts and Payments Account (Bank Overdraft) should be shown on the liability side.
7. Assets in existence at beginning of the year should be adjusted for additions and depreciation
8. New assets acquired during the year which appear on the payment side of Receipts and Payments
Account should be shown on the asset side of the closing balance sheet.
9. Any special collection of non-recurring nature (Capital Items) should be shown on the liability side
Receipts and Payments Income and Expenditure Account

Account
Real account Nominal Account

Summary of cash book Like a Profit and Loss account
Its debit side shows receipts and Its debit side shows expenses and losses
credit side shows payments and credit side shows incomes and gains
It starts with an opening balance of It doesn’t start with cash or bank balance
cash or bank
It records all receipts and payments It records income and expenses of
of previous year, current year and current year only
succeeding year
Non- cash transactions are not Non- cash transactions are made
made
Its closing balance is carried to Its balance (Surplus or Deficit) is transferred
the succeeding year. to Capital Fund.
It records both revenue and It records only revenue
capital items
Treatment of some peculiar items:

1. Subscription – Current year subscription is to be calculated and it is shown on the
credit side of Income and Expenditure Account. Whereas, subscription received for
some specific purpose like subscription for tournament fund, subscription for
construction of a building etc. should be capitalized and hence shown on the liability
side of the Balance Sheet.
2. Donation
a. Specific donation – Donation for building, donation for library etc. must be treated as
capital receipt and shown on the liability side of balance sheet.
b. General donation – Given for general purpose, if it is a large amount it should be
capitalized and shown on the liability side and if it is a small amount it can be shown on
the credit side of I&E account.
3. Grant received from central govt., state govt. or local bodies for day to day expense are
treated as income. But grant for specific purpose like construction of a building is to be
capitalized.
4. Legacy – It is the amount received as per the will of a deceased person. It is a capital
receipt and shown on the liability side. But if it is a small amount, it may be treated as
income. In the absence of specific information, it is preferably be capitalized.
5. Endowment fund – Fund meant for providing permanent means of support. It is a
capital receipt.
6. Entrance fee – It is the amount of fees collected on the admission of members. Some
Accountants argue that it should be capitalized as it is collected only once (nonrecurring),
but others argue that the organization receives this amount regularly in every
year because of regular entry of members, so it should be shown as an income. In the
absence of correct information, students may treat it any way, but they must append a
note justifying the choice.
7. Sale of old assets – The amount realized from the sale of an asset must be
capitalized. But if there is a profit or loss, it should be treated as income or expenditure.
8. Sale of newspapers, periodicals etc. – It should be treated as an income.
9. Expenditure stock items – Items like stationery, sports materials like bats, balls etc.
are called expenditure stock items. The value of such items used is considered as
expense and the value of unused items are treated as assets.
10.Sale of scrap, grass etc. – These are treated as income.
11.Life membership fee – It is a lump sum amount received from certain members
towards life membership instead of annual subscription. It should be capitalized as it is
a capital receipt.
12.Special purpose fund – E.g. Tournament fund, Charity fund, Prize fund, Endowment
fund etc. If there is any expense or income relating to that fund, it should not be shown
in the Income and Expenditure account, but adjusted to that fund on the liability side as

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Hsslive Xii Ch1 Accouting For Nop Organisation Signed

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ACCOUTING FOR

NOT FOR PROFIT ORGNISATION

Features of accounting for not-for-profit organisation

ACCOUNTING RECORDS OF NOT-FOR-PROFIT ORGANISATION

Features of Receipt and Payment Account

Features of Income &Expenditure Account

Precautions to be taken while preparing I/E a/c

Preparation of Income and Expenditure Account

The procedure in the preparation of balance sheet is as follows:

Receipts and Payments Income and Expenditure Account

Real account Nominal Account

Treatment of some peculiar items:

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