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Definition :
Anincorporatedorganizationwhichexistsforeducationalorcharitable
reasons,andfromwhichitsshareholdersortrusteesdonotbenefit
financially.Anymoneyearnedmustberetainedbytheorganization,
andusedforitsownexpenses,operations,andprograms.Manynonprofitorganizationsalsoseektaxexemptstatus,andmayalsobe
exemptfromlocaltaxesincludingsalestaxesorpropertytaxes.Wellknownnon-profitorganizationsincludeHabitatforHumanity,theRed
Cross,andUnitedWay.also called not-for-profitorganization.
Meaning
There are certain organizations which are set up for providingserviceto
its members and the public in general. Such organizations include clubs,
charitable institutions, schools, religious organizations, trade unions,
welfare societies and societies for the promotion of art and culture. These
organizations have service as the main objective and not theprofitas is
the case of organizationsin business. Normally, these organizations do
not undertake any business activity, and are managed by trustees who
are fully accountable to their members and the society for the utilization
of the funds raised for meeting the objectives of the organization.
Hence, they also have to maintain proper accounts and prepare the
financial statement which take the form of Receipt and Payment Account;
Income and Expenditure Account; and Balance Sheet. at the end of for
every accounting period (normally a financial year). This is also a legal
requirement and helps them to keep track of their income and
expenditure, the nature of which is different from those of the business
organizations. In this chapter we shall learn about the accounting aspects
relating to not-for-profit organisation.
IMPORTANCE
In a book by Lester Salmon called America's Nonprofit Sector, the author concludes that the
nonprofit sector exists to serve four critical functions:
Service Provision:Nonprofit organizations provide programs and services to the community.
Often times, nonprofits are formed or expanded to react to a community need not being met by
the government. Nonprofits also tend to have the ability to act faster than government in
response to an issue. Nonprofits do not have to wait for a majority of citizens to agree upon a
proposed solution. Rather, they have the ability to react to a specialized need or a request by a
small group of citizens.
Value Guardian:Nonprofit organizations provide a mechanism for promoting individual
initiatives for the public good (16). Nonprofit organizations provide a means by which members
of a community can take action in an attempt to change the community they live in. These
actions may take the form of developing a local neighborhood watch program or, on a larger
scale, developing an organization that responds to world relief efforts.
Advocacy and Problem Identification:Nonprofit organizations provide a means for drawing
public attention to societal issues. Nonprofit organizations make it "possible to identify
significant social and political concerns, to give voice to under-represented people and points of
view, and to integrate these perspectives into social and political life" (16).
Social Capital:In America, the nonprofit sector can be seen as a bridge between capitalism and
democracy. Nonprofit organizations develop a sense of community among the citizens by
providing a means to engage in social welfare
1.Such
The Not-for-Profit Organizations are also required to prepare financial statements at the end of the each
accounting period. Although these organizations are non-profit making entities and they are not required to
make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was
sufficient to meet the expenses or not. Not only that they have to provide the necessary financial information
to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to
prepare their final accounts at the end of the accounting period and the general principles of accounting are
fully applicable in their preparation as stated earlier, the final accounts of a not-for-profit organization
consist of the following:
(i) Receipt and Payment Account
(ii) Income and Expenditure Account, and
(iii) Balance Sheet.
The Receipt and Payment Account is the summary of cash and bank transactions which helps in the
preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as
the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the
Income and Expenditure Account, and the Balance Sheet. Income and Expenditure Account is akin to Profit
and Loss Account.
The Not-for-Profit Organizations usually prepare the Income and Expenditure Account and a Balance Sheet
with the help of Receipt and Payment Account. However, this does not imply that they do not make a trial
balance. In order to check the accuracy of the ledger accounts, they also prepare a trial balance which
facilitates the preparation of accurate Receipt and Payment Account as well as the Income and Expenditure
Account and the Balance Sheet. In fact, if an organization has followed the double entry system they must
prepare a trial balance for checking the accuracy of the ledger accounts and it will also facilitate the
preparation of Receipt and Payment account. Income and Expenditure Account and the Balance Sheet.
It is a summary of cash book for a given period, but the Receipts and Payments account shows the totals
of cash transactions under different heads. All the receipts, be cheque or cash are entered on the debit
(receipts) side (as in cash book) whereas all the payments (both by cheque or cash) are shown on the
credit (payments) side. Following features of the receipts and payments account will help to identify its
nature clearly :
1. It is a summary of cash book, like a cash book, receipts are shown on the debit side and
payments on the credit side.
2. Cash and bank items are merged in one column. That means receipts in cash as-well-as by , cheque are entered in one column on debit
and payments in cash as-well-as by cheque are entered in one column on credit side. Contra entries between cash and bank get
eliminated.
3. It is not a part of double entry book-keeping. It is just a summary of cash book which is a , part of double entry system.
4. Just like cash book, it starts with the opening balance of cash and bank and closes with the closing balance of cash and bank.
5. Both revenue and capital receipts and payments are recorded in this account. For example, ...An organization that is exclusively set up
to carryon with the object of carrying out social service or promo & organization of social activities, is a non-trading enterprise. payment
for rent and payment for building and machinery both are recorded on its payments side. Similarly, receipts on account of subscription and
machinery are shown on the receipts side.
6. Usually, it shows a debit balance which represents cash in hand and at bank. However, in case of bank overdraft, which is larger than
cash in hand, the account will show a credit balance.
7. Receipts and payments account fails to disclose gain or loss made by the concern during the period because (a) it is prepared on actual
receipt basis i.e. it records all receipts-irrespective of the period to which it relates (previous year, current year or future), (b) it also
ignores the nature of the receipts and payments (whether capital or revenue). I
8. Accounting concept of gain or loss is based on "accrual concept" which by its very nature "receipts and payments account" is not
capable of considering. Therefore, fails to disclose gain or loss (earned or suffered by the concern) during the period. For example, this
account ignores: !
(i) Decrease or increase i.e. depreciation or appreciation in the value of assets;
(ii) Increase or decrease in the value of stock;
(iii) Provision for expenses incurred but payments not made-outstanding expenses.
(iv) Accounting for payment in advance for the services to be utilized in the next accounting period-prepaid expenses.
It also fails to distinguish between:
(v) Capital and revenue payments-whether expenditure or purchase of an asset, and
(vi) Business charge and appropriation- whether business expenditure or drawings.
BALANCE SHEET
1. It is a real account.
2. It need not be accompanied by a balance sheet.
3. It is like a cash book.
4. Closing balance is carried forward to the next period.
5. Debit side is for receipts and credit side is for payments.
6. Closing balance represents cash in hand and at bank.
7. It includes both capital and revenue items.
8. It usually shows a debit balance.
9. It ignores outstanding items.
10. It ignores credit sales and purchases.
11. It includes prepaid items.
12. It begins with a balance.
13. It includes items relating to past, present or future periods.
14. It is not a part of double entry system.
15. It ignores non-cash items like depreciation, bad debts etc
Receipt
Income
PAYMENTS
Expenditure
1.Anycashpaidmayormaynotberegardedasexpenditure.
2.Itisconfinedtocurrentaccountingyearonly.
3.Itisofrevenuenatureonly.
4.Cashmayormaynotdecreaseequaltotheamountofexpenditure.
5.Anitemmaybe"expenditure"eventhoughcashhasnotbeenpaid.
6.Itisdebitedtoincomeandexpenditureaccount.
7.Itmustbeconsideredinfinalaccounts
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