Financial statements of Non - Profit Organisations Important notes , Class-12 Chapter-1

ACCOUNTING

Concept of Non- Profit Organizations 

Its main objective to serve the society and its members is not to earn profit for the set -up of culture Educational Health religious Public Service to the public and members it is not with the purpose of earning profit.

Example: School college Public Hospital literary Society for promotion of sports art and culture social welfare organization club etc.
There are lots of sourced like Trustee  and its members of Non profit organization raIge fund for required  activities as dominates members and subscription.

Financial statements of Non- Profit Organization 

It repairs annual or final accounts showing the financial transactions of the organizations for its members and to comply with statutory requirements in financial statements and financial accounts.

1. It does not differentiate between revenue and chapter incomes and expenses.
2. It does not show the incomes and expenses which have been earned during the years.
3. It does not shown defecate or surplus for the accounting period.
4. It does not show ability to meet its day to day expensive outs of if incomes of non- profit organization.

Funds received by a Non-Profit Organization may be:

1).Donates 2). membership fee 3). Entrance fee 4). subscription 5).Loans  and 6). Grants (From  Government or Institutions)

Features of  Non-Profit organization

(1). Entity: it is legal entity which is separate from it is promoters.
(2). Purpose: Its purpose is to further cultural religious educational professional objective deliver service to the people at large.
(3). Ownership: This is set up by companies individually as charitable societies or trust its belong to the society.
(4). Profit is not the objective: It does not function with the objective of earning profit but it does not  mean that it can not earn profit earned as surplus.
(5). Management: It is manage by a group of individuals cold managing committee or trustee.

(6). Funds: In the non- profit organizations funds are given by its members and donors in the form of entrance fee membership fee subscriptions and donations.
(7).Financial statements: Non- Profit organizations prepares its financial statements every year and include receipts and payments accounts income and Expenditure account and balance sheet.

Basis	Non-for-Profit Organizations	Profit Earning organizations (business Firm)
1. Purpose for which set up	It is set-up with a purpose to further culture, educational, religious, professional or public service.	Purpose is to earn profit.
2.Sources of Funds	They are raised by way of membership fee, subscriptions, Donations and Surplus from Operations. In the Balance sheet, it is shown as general Funds or capital Funds or corpus Funds	They are raised as capital by the proprietor, partner (in the cash of partnership Firms) and Share capital or borrowed funds (in the case of Companies). Profits not distributed to partners and shareholders are shown as Reserves
3.Financial Statements	Financial Statements prepared are receipts and Payments Account, Income and Expenditure Account and balance sheet	Financial Statements prepared are Trading Account, Profit and ;loss Account and balance sheet.
4.Surplus/Profit	Balance of the income and Expenditure Account is either Surplus or Deficit	Balance of the Profit and loss Account is either Net profit or Net Loss.
5.Distributions of Surplus/Profit	Its profit is not distributions among its members.	Its profit is distributions among its members.

There are some components included in the Non- Profit Organizations:

1. Receipts and payments accounts 

2. Income and expenditure accounts 

3. Balance sheet 

Receipts and Payments Accounts  

1. It is a summary of cash receipts and payments an it during and accounting period an it being shown under Appropriate heads of Accounts.

2. Receipts are shown in the Debit side where as payments are shown in the Credit side of the Accounts. 

3. Receipts and payments of every nature are shown in this Account.

Features or Characteristics of Payments and Receipts Account 

(1). Nature: It as an assets account including bank balance  

(2). Basis of preparing : It is prepared an cash basis of accounting that is transactions which have been received or paid in cash are shown in the account. Amount received are shown in the debit side and account paid are shown in the credit side.

(3). Capital and revenue receipts and payments its shows all receipts and payments weather they are of capital nature as revenue nature nature.

(4). Period : It shows all cash in bank transactions whether it receipts to currents previous as succeeding Accounting period.

(5). Opening and closing balance: In this account shows cash in hand or at bank in the beginning of the accounting period and closing balance shows cash in hand and at the end of the accounting period. 

(6). Adjustment : Adjustment of outstanding expenses , prepared expenses , Income received an advanced and depreciations are not maid in this Account.

(7). Purpose: It is to show Amount received and paid under different heads during the accounting period.

Limitation and receipts and payments accounts

1. It does not differentiate between revenue and chapter incomes and expenses.
2. It does not show the incomes and expenses which have been earned during the years.
3. It does not shown defecate or surplus for the accounting period.
4. It does not show ability to meet its day to day expensive outs of if incomes of non- profit organization.

Income and expenditure

It prepared add the end of accounting period matching revenue receipts with revenue expenses to determine surplus or defecate.

★surplus: If total credit side is more than the total of debit side is known or surplus.

★Defecate: If the credit side is more than the product of credit side is known as defecate.

★Surface is added to the capital fund where as defecate is deducted from capital in the balance sheet.

★Income and expenditure account is prepared following the accrual basis of accounting therefore.

Revenue expenses covered the accounting period are taken whether paid or not.

Revenue income for the accounting period are taken whether received or not.

Non cash expenses such as depreciation are accounted for.

Capital expenditure, e.g purchase of hand are not considered because they are shown in the balance sheet.

Capital income or received, eg., donations specific purpose are not considered.

Features of income and expenditure accounts: 

1. Nature:  This is Nominal account  expenses and losses for the fees are transferred to the dabit  while income and gains for the year transferred to the credit of incomes and expenditures.

2. Basis of Accounting: It is an accrual basis of accounting in which income expenses of losses of revenue are shown.

3. Accounting period: In the income and expenditure account income and expenses and losses which relate to the current accounting period whether paid or not are shown in the Accounting.

4.Opening and closing balance: It does not have an opening balance.

★ Its balance at the end is transferred to Capital funds in the balance sheet.

5.Adjustment: All adjustments relating to prepared for outstanding expenses and incomes provision for depreciation or doubtful debts are made.

Balance sheet

★ It shows the financial position of an organization at a particular date.

Method of preparing the balance sheet is the same as that is of an enterprise of a non-profit organization.

★ The balance sheet shows assets Liabilities and capital funds. 

★ Capital funds as journal funds corpus funds and accumulated funds.

★ Opening capital fund is excess of assets over liabilities in the beginning of the period

capital fund= Total assets -Total liabilities

Fund bases Accounting 

Fund: The amount which is received or set aside by the non- profit organizations to be used for specific purpose.

Donations Received or fund set aside for specific purpose are credit to a separate account fund account which are shown in the Balance Sheet.

Fund bases Accounting: Accounting when done on this basis is non-as fund base accounting .

★ Non-Profit Organization normally  maintains a separate Bank Account for each fund.

★ In the Balance sheet, each Fund (Say Building Fund, Sports Fund, etc.) are shown separately further receipts and/or surplus set aside towards the fund and income from investment of fund amount is added to the opening balance of the fund.

★A fund normally has a credit Balance, which is Shown in the liabilities side of the Balance Sheet.

Example: prize fund has a balance sheet of ₹1,00,000 which is invested or fixed deposit in a Bank earning 8% interest. Further Donations of ₹10,000 is received towards it. Expenses incurred towards prize are₹7,000, ₹3,000 Towards and ₹4,000 Towards distributions of cash prizes.

In the Balance Sheet, it is shown as follows:  

Prize Fund                                                                                                 ₹

Opening Balance                                                                                                  1,00,000

Add: Donations                                                                                                        10,000

         Interest earned on deposit                                                                                 8,000

                                                                                                                           ___________

                                                                                                                              1,18,000

Less: Expenses incurred towards prizes for the year                                                 7,000

                                                                                                                          ____________

Shown in the liabilities side of the Balance sheet                                                1,11,000

Accounting Treatment of Fund when an Assets is Created 

In an asset is created out of specific (say Building Fund ). Amount  incurred on the asset (easy Building) is Transferred to capita fund.

★Assets created out of specific Fund is shown in the assets side of the Balance Sheet and the amount is included in capital Fund. 

Categories  of Fund : In the case of non-profit organizations, Funds may be classified  under following two heads.

(i) Unrestricted Fund: Unrestricted Fund means the fund use of which is not restricted stating differently, management can use the amount in the fund as is considered appropriate, but for the purpose for which the organization exists. This fund is known as the fund General Fund or Capital Fund.

(ii) Restricted Fund: Restricted Fund is the fund the use of which is restricted either by the management or by the donors for a specific purpose. 

(a) Government grant for a specific purpose: Grant received from Government for specific purpose is restricted to be used for the purpose it is granted.

★It is accounted in the books following fund based Accounting. For example, grant received from government for 'polio' Eradication programmer is created to 'polio' Eradication Fund and Incomes (Interest) earned relating to the fund is created to the fund while related expenses are debited.

(b) Endowment Fund: It is a fund usually of a non-profit institution, arising from bequest or gift, the income of which is devoted to a specific purpose.

(c) Annuity Fund: An annuity find is established when a non-profit organizations receives assets from a donors with a condition to a pay specific amount periodically to designated beneficiary or beneficiaries.

★Annuity is a fixed annual (normally) payment and usually, continue only during the lifetime of the named beneficiary or for the period specific by the donor.

(d)Loan Fund: Loan Fund is set-up to grant loans for specific purpose say loan to purpose higher steadies.

(e)Fixed Assets Fund: Fixed Assets fund is a fund earmarked for investment in fixed assets or already invested in fixed assets fund.

Example of fixed Assets fund is 'Building Fund': Amount invested in fixed assets during the year is transferred to capital fund.

(f)Prize Fund: Prize fund is a fund set-up to use for distributions as prize say for achievements or contribution to the society.

Accounting Treatment of Important items of Income and Expenditure Account.

1. Entrance Fee/Admission fee

2. Life Membership fee 

3. Specific Receipts 

4. Donations 

5. legacy 

6. Grant 

7. Sale of used sports Materials 

8. Sale of old Assets 

9. Sale of old Newspaper 

10. Subscriptions

11. Honorarium 

12. Revenue Expenses 

13. Revenue receipts 

14. Capital Expenditure 

15. Capital Receipts 

16. Cost of Goods Consumed 

1. Entrance Fee/Admission Fee:- Entrance fee or Admission fee is the amount paid by a person at the time of becoming a member of the non-profit Organizations.

★ Entrance fee or Admission fee is a revenue receipts and therefore, is accounted as an Income and Expenditure Account.

2. Life Membership Fee: Life Membership fee is accounted as a capital Receipts and added to capital fund on the liabilities side of the the Balance Sheet.

3. Special Receipts: Special receipts mean receipts of amount for special Occasions.

★ The Balance after the event is held is transferred to the Income and Expenditure Account.

4. Donations:- There are two types of Donations:-

(i) General Donations 

(ii) Specific Donations

(i) General Donations:- The amount of general donations is a accounted as an income and credited and Expenditure Account.

(ii) Specific Donations:- In case  the donor specific the purpose for which the donations can be used. It is a specific Donations.

★ It is a specific donations is capitalized and is Shown in the liabilities side of the Balance Sheet.

5. Legacy:- Legacy is the amount received as donations by a non-profit Organizations under will of a deceased person. The donor may or may not specific Conditions for its use.

It is accounted for in the Books of Accounted as follows:-

(i) General Donations 

(ii) Specific Donations

(i) General Donations :- It is accounted as revenue receipts and thus is credited to Income and Expenditure Account.

(ii) Specific Donations:- It is accounted as capital receipts and is credited to a specific 'Fund Account ' maintained for the purpose (e.g., prize fund ).

★ It is shown in the liabilities side of the Balance Sheet.

6. Grant:- Grant (Including Government Grant ) Received for a specific purpose is a capital receipts and is shown in the Balance Sheet.

If the grant is not for a specific purpose, it is a revenue receipts and is credited to Incomes and Expenditure Account.

7. Sale of used Sports materials:- Stock of sports material is shown in the assets side of the Balance Sheet. Sports materials consumed during the year is debited to  Income and Expenditure Account and balance amount is carried  forward in the Balance Sheet.

There are two types of account:-

(i)In case old sports material that was debited to Income and Expenditure Account is sold , the sale proceeds are created to Income and Expenditure Account. i.e.. is shown as Incomes.

(ii) In case , old sports material apereas in the Balance Sheet and is sold gain (profit) if any on sale of old sports material (sale proceeds -Book value ) is created to Incomes and Expenditure Account ,ue.is shown as incomes.

8. Sale of old Assets :- Sale of an assets may result in gain (profit), if sale value is more then the book value or loss if sale value is less then the book value ; or neither profit nor ;loss , if Sale value is equal too the book value.

★ Book value of am assets as on the date of sale is determined after charging deprecations up the date of sale .

★ Sale value is created or loss, if any , is debited to the Income and  Expenditure Account.

9. Sale of old newspaper :- Amount paid for newspaper , magazine , periodicals , etc., is debited to Incomer and Expenditure Account.  It being a revenue expenses.

10. Subscriptions:- It is the amount paid by the members periodically )quarterly or half or yearly ) so that their membership remains alive. It is a source of Income of non-profit Organization.

★ Subscriptions received whether is for current, pervious or next period, is shown in the debit Side of the receipts and payments Account.

11. Honorarium:- Honorarium is a token payment made to a person who has voluntarily undertaken a service which is normally rendered for a fee.

★ It is an Expenditure of gratitude rather then a payments for the service.

For Example, Payments made to a guest teacher for lecture is an honorarium.

★ Honorarium is a revenue expense hence, debited to Income and Expenditure Account.

12. Revenue Expenses:- Revenue expenses are expenses incurred by the non- profit organizations to carry out the operations or activities for which it is set-up.

Examples: Wages, Salaries, rent, Printing and Stationery , insurance, advertisement, etc,.

★ Revenue Expenses also include expenses incurred on the maintenance of fixed assets .eg. repairs, Depreciation, etc,. 

All such expenses are debited to the Income and Expenditure Account.

13. Revenue receipts :- Revenue receipts are the amounts received as Income such as entrance Fee , General  Donations, rent, subscription and interest on investment other then interest on specific fund investments. They are shown in the credit side of income and expenditure Account.

14.Capital Expenditure:- Expenditure that gives benefit of enduring nature, i.e., the benefit of which is not exhausted or consumed within the accounting period is Capital Expenditure. Examples: purchase of books furniture, investment, building, etc., Are treated as capital expenditure and shown in the assets side of the Balance sheet.

15.Capital Receipts:- Capital Receipts are the receipts by Non-profit Organization that are received for a specific purpose say, specific donation, specific legacy donation and Life Membership Fee, etc.

16. Cost of Goods Consumed:- Non-Profit Organization consume consumable items, e.g., stationary is consumed in the office, medicines in the hospital sports material by a sports club and so on. In such a case, separate Stock Account for each of the consumable items is prepared to determine the consumptions during the year. 

★ Income and Expenditure Account will show correct 'surplus ' or 'Deficit' , only if the goods consumed are debited to Income and Expenditure Account and Closing Stock is shown in the Balance Sheet. 

Preparations of Income and Expenditure Account and Balance Sheet from Receipts and Payments Account with Additional Information

Income and Expenditure Account from the Receipts and Payments Account and other information is prepared by following the steps as follows:

Step 1. Calculate Opening Capital Fund:  If opening balance of the Capital Fund is not given, Balance Sheet in the beginning of the year is prepared by taking Opening Cash and Bank balance as given in the Receipts and Payments Account, other assets and liabilities as given the additional information. Difference between the  assets and liabilities is Capital Fund.

Step 2. Determine Items of Income from Receipts and Payments Account: In Receipts and Payments Account, all receipts, whether they relate to current, previous or future

periods and whether they are of revenue or capital nature are shown in the debit side. But, in the Income and Expenditure Account only revenue receipts of current accounting period (whether received or not) are taken. Thus,

(a) Revenue receipts in which no adjustment is required, are shown in the credit side of the Income and Expenditure Account.

(b) Revenue receipts in which adjustment is required, determine income for the current accounting period and show in the credit side of the Income and Expenditure Account. Incomes requiring adjustments can be for subscriptions, rent and interest, etc. It is determined as follows:

(c) Shows capital receipts in the appropriate assets and liabilities Account and then incorporate them in the Balance Sheet.

Step 3.Determine Items of Expenses from Receipts and Payments Account: Identify from the payments side (Credit Side) of Receipts and Payments Account, revenue

payments and capital payments.

(a) Revenue payments which do not require adjustment, are shown in the debit side

of the Income and Expenditure Account.

(b) Revenue payments which require adjustment, determine the expense for the

current accounting period and show them in the debit side of the Income and

Expenditure Account. It is determined as follows:

              

(c) Show capital payments in the appropriate assets and liabilities accounts and

show them in the Balance Sheet.

Step 4. Items not existing in Receipts and Payments Account: Following items do not exist in

Receipts and Payments Account but are shown in Income and Expenditure Account:

(a) Depreciation on fixed assets as an expense, i.e., in the debit side.

(b) Outstanding Expenses as expenses, i.e., in the debit side.

(c) Accrued or outstanding incomes as an income, i.e., in the credit side.

(d) Loss on sale of fixed assets, if any, as expense (loss), i.e., in the debit side.

(e) Gain (Profit) on sale of fixed assets, if any, as income, i.e., in the credit side.

Deduct the amount of depreciation from fixed assets in the Balance Sheet after adjusting purchase and sale of fixed assets.

Step 5. Determine Surplus or Deficit in Income and Expenditure Account: By comparing total

of debit side and total of credit side of Income and Expenditure Account. If total of credit side is more than the total of debit side, it is surplus (i.e., excess of income over expenditure). And if, total of debit side is more than the total of credit side, it is deficit (i.e., excess of expenditure over income). Surplus or deficit is transferred to the Capital Fund and shown in the Balance Sheet.

Step 6. Closing Balance Sheet: Prepare Balance Sheet as at the end of the year after taking into account opening balances of assets, liabilities and opening Capital Fund, surplus or deficit, purchase and sale of assets during the year and charging depreciation on the fixed assets.

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