NPO Accounting is very important topic for all Accounting and Finance students to learn and have knowledge of its basics theory and accounting.

1. CHAPTER #2
Accounting for
Non-Profit Organizations
Prepared by: Asadullah Sharifi
Lecturer at Maiwand University, Kabul

2. Definition and Explanation
 What is non-profit organization?
 There are certain organizations which are
formed not to earn profits but to render
services to their members and to the public.
Such organizations are clubs, hospitals,
libraries, colleges, charitable/religious
institutions, literary societies etc.
 These non-profit seeking entities exist with a
primary motive of providing service.

3. Conti…
 Services such as a club provides sports and
recreational facilities; a hospital renders medical
services; a literary society promotes art and
culture; and an association may also be formed to
protect the rights of its members.
 Though the main source of income of such
organizations is membership subscriptions,
donations and grants etc., they may also
undertake trading activities in order to earn
some profit which is also used for the furtherance
of the goals of the organization.

4. Conti…
 As the main aim of these organizations is not
to earn profits, they do not prepare Trading
and Profit and Loss A/c. But still they would
like to know whether their current incomes are
sufficient to meet their current expenses. For
this purpose they prepare an Income and
Expenditure Account which is similar to a
Profit and Loss A/c of profit seeking entity.
 A Balance Sheet is also prepared in order to
show the financial position of the non-profit
organization.

5. Final Accounts of non-profit
organizations
 Non-Profit Organizations also prepare their
final accounts more or less on the lines of the
profit seeking organizations, which include the
following statements:
1. The Receipts and Payments Account
2. The Income and Expenditure Account
3. The Balance Sheet

6. Receipts and Payments Account
 Receipts and payments account is a mere
summary of transactions appearing in Cash
Book.
 William Pickles: “Receipts and Payments
Account is nothing more than a summary of the
Cash Book (Cash and Bank transactions) over a
certain period, analyzed and classified under
suitable headings.”
 As such Receipts & Payments A/c is prepared at
the end of the year from Cash Book.

7. Special Features of R&P a/c
1. It is real account and hence the rule of real
account i.e., ‘Debit what comes in and Credit what
goes out’ is followed while preparing it.
2. It starts with opening balance of cash in hand
and cash at bank.
 Cash in hand always shows a debit balance and
will, therefore, be written on its debit side.
 Cash at bank may show a debit or favorable
balance, in which case it will be written on its debit
side. In case, it is an overdraft or unfavorable, it
will be placed on the credit side. Likewise, it is
balanced at the end of the year by entering the
closing balance of cash in hand and at bank, on
the credit side.

8. Conti…
3. All cash receipts are shown on the debit side
irrespective of their nature (whether capital nature or
revenue nature) and of the period (previous year, current
year or next year).
4. Likewise, all cash payments are shown on its credit
side, irrespective of their nature and relation to the
previous, current or next year.
5. Only the actual receipts and payments of cash is
recorded. Non-cash items such as depreciation,
outstanding expenses and accrued incomes are ignored.
6. This account does not tell us whether the current
incomes exceed the current expenditure or vice versa. In
order to ascertain the net income or loss of a particular

9. Format of Receipt and Payment
Account
Receipts $ Payments $

10. Example
Receipts $ Payments $
To Balance b/d
To Annual subscription
To Life membership fees
To Entrance fees
To interest on securities
To sundry receipts
1,240
1,630
250
240
180
50
By general expenses
By salaries and wages
By furniture
By rent, rates & taxes
By printing & stationary
By Repairs
By Balance c/d
550
550
800
500
125
150
915
3,590 3,590

11. Income and Expenditure
Account
 Income and expenditure account is similar to
Profit and Loss A/c of a profit seeking entity and
is prepared to ascertain whether the current
incomes are in excess of current expenditure or
vice versa. Or, it reveals the surplus or deficit
arising out of the organization’s activities during
a particular period.
 It is provided in the same manner as P&L A/c
and the end product will show a surplus or
deficit.

12. Special Features of Income and
Expenditure A/c:
1. It is a nominal account and hence the rule of nominal
account, i.e., ‘Debit all expenses or losses and credit all
income and gains’ is followed while preparing it.
2. No opening and closing balance of cash and bank are
recorded in it.
3. This account is prepared in the same manner in which a
P&L A/c is prepared. As such all adjustments relating to
current year such as depreciation, outstanding expenses,
prepaid expenses, earned income etc. are taken into
consideration while preparing it.
4. Only items of Revenue nature are recorded in it. All
capital nature items are ignored.

13. Example
Expenditures $ Incomes $
To Salaries of nurses
To Board, laundry
and domestic help
To Rent, rates and taxes
To Car expenses
To Drugs and incidental
exp.
To Outstanding expenses
656
380
200
840
670
128
By
Subscriptions 1,115
Less Wrong
inclusion 100
By Fees from non members
By Municipal grant
By Interest
By Deficit
1,015
270
1,000
38
551
Nursing Society
Income and Expenditure
Account
2,874 2,874

14. DIFFERENCE:
Basis of the Difference Receipts & Payments A/c Income & Expenditure A/c
Nature It is summary of Cash Book It is like a P&L A/c of profit
seeking entity
Sides Debit side records receipts
and Credit side records
payments
Debit side is expenses
and on Credit side income
& gains
Types of Account It is real account It is nominal account
Opening Balance It starts with opening balance
of cash and bank
It has no opening balance
Closing Balance Closing cash in hand/at bank
or overdraft at bank
Indicates either surplus or
deficit
Capital and Revenue
items
Records receipts and
payments of both items
Income and expenditure
of only revenue nature
Period of Income &
Expenses
All receipts and payments
irrespective of the period.
Incomes & expenditures
of the current year only
Balance Sheet No need as all items are
included
It is a must for remaining
capital items
Transfer of Closing Balance To next year R&P A/c To Capital Fund in B/S

15. Balance Sheet
 Just as in profit seeking concerns, a Balance
Sheet is to be prepared even by non-profit
organizations to show the financial position
on the last date of the accounting year.
 It is prepared from the balance remaining
after the transfer of all revenue incomes and
expenditures to the Income & Expenditure A/c
 In other words, it contains only Capital Items,
i.e., Assets, Liabilities and the Capital Fund.

16. Format of Balance Sheet in a Non-
Profit Organization
Liabilities $ Assets $
Outstanding Salaries
Capital Fund (Balancing
Figure)
2000
8000
Cash in hand
Outstanding Subscriptions
Investment
Furniture
Sports Equipment
4000
1500
1500
1000
2000
10000 10000

17. Some important items relating to
Non-Profit Organizations
 Subscriptions: It is the main source of
Income of a non-profit entity.
 Life-Membership Fees: The fee paid in order
to become the permanent member of the
entity. It is a receipt of non-recurring nature
(Capital receipt) since the members will not be
required to pay the fee annually. Hence, it is
not credited to the Income and Expenditure A/c
but added to Capital Fund or shown separately
on the liabilities side.

18. Conti…
 Endowment Fund: Eric L. Kohler, “It is a fund arising from a
bequest or gift, the income of which is devoted for a specific
purpose.” Thus it is a capital receipt as it provides a
permanent income to the institution and shown in Liability
Side of B/S.
 Entrance Fees: Received from new members apart from the
annual subscription amount. There are arguments for
entrance fees to be considered as capital item because it is
collected once for all and as such it is not of the recurring
nature. However, some argue that it is paid fairly regularly
every year and as such should be treated as revenue
income. (In the absence of specific instructions in
examination, it is treated as revenue income)
 Payment of Honorarium: The amount paid to persons who
are not employee of the institution for conducting Lectures,
Seminars, Conferences etc., is called honorarium and is
debited to the Income & Expenditure A/c.

19. Conti…
 Donations: are classified into categories;
1. Specific Donation: when donation is received
for a specific purpose, i.e., donation for building or
for providing a swimming pool, it is capitalized on
the liability side of Balance Sheet.
2. General Donation: It can be of two types;
a- General Donations of Big Amount:- It is non-
recurring in nature as such donations of huge
amount cannot be expected every year so it is
shown on the liability side of Balance Sheet.
b- General Donations of Small Amount:- Shown
on credit side of Income & Expenditure A/c
because small donations are expected every year.

20. Conti…
 Legacy: It is the amount received as per the will of a
deceased person. It appears on the debit side of Receipts &
Payments A/c. This amount is not of a recurring in nature,
and as such it is treated as capital receipt and shown on the
liability side.
 Sale of Old Assets: appears on the debit side of Receipts &
Payments A/c. It is capital receipt and as such should not be
transferred to Income & Expenditure A/c. However the profit
earned or loss suffered on sale of an asset must be
considered.
 Sale of Old Newspapers and Sports Materials: Shown on
the debit side of Receipts & Payments A/c and transferred to
Credit side of Income & Expenditure A/c due to the fact that
sale of these items are of regular feature.

21. Numerical Questions
(1)
 Following is the receipts and payments account of Modern Club
for the year ending 31st December, 1993:
Receipts Rs. Payments Rs.
To Balance b/d on 1-1-1993
To Subscriptions
To Interest
To Donation
To Donations for Building Fund
To Match Fund
To Miscellaneous receipts
To Sale of Grass
2300
56400
300
6000
50000
10000
430
100
By Match Expenses
By Rent
By Salaries
By Sundry Expenses
By Investments Purchased
By Newspapers
By Sports Equipment
By Balance c/d 31-12-1993
6800
9600
24000
3600
30000
750
32000
18780
125530 125530

22. Additional Details
 Subscription at the end of 1992 were Rs. 4000 and at
the end of 1993 were Rs. 6000. Salaries Outstanding on
31st December, 1992 and on 31st December, 1993 were
Rs. 2000 and Rs. 2500 respectively.
 On 31st December, 1992, the Club had Investments
worth Rs. 12000, Furniture Rs. 10000 and Sports
equipment valued at Rs. 20000.
 Prepare Income & Expenditure A/c for the year
ended 31st December, 1993 and a Balance Sheet as
on that date after depreciating furniture by 20% and
sports equipment by 25%.

23. Solution
Balance Sheet
As on 41st Dec., 1992
Assets Rs. Liabilities Rs.
Cash in hand
Outstanding Subscription
Investments
Furniture
Sports Equipment
2300
4000
12000
10000
20000
Outstanding Salaries
Capital Fund (Balancing Figures)
2000
46300
48300 48300

24. INCOME AND EXPENDITURE ACCOUNT
for the year ending 31st Dec. 1993
EXPENDITURE Rs. INCOME Rs.
To Rent
To Salaries 24000
Less: Outstanding 2000
for 1992
Add: Outstanding 2500
for 1993
To Sundry Expenses
To Newspapers
To Depreciation on:
Furniture 2000
Sports Equipment(1) 13000
To Excess of Income over
expenditure (Surplus)
9600
24500
3600
750
15000
11780
By Subscriptions 56400
Less: Outstanding Subscription
for 1992 4000
52400
Add: Outstanding Subscription
for 1993 6000
By Interest
By Donation
By Miscellaneous receipts
By Sale of Grass
58400
300
6000
430
100
65230 65230

25. Balance Sheet
as on 31st December, 1993
Assets Rs. Liabilities Rs.
Cash in Hand
Outstanding Subscriptions
Investments
12000
Add: Additions 30000
Furniture 10000
Less: Depreciation 2000
Sports Equipment
20000
Add: Additions 32000
52000
Less: Depreciation
13000
18780
6000
42000
8000
39000
Outstanding Salaries
Match Fund 10000(2)
Less: Match Expenses 6800
Donation for Building Fund (3)
Capital Fund 46300
Add: Surplus 11780
2500
3200
50000
58080
11378
0
11378
0

26. Notes
(1)Since of the date of purchase of Sports
Equipment is not given, depreciation will be
charged for the full year.
(2)Since a “Match Fund” is given in the question,
“Match Expenses” will be deducted from it and
the balance will appear on the liability side of
the B/S.
(3)“Donation for the Building” will be shown on the
liabilities side, because it has been received for
a specific purpose.

27. (2)
Following is the Receipts and Payments A/c of
Star Club for the year ended 31st Dec., 1993
Receipts Rs. Payments Rs.
To Balance b/d on 1-1-1993
To Subscriptions
To Interest
To Tournament Fund
To Donation
To Donation for Building
extension
To Receipts from advertisement
in the year book
4400
46100
2500
12000
6000
20000
5200
By Salaries
By Rent
By Printing and Stationery
By Expenses on Charity Show
By Tournament Expenses
By Investment purchased
By Furniture
By Balance c/d 31-12-1993
18200
15000
7300
16100
7500
10000
6000
16100
96200 96200

28. Additional Information
 Subscriptions outstanding on 31st Dec., 1992
were Rs. 4500 and on 31st Dec., 1993 were
Rs. 6000. Rent outstanding at the beginning of
the year was Rs. 1000 and in the end was Rs.
1500. Furniture was purchased on 1st April,
1993.
 On 1st January, 1993 the Club had Furniture
valued Rs. 8000 and Investments valued Rs.
15000.
 Prepare Income & Expenditure A/c for the year
ended 31st Dec., 1993 and a B/S as on that
date, after depreciating furniture by 10% p.a.

29. (3)
Prepare I&E A/c and B/S as on 31st Dec., 1993.
Receipts Rs. Payments Rs.
To Balance b/d (Cash in Hand)
To Subscriptions (Including Rs.
600 received in advance)
To Interest on Investments (Cost
of Investment Rs. 50000)
To Bank Interest
To Sale of furniture (Book value
Rs. 5000)
To Life Membership fees
6000
40000
6000
200
2400
8100
By Salaries
By Rent
By Stationery
By Postages
By Bicycle
By Govt. Bonds
By Balance c/d (Cash in hand)
15400
12300
700
400
1800
12500
19600
62700 62700

30. Additional Information
 Subscriptions include Rs. 3200 for the last
year; rent includes Rs. 900 paid for the last
year. Subscriptions outstanding of the current
year are Rs. 4500. Rent outstanding for the
month of Dec., 1993 is 1000 and a payment
for stationery is also due for Rs. 250.
 On 1-1-1993, Club had land valued Rs. 50000
and furniture valued at Rs. 15000.

31. Thank you!
THE END