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Nonprofit Organization Accounts

Nonprofit Organization Accounts

This article contains information about nonprofit organizations and features and their accounting.

Specific organizations are established to provide services to their members and the community. Clubs, charitable institutions, schools, religious organizations, trade unions, welfare societies, and societies to promote art and culture are examples of such organizations. Service, rather than profit, is the primary goal of these organizations, as opposed to profit in the case of businesses. Typically, these organizations do not engage in any business activity and are operated by trustees who are entirely responsible for their members and the community for using funds raised to meet the organization’s objectives. As a result, they must also keep proper accounts and prepare financial statements in a receipt and payment account, an income and expenditure account, and a balance sheet.

What is a Nonprofit Organisation?

A nonprofit organization (NPO), also known as a nonprofit entity, not-for-profit organization, or nonprofit institution, is a public authority that is organized and controlled for a collective, community, or benefit to society, as opposed to an organization that operates as a business and seeks to generate a profit for its owners. The non-distribution constraint applies to nonprofits: any profits that exceed expenditures must be dedicated to the organization’s goals rather than taken by private events. 

Donations to a nonprofit organization are usually tax-deductible to the businesses and individuals who make them. The nonprofit pays no tax on the collected donations or other income generated through fundraising events. Because of the tax code section that allows them to operate, nonprofit organizations are sometimes referred to as NPOs. 

Responsibility, truthfulness, integrity, and openness to all who have put effort, money, and faith in the organization are essential characteristics of nonprofits. Donors, funders, volunteers, program recipients, and the public hold nonprofit organizations accountable. In theory, public trust is an aspect of the amount of revenue that a nonprofit organization successfully raises for its operations if it seeks to finance its overall operations through donations.

What is Accounting for a Nonprofit Organisation?

Accounting for a nonprofit organization is the distinct process by which nonprofit organizations prepare, record, and report on their financial activities. While for-profit organizations are primarily concerned with making a profit, nonprofit organizations are more concerned with the responsibility aspect of accounting. They abide by a set of guidelines that assist them in remaining answerable to their donors and contributors.

Characteristics of Nonprofit Organisation

The following are the primary characteristics of such organizations:

  • These groups are established to provide services to a social community or the public, such as schooling, medical services, recreation, sports, and so on, without regard for caste, creed, or colour. Its main intention is to provide a service to the public for free or at a low cost, not to make a profit.
  • These are organized as charitable trusts/societies, and subscribers to such organizations are referred to as members.
  • Their relations are primarily handled by a managing/executive council appointed by their members.
  • The following are the primary sources of earnings for such organizations: 
  • (i) membership subscriptions, (ii) donations, (iii) reputations, (iv) grant-in-aid, (v) income from investments, and so on.
  • Funds raised by such organizations from different resources are attributed to an investment capital or a general fund.
  • The profit generated as an excess of income over expenditure is not distributed to the members. It is incorporated into the capital fund.
  • Not-for-profit organizations build their reputation by contributing to the well-being of society rather than by satisfying customers or owners.
  • The accounting information provided by such organizations is intended for current and prospective contributors and meets legal requirements.

Accounting for Nonprofit Organization 

1.Receipt And Payment Account: 

  • It is created at the end of the financial year using cash receipts and cash payments documented in the cash book. 
  • It is a concise summary of Cash Book. 
  • It starts with the opening balance of money in hand and money at the bank and ends with the year-end balance of cash in hand/cash at the bank.
  • Receipts and payments could be capital or revenue; they may relate to the current, previous, or subsequent year; as long as they are received or paid, they must be recorded in this account.
  • It begins with the opening balance and concludes with the closing balance.
  • It should be acknowledged that this account does not include any non-cash items such as depreciation.

2.Income and Expenditure Account:

  • It is a summary of income and expenditure for the fiscal year. It is similar to a profit and loss account prepared on an accounting system in the case of a business organization.
  • On the debit side, it documents all losses and expenses, and on the credit side, it documents all income and gains.
  • The Income and Expenditure Account only shows the part of revenue income and expenses that correspond to the current financial year.
  • It displays the company’s net result as a surplus (excess of revenue over spending) or deficit (excess of expenses over earnings), which is transferred to the capital fund shown on the balance sheet.

3.Balance Sheet:

  • ‘Not-for-Profit’ Balance sheets are prepared by organizations to determine the company’s financial position. Their Balance Sheet is prepared in the same manner as business entities.
  • It displays assets and liabilities as of the end of the accounting year. The assets can be seen on the right, and the liabilities are seen on the left.
  • It is sometimes necessary to prepare a Balance Sheet at the start of the year to identify the opening balance of the capital/general fund.

Conclusion

A nonprofit organization (NPO), also known as a nonprofit entity, not-for-profit organization, or nonprofit institution, is a public authority that is organized and controlled for the benefit of a group, community, or society, as opposed to an organization that operates as a business and seeks to profit its owners. These organizations do not engage in any commercial activity. They are run by trustees who are entirely accountable to their members and the community for using funds raised to achieve the organization’s goals. They must also maintain accurate records and prepare financial statements in a receipt and payment account, an income and expenditure account, and a balance sheet.