Accounting Systems for Non-Profit Organizations (Part II)

In part I of this series, we looked at two differences in accounting for non-profit businesses. Here is a look at two more:

Accounting Statement for a Non-Profit Organization: The Non-Profit Organizations being a different type of entity necessitates a different type of accounting treatment. This need arises because the type of information required to be generated to support the various decisions of the management. Besides, their funding pattern is also different as these entities receive money from members and other agencies to promote their activities, which is usually not in the case of business enterprises. All of the accounts are compiled at the end of the financial year and presented in the form of following statements:

1) Receipt and payment account (also known as Receipt and Disbursement account) stating the actual receipts and payments made during the year. This includes for revenue receipts and payments.

2) Budget is an estimate of receipts and payments of the next financial year presented to the Board indicating expenses to be charged, voted, expenditure to be voted on account, and the receipts under various headings such as tax collection, interest, and other types receipts including revenue receipts and capital receipts. The capital receipts and disbursement, revenue receipts, and disbursements are shown in two sub-heads; Planned expenditure and Non-Planned expenditure.

3) An appropriation bill is placed in the Board seeking approval of the proposal made in the budget for raising revenue from receipts, disbursements, and payments.

4) Along with receipt and payment account, a statement of position of consolidated fund is presented.

The Income and Expenditure Account: The Income and Expenditure account is a revenue account of a Non-Profit entity, like a charitable or cultural society, educational institution, hospital, or sports club etc. It is a type of income statement similar to profit and loss statements of other business organizations. The income and expenditure account is prepared based on some principles, which are applicable in the preparation of profit and loss accounts.

Fund based expenses are first matched against the income arising/accrued from the same fund. Fund based expenses cannot be in excess of the income accrued from the fund. However, a transfer may be made from the general fund to the specific fund to set off the deficit.

Any surplus arising on the income of a non-profit either must accumulate in the fund itself or is to be disposed of as per the specific provisions. Items of revenue nature alone are dealt with in this account but they are not confined to actual cash transacted during the accounting period. Gains whether received or accrued are credited and expenses and/or loses, whether paid or incurred, are debited to the Income and Expenditure Account.

Any advance receipt of income on payment or expense is duly adjusted. After due adjustment of accruals, prepayments, provisions, depreciation etc, the final balance of the account represents an excess of income over expenditure, which is called a surplus. When the expenditure is in excess of the income then the balance is called deficit.

The Bottom Line

Nonprofit organizations (NPOs) are playing more and more influential and powerful roles all over the world. From small and local to large national and international organizations, they cover different aspects of social activities including religion, politics, education, health, environment, charity, etc. If you operate a non-profit agency of any kind, it is important to keep in mind these accounting essentials. Moreover, because of the extra complications involved with accounting for non-profits, it is always best to partner with an accounting firm that specializes in this area and understands the detailed compliance requirements.

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