Accounting for not-for-profit organisations

Not-for-profit organisations

Not-for-profit organisations are those whose main objective is not profit maximisation.

Rather, these organisations have social or environmental objectives that are meant to improve the general welfare. For example, a sports club is a non-profit organisation as it mainly exists to provide recreational services to its members.

A not-for-profit (NFP) or not-for-loss (NFL) organization is an organization 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 recognized, 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:

Receipts and payments account

The receipts and payments account is a summary of a non-profit or non-trading entity’s receipts and payments for a certain time, often annually. Due to the fact that 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 way that is similar to the income statement. The first section is the income section, which may include items like subscriptions and ticket sales. The following section is the expenditure section, which may include items like repairs and administration expenses.

The total expenditure is subtracted from the total income to obtain a resultant figure. 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 amount of liquid and non-liquid cash that the organisation has at its disposal.

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