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Designed By : Dharmik Patel


Definition :
Cross,andUnitedWay.also called not-for-profitorganization.


A nonprofit organization is formed for the purpose

of serving a public or mutual benefit other than
the pursuit or accumulation of profits for owners
or investors. "The nonprofit sector is a collection
of entities that are organizations; private as
opposed to governmental; non-profit distributing;
self-governing; voluntary; and of public benefit"
(Solomon 10). The nonprofit sector is often
referred to as the third sector, independent sector,
voluntary sector, philanthropic sector, social
sector, tax-exempt sector, or the charitable sector.

There are certain organizations which are set up for providingserviceto

its members and the public in general. Such organizations include clubs,
charitable institutions, schools, religious organizations, trade unions,
welfare societies and societies for the promotion of art and culture. These
organizations have service as the main objective and not theprofitas is
the case of organizationsin business. Normally, these organizations do
not undertake any business activity, and are managed by trustees who
are fully accountable to their members and the society for the utilization
of the funds raised for meeting the objectives of the organization.
Hence, they also have to maintain proper accounts and prepare the
financial statement which take the form of Receipt and Payment Account;
Income and Expenditure Account; and Balance Sheet. at the end of for
every accounting period (normally a financial year). This is also a legal
requirement and helps them to keep track of their income and
expenditure, the nature of which is different from those of the business
organizations. In this chapter we shall learn about the accounting aspects
relating to not-for-profit organisation.


Not-for -Profit Organizations refer to the organizations that are for

used for the welfare of the society and are set up as charitable
institutions which function without any profit motive. Their main aim
is to provide service to a specific group or the public at large.
Normally, they do not manufacture, purchase or sell goods and may
not have credit transactions. Hence they need not maintain many
books of account (as the trading concerns do) and Trading and Profit
and Loss Account. The funds raised by such organizations are
credited to capital fund or general fund. The major sources of their
income usually are subscriptions from their members donations,
grants-in-aid, income from investments, etc. The main objective of
keeping records in such organizations is to meet the statutory
requirement and help them in exercising control over utilization of
their funds. They also have to prepare the financial statements at
the end of each accounting period (usually a financial year) and
ascertain their income and expenditure and the financial position,
and submit them to the statutory authority called Registrar of


In a book by Lester Salmon called America's Nonprofit Sector, the author concludes that the
nonprofit sector exists to serve four critical functions:
Service Provision:Nonprofit organizations provide programs and services to the community.
Often times, nonprofits are formed or expanded to react to a community need not being met by
the government. Nonprofits also tend to have the ability to act faster than government in
response to an issue. Nonprofits do not have to wait for a majority of citizens to agree upon a
proposed solution. Rather, they have the ability to react to a specialized need or a request by a
small group of citizens.
Value Guardian:Nonprofit organizations provide a mechanism for promoting individual
initiatives for the public good (16). Nonprofit organizations provide a means by which members
of a community can take action in an attempt to change the community they live in. These
actions may take the form of developing a local neighborhood watch program or, on a larger
scale, developing an organization that responds to world relief efforts.
Advocacy and Problem Identification:Nonprofit organizations provide a means for drawing
public attention to societal issues. Nonprofit organizations make it "possible to identify
significant social and political concerns, to give voice to under-represented people and points of
view, and to integrate these perspectives into social and political life" (16).
Social Capital:In America, the nonprofit sector can be seen as a bridge between capitalism and
democracy. Nonprofit organizations develop a sense of community among the citizens by
providing a means to engage in social welfare

The main characteristics of such

organizations are:


organizations are formed for providing service to a specific group or public at

large such as education, health care, recreation, sports and so on without any
consideration of caste, creed and color. Its sole aim is to provide service either free of
cost or at nominal cost, and not to earn profit.
2. These are organized as charitable trusts/societies and subscribers to such
organization are called members.
3. Their affairs are usually managed by a managing/executive committee elected by
its members.
4. The main sources of income of such organizations are: (i) subscriptions from
members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income from investments,
5. The funds raised by such organizations through various sources are credited to
capital fund or general fund.
6. The surplus generated in the form of excess of income over expenditure is not
distributed amongst the members. It is simply added in the capital fund.
7. The Not-for-Profit Organizations earn their reputation on the basis of their
contributions to the welfare of the society rather than on the customers or owners
8. The accounting information provided by such organizations is meant for the
present and potential contributors and to meet the statutory requirement.

Accounting Records of Not-for-Profit


As stated earlier, normally such organizations are not engaged in any

trading or business activities. The main sources of their income are
subscriptions from members, donations, financial assistance from
government and income from investments. Most of their transactions are
incashor through the bank. These institutions are required by law to keep
proper accounting records and keep proper control over the utilization of
their funds. This is why they usually keep a cash book in which all receipts
and payments are duly recorded.
They also maintain a ledger containing the accounts of all incomes,
expenses, assets and liabilities which facilitates the preparation of financial
statements at the end of the accounting period. In addition, they are
required to maintain a stock register to keep complete record of all fixed
assets and the consumables. They do not maintain any capital account.
Instead they maintain capital fund which is also called general fund that
goes on accumulating due to surpluses generated, life membership fee,
donation, legacies, etc. received from year to year. In fact, a proper system
of accounting is desirable to avoid or minimize the chances of
misappropriations or embezzlement of the funds contributed by the
members and other donors.


The Not-for-Profit Organizations are also required to prepare financial statements at the end of the each
accounting period. Although these organizations are non-profit making entities and they are not required to
make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was
sufficient to meet the expenses or not. Not only that they have to provide the necessary financial information
to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to
prepare their final accounts at the end of the accounting period and the general principles of accounting are
fully applicable in their preparation as stated earlier, the final accounts of a not-for-profit organization
consist of the following:
(i) Receipt and Payment Account
(ii) Income and Expenditure Account, and
(iii) Balance Sheet.
The Receipt and Payment Account is the summary of cash and bank transactions which helps in the
preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as
the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the
Income and Expenditure Account, and the Balance Sheet. Income and Expenditure Account is akin to Profit
and Loss Account.
The Not-for-Profit Organizations usually prepare the Income and Expenditure Account and a Balance Sheet
with the help of Receipt and Payment Account. However, this does not imply that they do not make a trial
balance. In order to check the accuracy of the ledger accounts, they also prepare a trial balance which
facilitates the preparation of accurate Receipt and Payment Account as well as the Income and Expenditure
Account and the Balance Sheet. In fact, if an organization has followed the double entry system they must
prepare a trial balance for checking the accuracy of the ledger accounts and it will also facilitate the
preparation of Receipt and Payment account. Income and Expenditure Account and the Balance Sheet.

Certainly, proper accounting is essential for non-trading

institutions. These concerns maintain, generally, a cash
book and later they prepare a summary of cash transactions
appearing in the cash book. This summary takes the form of
an account known as receipts and payments account.
Such concerns also prepare 'income and expenditure
account' (which is more or less on the lines of profit and loss
account) and the Balance Sheet.
The day-to-day accounting consists of maintaining.
(I) Cash book for recording receipts and payments, and

(ii) Ledger for classification of transactions under proper


Receipts and payments account

It is a summary of cash book for a given period, but the Receipts and Payments account shows the totals
of cash transactions under different heads. All the receipts, be cheque or cash are entered on the debit
(receipts) side (as in cash book) whereas all the payments (both by cheque or cash) are shown on the
credit (payments) side. Following features of the receipts and payments account will help to identify its
nature clearly :
1. It is a summary of cash book, like a cash book, receipts are shown on the debit side and
payments on the credit side.
2. Cash and bank items are merged in one column. That means receipts in cash as-well-as by , cheque are entered in one column on debit
and payments in cash as-well-as by cheque are entered in one column on credit side. Contra entries between cash and bank get
3. It is not a part of double entry book-keeping. It is just a summary of cash book which is a , part of double entry system.
4. Just like cash book, it starts with the opening balance of cash and bank and closes with the closing balance of cash and bank.
5. Both revenue and capital receipts and payments are recorded in this account. For example, ...An organization that is exclusively set up
to carryon with the object of carrying out social service or promo & organization of social activities, is a non-trading enterprise. payment
for rent and payment for building and machinery both are recorded on its payments side. Similarly, receipts on account of subscription and
machinery are shown on the receipts side.
6. Usually, it shows a debit balance which represents cash in hand and at bank. However, in case of bank overdraft, which is larger than
cash in hand, the account will show a credit balance.
7. Receipts and payments account fails to disclose gain or loss made by the concern during the period because (a) it is prepared on actual
receipt basis i.e. it records all receipts-irrespective of the period to which it relates (previous year, current year or future), (b) it also
ignores the nature of the receipts and payments (whether capital or revenue). I
8. Accounting concept of gain or loss is based on "accrual concept" which by its very nature "receipts and payments account" is not
capable of considering. Therefore, fails to disclose gain or loss (earned or suffered by the concern) during the period. For example, this
account ignores: !
(i) Decrease or increase i.e. depreciation or appreciation in the value of assets;
(ii) Increase or decrease in the value of stock;
(iii) Provision for expenses incurred but payments not made-outstanding expenses.
(iv) Accounting for payment in advance for the services to be utilized in the next accounting period-prepaid expenses.
It also fails to distinguish between:
(v) Capital and revenue payments-whether expenditure or purchase of an asset, and
(vi) Business charge and appropriation- whether business expenditure or drawings.

Income and expenditure account


account is prepared by non-trading concerns who want to know if during

the financial year their income has been more than their expenditure i.e. profit
or vice versa ( i.e. loss). Since the object of these concerns is not primarily to'
earn profit, therefore, they feel shy in giving it the name of profit and loss
account. Because the word 'profit' is a taboo which any society 'looks down
upon'. Of course, it discloses whether the concerned institution earned or lost.
It is equivalent to and serves the purpose of 'profit and loss account'.
It is prepared on "accrual basis" (not on receipt basis) meaning thereby that all
incomes are to be included which have been earned in the relevant period
(whether actually received or not). Similarly, it includes all expenses incurred in
the relevant period (whether actually paid or not). This account serves exactly
the purpose which 'profit and loss account' serves in a trading concern. On the
pattern of 'profit and loss account' income is shown on the credit side and
expenditure on the debit side. It also distinguishes between 'capital & revenue'
items i.e. it does not take into consideration capital items {both receipts and
payments). It follows double entry principles faithfully.


The balance sheet of a non-trading concern

is on usual lines. Liabilities on left hand side
and assets on right hand side. In trading
concerns, excess of assets over liabilities is
called 'capital'. Here, in non-trading
concerns, excess of assets over liabilities is
called 'capital fund'. The capital fund is built
up out of surplus from income and
expenditure account.



1. It is a real account.
2. It need not be accompanied by a balance sheet.
3. It is like a cash book.
4. Closing balance is carried forward to the next period.
5. Debit side is for receipts and credit side is for payments.
6. Closing balance represents cash in hand and at bank.
7. It includes both capital and revenue items.
8. It usually shows a debit balance.
9. It ignores outstanding items.
10. It ignores credit sales and purchases.
11. It includes prepaid items.
12. It begins with a balance.
13. It includes items relating to past, present or future periods.
14. It is not a part of double entry system.
15. It ignores non-cash items like depreciation, bad debts etc

Income and Expenditure Account

1. It is a nominal account.

2. Must be accompanied by a balance sheet.

3. It is like a profit & loss account.
4. Closing balance is merged into capital fund.
5. Debit side is for expenses and credit side for incomes.
6. Closing balance represents either surplus or deficiency.
7. It includes only revenue items.
8. It may show a debit or credit balance.
9. It records outstanding items.
10. It records credit sales and purchases.
11. It excludes prepaid items.
12. It does not begin with a balance.
13. It includes items relating to current period only.
14. It is a part of double entry system.
15. It records non-cash items like depreciation, bad debts etc.


1. Any cash received in regarded as receipt.

2. It is not confined to any accounting year. In other words, it may
include cash received for any year-past, present or future.
3. It may be of both capital and revenue nature.
4. In case of receipt, cash increases equal to amount of receipt.
5. An item can't be called "receipt" unless equivalent amount of
cash received.
6. It is recorded on debit side of cash book.
7. It is not included in final accounts. In other words, it is not
considered in determining the result of concern.


1. Any cash received mayor may not be regarded as income. Cash

received for current year is regarded only as income.
2. It is confined to current accounting year only.
3. It is of revenue nature only.
4. In case of income cash may not increase equal to the amount of
5. An item may be "income", even though cash has not been received.
6. It is credited to income and expenditure account.
7. It must be considered in final accounts.


1. Any cash paid in regarded as payments.

2. It is not confined to any accounting year, i.e. it may include cash paid for
any year-past, present or future.
3. It may be of both capital and revenue nature.
4. In case of payment, cash decreases equal to amount of payment.
5. An item can't be called "payment" unless equivalent amount of cash is paid.
6. It is recorded on credit side of cash book, i.e. credited to cash account.
7. It is not included in final accounts. In other words, it is not considered in
determining the result of concern.