Accounting for Not-for-Profit Organisations

Not-for-Profit Organisations (NPOs) are organisations that are established for the purpose of providing services to their members or to the society at large rather than for earning profits. Characteristics: 1. Their main objective is service — not profit 2. They do not distribute surplus to members 3. Any surplus is added to the Capital Fund (General Fund) 4. They are managed by an elected Managing Committee 5. Main sources of income: subscriptions, donations, grants, legacies Examples: • Hospitals and dispensaries • Educational institutions (schools, colleges, universities) • Sports clubs, social clubs, cultural clubs • Religious organisations (temples, mosques, churches) • Charitable trusts • Trade unions • Professional associations (ICAI, Bar Association) • Libraries • Red Cross Society, Rotary Club, Lions Club

Receipts and Payments Account: • It is a summary of all cash and bank transactions during a period • It is like a Cash Book — records actual cash received and cash paid • It starts with opening balance of cash/bank and ends with closing balance • Includes both capital and revenue items • Includes both current year and previous/next year items • No distinction between capital and revenue items • Does not show profit or surplus • Prepared on cash basis Income and Expenditure Account: • It is like a Profit and Loss Account for NPOs • Records only revenue items (not capital items) • Shows only current year's income and expenditure (adjustments made) • Starts with no opening balance • Shows surplus (excess of income over expenditure) or deficit • Prepared on accrual basis • Outstanding/prepaid items are adjusted • Depreciation and other non-cash items are included Key difference: R&P Account is a cash account; I&E Account is a nominal account showing surplus/deficit.

Subscription is the main source of income for most NPOs. It is paid periodically (monthly/quarterly/annually) by members. Treatment: 1. Subscription is a revenue income — shown in the Income and Expenditure Account 2. Only the subscription relating to the CURRENT year is shown in I&E Account 3. Adjustments made for: a. Subscription received in advance (for next year) — deducted from subscriptions received; shown as a liability in Balance Sheet b. Subscription outstanding/due (for current year, not yet received) — added to subscriptions received; shown as an asset in Balance Sheet c. Subscription in arrears (for previous years) — if collected in current year, deducted from total received Formula for current year subscription income: Subscription received during the year Add: Outstanding subscription (current year) Less: Advance subscription (current year, received last year) Less: Outstanding subscription (last year) collected this year Add: Advance subscription received this year (for next year) already excluded Simple formula: Current year subscription = Total subscriptions received + Outstanding (current year) − Received in advance (current year) − Last year's outstanding collected now + Advance brought forward (now earned) In Balance Sheet: • Outstanding subscription (current year) = Current Asset • Advance subscription (for next year) = Current Liability

Capital Fund (also called General Fund or Accumulated Fund): • It represents the net worth or proprietors' interest in a Not-for-Profit Organisation • It is equivalent to Capital in a business firm or Shareholders' Equity in a company • It is built up over the years from past surpluses, donations, legacies, and other capital receipts Calculation of Capital Fund: Method 1 — From Opening Balance Sheet: • Capital Fund at the beginning = Total Assets − Total Liabilities • This is calculated from the opening Balance Sheet (statement of affairs) Method 2 — Change during the year: Capital Fund at end = Capital Fund at beginning + Surplus (excess of income over expenditure) for the year + Capital receipts during the year (if added to capital fund) − Deficit (if any) Items that increase Capital Fund: • Surplus from I&E Account • Legacies (usually added to Capital Fund) • Life membership fees • Entrance/admission fees (if treated as capital) • Endowment fund Items that decrease Capital Fund: • Deficit from I&E Account • Losses on sale of assets Capital Fund appears on the Liabilities side of the Balance Sheet.

(a) Legacy: • A gift (amount) received by an NPO from a deceased person's will • Generally treated as a capital receipt — added to Capital Fund • However, if the amount is small and recurring in nature, it may be credited to Income side of I&E Account • If received for a specific purpose: create a separate fund; use interest/income for that purpose • Treatment: Capital Fund (Liabilities side of Balance Sheet) (b) Life Membership Fee: • A one-time fee paid by a member for lifetime membership • Treated as a capital receipt — not income for the current year • Added to Capital Fund (not to I&E Account) • Alternatively: spread over years or kept in a separate fund • Treatment: Added to Capital Fund in Balance Sheet (c) Entrance Fee (Admission Fee): • Fee paid by a new member when joining the organisation • Two possible treatments: 1. Capital treatment: Added to Capital Fund (more common, as ICAI recommends) 2. Revenue treatment: Credited to I&E Account as income • Question or organisation's practice determines treatment • Unless specifically mentioned, treat as Capital (add to Capital Fund) (d) Specific Donations: • Donations received for a specific purpose (e.g., Building Fund, Prize Fund, Scholarship Fund) • Treated as capital receipts — shown as a separate fund on Liabilities side of Balance Sheet • Principal is not spent; only the income/interest from the fund is used for the stated purpose • Never credited to I&E Account directly • General donations (not specific): Credited to Income side of I&E Account

Step 1: Calculate current year subscription Subscription received = ₹40,000 Add: Outstanding subscription = ₹4,000 Less: Received in advance = ₹2,000 Current year subscription = ₹42,000 Step 2: Calculate current year salaries Salaries paid = ₹18,000 Add: Outstanding salaries = ₹2,000 Total salary expense = ₹20,000 Income and Expenditure Account for the year ended 31st March 2024 Expenditure ₹ | Income ₹ Salaries 18,000 | Subscription 42,000 Add: Outstanding 2,000 20,000 | Donations 10,000 Rent 12,000 | Interest 2,000 Printing 3,000 | Surplus (excess) 19,000 | 54,000 | 54,000 Balance Sheet as at 31st March 2024 Liabilities ₹ | Assets ₹ Capital Fund 15,000 | Sports Equipment 8,000 Add: Surplus 19,000 | Cash/Bank 21,000 Add: Entrance fees 5,000 39,000 | Outstanding sub. 4,000 Outstanding Salaries 2,000 | Subscription in advance 2,000 | 43,000 | 33,000 Note: Balance Sheet total should balance. Let's verify: Assets: Sports Equipment ₹8,000 + Cash ₹21,000 + Outstanding Sub ₹4,000 = ₹33,000 Liabilities: Capital Fund ₹39,000 + Outstanding Salaries ₹2,000 + Advance Sub ₹2,000 = ₹43,000 Discrepancy: Opening assets not fully given. Opening capital fund ₹15,000 + opening cash ₹5,000 = ₹20,000 in opening balance sheet. In exam problems, always verify both sides balance using opening assets.