Financial Accounting

Accounting for not-for-profit organisations

Not-for-profit organisations

A not-for-profit organisation is a business or entity established by individuals to further an end, not-for-profit and charitable.

Not-for-profit organisations have one of two primary purposes: to advance the social, economic, or environmental well-being of the people; or to bring into existence or to carry out activities that, although benefiting some other end, get greater social benefit than otherwise.

A not-for-profit (NFP) or not-for-loss (NFL) organisation is an organisation that uses surplus revenues to improve and promote its mission rather than distributing them as profit or dividends. The terms nonprofit and not-for-profit are often used interchangeably.

While the similarities among NPOs in terms of a continuing focus on social benefit and development are commonly recognised, in theory and in legal definitions, the distinction goes further than just having a non–commercial orientation.

Not-for-profits play a critical role in providing vital services and social support to society. They work with governments and other groups to create and maintain social and political structures.

Financial Statements of Not-for-profit organisations

The financial statements of a non-profit organisation are quite different from that of a for-profit business. Since their primary objective is not to earn profits, they do not need to prepare a profit & loss account.

There are two main differences between the financial statements:

  • A receipts and payments account is prepared instead of a cash book.
  • An income and expenditure account is designed instead of a profit and loss statement (or income statement).

Receipts and payments account

The receipts and payments account summarises a non-profit or non-trading entity’s receipts and payments for a specific time, often annually. Because these receipts and payments are derived from cash book transactions, the receipts and payments account is seen as a condensed version of the cash book.

Because it is a real account, it may record receipts and payments for the future or prior year as well. Establishing a receipt and payment account is essential (but insufficient) for the establishment of an income and spending account.

Income and expenditure account

All accrual-based transactions are recorded in an income and expenditure account. The account is organised in a similar way to the income statement. The first section is the income section, including items like subscriptions and ticket sales. The following section is the expenditure section, including items like repairs and administration expenses.

To obtain a resultant figure, the total expenditure is subtracted from the total income. If this figure is positive, the organisation has a surplus. If it is negative, the organisation has a deficit.

Statement of financial position

The statement of financial position (or the balance sheet) for non-profit organisations has one crucial difference: instead of capital, it has an accumulated fund.

Accumulated fund = Assets – Liabilities

This fund is the total liquid and non-liquid cash that the organisation has at its disposal.

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