Home > Topics > Foundation – Paper 1 – Accounting > Financial Statements of Not-for-Profit Organizations

Financial Statements of Not-for-Profit Organizations (NPO)

"Organizations that exist to serve a purpose, not to earn profit."

Not-for-Profit Organizations (NPO) like charities, clubs, educational institutions, religious organizations, and trusts operate on a different philosophy than businesses. They don't have "owners" seeking profit—instead, they exist to serve a social cause or provide services to members.

What Makes NPOs Different?

Basis	For-Profit Business	Not-for-Profit Organization
Objective	Earn profit for owners/shareholders.	Serve a social cause or members.
Ownership	Owned by shareholders/proprietors.	No owners. Managed by trustees/governing body.
Capital	Called 'Capital'.	Called 'General Fund' or 'Corpus Fund'.
Profit Statement	Profit & Loss Account.	Income & Expenditure Account.
Revenue Source	Sales from customers.	Subscriptions, donations, grants, fees.
Surplus	Profit distributed to owners.	Surplus added to General Fund (reinvested in cause).

Loading comparison…

Financial Statements Prepared by NPOs

NPOs prepare three main financial statements:

1. Receipts & Payments A/c

↓

2. Income & Expenditure A/c

↓

3. Balance Sheet

Loading diagram…

1. Receipts and Payments Account

"A summary of the Cash Book."

This is the simplest statement. It's just a record of all cash received and paid during the year.

Features

Note

Key Characteristics:

Real Account: It's essentially a summarized Cash Book.
All Cash Transactions: Includes both capital and revenue receipts/payments.
No Accrual: Only cash transactions (no outstanding/prepaid).
Opening & Closing Balance: Shows cash/bank at start and end.
Always Debit Balance: Represents cash in hand/bank.

Loading note…

Format

Receipts and Payments Account for the year ending 31st March 20XX

Receipts (Dr. Side)	Amount (₹)	Payments (Cr. Side)	Amount (₹)
To Balance b/d (Opening Cash)	XXX	By Salaries Paid	XXX
To Subscriptions Received	XXX	By Rent Paid	XXX
To Donations Received	XXX	By Furniture Purchased	XXX
To Entrance Fees	XXX	By Electricity Bills	XXX
To Interest on Investments	XXX	By Balance c/d (Closing Cash)	XXX
Total	XXX	Total	XXX

2. Income and Expenditure Account

"The equivalent of Profit & Loss Account for NPOs."

This shows whether the NPO generated a Surplus (profit) or Deficit (loss) during the year.

Features

Note

Key Characteristics:

Nominal Account: Records only revenue items (not capital items).
Accrual Basis: Includes outstanding and prepaid adjustments.
Period-Specific: Only items relating to the current year.
Result: Surplus (income > expenses) or Deficit (expenses > income).

Loading note…

What's Included?

Include:

Subscriptions (adjusted for outstanding/advance)
Donations (excluding capital donations)
Entrance Fees (if recurring nature)
Expenses like salaries, rent, electricity, depreciation

Exclude:

Capital receipts (Life Membership Fees, Legacies, Sale of Assets)
Capital payments (Purchase of Fixed Assets)

Income & Expenditure vs Profit & Loss

Basis	Income & Expenditure A/c	Profit & Loss Account
Used By	Not-for-Profit Organizations	For-Profit Businesses
Purpose	Find Surplus or Deficit	Find Profit or Loss
Credit Side	Income (Subscriptions, Donations)	Revenue (Sales, Service Income)
Debit Side	Expenditure (Salaries, Rent)	Expenses (Wages, Rent, Cost of Goods)
Opening Stock	Not Applicable	Shown on Debit Side
Result	Surplus/Deficit added to General Fund	Profit/Loss added to Capital

Loading comparison…

3. Balance Sheet

Similar to a business Balance Sheet, but with different terminology:

Capital is called General Fund or Accumulated Fund.
Liabilities side shows funds, reserves, and creditors.
Assets side shows fixed assets, current assets.

Special Items in NPO Accounting

1. Subscriptions

Members pay annual fees called Subscriptions. This is the primary revenue source.

Adjustment Needed:

Outstanding Subscriptions (Previous Year): If collected this year, it's revenue of the previous year (exclude from this year's I&E).
Outstanding Subscriptions (Current Year): Earned but not received (include in I&E, show as asset).
Advance Subscriptions: Received for next year (exclude from this year's I&E, show as liability).

Formula:

Subscription for I&E = Cash Received 
                     + Outstanding (Current Year) 
                     - Outstanding (Previous Year collected this year) 
                     - Advance Subscriptions

2. Donations

Revenue Donation: Used for day-to-day expenses (goes to I&E Account).
Capital Donation: For specific capital purposes like building fund (goes directly to Balance Sheet).

3. Entrance Fees / Admission Fees

If recurring in nature → Treat as Revenue (I&E Account).
If one-time contribution → Treat as Capital (Balance Sheet).

Most Common Treatment: Revenue (I&E Account).

4. Life Membership Fees

A one-time fee paid by members for lifetime membership. This is Capital in nature and goes directly to the Balance Sheet (not I&E).

5. Legacies

Money received as inheritance/bequest. This is a windfall gain and is treated as Capital (added to General Fund in Balance Sheet).

Opening Balance Sheet (Statement of Affairs)

Since NPOs don't maintain complete books, we often need to prepare an Opening Balance Sheet to find the General Fund.

Formula:

General Fund (Capital Fund) = Total Assets - Total Liabilities

This is like finding your net worth.

Real-World Example

Mumbai Cricket Club

Receipts & Payments: Shows ₹5 Lakhs received as subscriptions and ₹3 Lakhs paid as salaries in cash.
Adjustment: ₹50,000 subscriptions are still outstanding (members haven't paid). ₹20,000 was received in advance for next year.
Income & Expenditure:
- Subscription Income = ₹5,00,000 + ₹50,000 (outstanding) - ₹20,000 (advance) = ₹5,30,000
Result: If expenses are ₹4,80,000, Surplus = ₹50,000 (added to General Fund).

Quiz: NPO Accounts

Test Your Knowledge

Question 1 of 4

1. Receipts and Payments Account is prepared on which basis?

Accrual Basis

Cash Basis

Mercantile Basis

Hybrid Basis

Loading quiz…