Meaning of NPO

Not-for-Profit organizations(NPO) are to those organizations the main purpose of which is not to earn profit but promoting commerce, art, science, religion, charity or any other useful activity for the welfare of others. The payment of dividend to their members is not allowed.

 

Examples of NPO

1.Sports Clubs 2.Charitable Hospitals 3.Social Clubs like any cultural club 4.Charitable Schools/ Colleges 5.Religious Institutions like Temple, Gurudwara, Church, Mosque 6.Resident welfare association etc.

 

Main features of NPO

  1. Purpose: formed for providing service like education, health care, recreation, sports but not to earn profit.
  2. Nature: formed as charitable trusts/societies.
  3. Management: NPOs are managed by a managing committee elected by its members.
  4. Main sources of income:
  • subscriptions from members,
  • donations,
  • legacies,
  • grant-in-aid,
  • other like income from investments.
  1. Capital: The funds raised through various sources are credited to capital fund or general fund.
  2. Distribution of dividend: Surplus is not distributed amongst the members but is added in the capital fund.
  3. Accounting Statements: Main accounting statements prepared by an NPO are:
  • Receipts and Payments A/c
  • Income and Expenditure A/c
  • Balance Sheet

 

Difference between a Profit making organisation and NPO

  Basis Profit Making Organisation Not-for-Profit Organisation
1. Primary Motive To earn profit. To provide services.
2. Owner’s Fund / Capital Fund Owner’s fund represents the owner’s investments plus accumulated reserves and surplus. Capital fund represents the accumulated surplus of subscriptions, donations and net profits of an NPO.
3. Net result of activities The net result is profit/loss. The net result is the surplus/deficit.
4. Accounting Statements Main accounting statements:

a) Manufacturing A/c

b) Trading A/c

c) Profit and Loss A/c

d) Balance Sheet

Main accounting statements:

a) Receipts and Payments A/c

b) Income and Expenditure A/c

c) Balance Sheet

 

Main Accounting Statements prepared by an NPO:

  1. a) Receipts and Payments Account
  2. b) Income and Expenditure Account
  3. c) Balance Sheet

 

Receipts & Payments Account

The ‘Receipts & Payment Account’ is a Real Account, which shows all receipts on Debit side and payments on Credit side, whether Capital or Revenue relating to Previous/ Current/ Next accounting year, along with the Cash & Bank balances in the beginning and at the end of an accounting period.

 

Income & Expenditure Account

An Income and Expenditure Account is a nominal account prepared to calculate the result of activities of an NPO over an accounting year.

It is debited with revenue expenses and losses and credited with revenue incomes, for current accounting period and discloses the surplus or deficit as the balance. The excess of income over expenditure is called surplus and the excess of expenditure over income is called deficit.

 

Balance Sheet

Balance Sheet is prepared to show the financial position of an NPO in the same manner as in case of any Business organisation or Profit making organisation. But, capital in this case is called Capital Fund and Surplus is added to Capital Fund or Deficit is subtracted from Capital Fund like profit is added to Capital and Loss is subtracted from Capital in case of profit making organisation.

 

Difference between Receipts & Payments A/c and Income & Expenditure A/c

  Basis of Distinction Receipts & Payments Account Income & Expenditure Account
1. Nature of Account Real account. Nominal account .
2. Basic Structure A summarised Cash Book. A Profit & Loss Account.
3. Objective To show a summary of cash/bank transactions during an accounting period . To ascertain the net results during an accounting period.
4. Opening Balance Opening balance is cash or bank balances ( or Bank Overdraft) . It has no opening balance.
5. Debit side All the receipts: revenue as well as capital. All the revenue expenses and losses. .
6. Credit side All the payments: revenue as well as capital. All the revenue incomes.
7. Closing Balance Cash or bank balance(or bank overdraft) . Surplus or deficit or no balance at all.
8. Treatment of Closing balance Carried forward in the same Account of the next period. Transferred to the Capital Fund in the Balance Sheet.
9. Non-cash ltems Like Depreciation, bad debts, not shown . Like depreciation, bad debts, etc. are shown.
10 Period to which Items relate Items relating to previous, current or next accounting period. Only those items which relate to current accounting period.

 

  

Difference between Profit and Loss A/c and Income & Expenditure A/c

  Basic of Distinction Income & Expenditure Account Profit & Loss Account
1. Object To calculate Surplus or Deficit. To ascertain net profit or loss.
2. Who Prepares ? Non-profit organisations. Business organisations.
3. Basis of Preparation Receipts and Payments Account (and other information). Trial balance (and other information).
4. Balance Surplus or deficit. Net profit or net loss.