Accounts of Not-For-Profit-Making Organizations

1. Introduction to Not-For-Profit-Making Organizations

Not-for-profit-making organizations (NPOs) are entities established for purposes other than the pursuit of profit. Examples include social clubs, charities, professional bodies (like ICAN), and religious organizations. Unlike commercial enterprises that aim to maximize profit, the primary objective of NPOs is to provide services or social benefits to their members or the public.

2. Key Features of NPOs

• Objective: To provide services and promote welfare.
• Ownership: They are owned by members, not shareholders.
• Funding: Sources of income include subscriptions, donations, entrance fees, grants, and legacies.
• Capital: They do not have 'Capital' in the traditional sense; instead, they have an Accumulated Fund.
• Surplus/Deficit: The excess of income over expenditure is called a 'Surplus', while the reverse is a 'Deficit'.

3. The Receipts and Payments Account

This is a summary of the Cash Book for a specific period. It records all cash received and paid, regardless of the period they relate to or whether they are capital or revenue in nature.

• Nature: Real Account.
• Basis: Cash Basis of accounting.
• Balance: The closing balance represents cash in hand and at bank at the end of the period.

4. The Income and Expenditure Account

This is the equivalent of the Profit and Loss Account for a commercial entity. It is prepared to show the surplus or deficit for the period.

• Nature: Nominal Account.
• Basis: Accrual Basis of accounting.
• Inclusions: Only revenue items (income and expenses) relating to the current accounting period are included. Capital items are excluded.

5. Accounting for Subscriptions

Subscriptions are the main source of income for NPOs. To determine the actual subscription income for a year, the following formula is used:

Subscription Income = Cash Received + Closing Arrears + Opening Advance - Opening Arrears - Closing Advance

• Subscription in Arrears: This is an asset (money owed to the club).
• Subscription in Advance: This is a liability (money received for future periods).

6. Accumulated Fund

This represents the opening net worth of the organization. It is calculated at the start of the period by subtracting opening liabilities from opening assets.

Accumulated Fund = Total Opening Assets - Total Opening Liabilities

7. Statement of Financial Position

This statement shows the financial position of the organization at a specific date. It lists assets, liabilities, and the accumulated fund (adjusted for the surplus or deficit from the Income and Expenditure account).