Accounting for Not-for-Profit Organisations
What the exam tests
NPOs do not aim at profit. The exam tests Receipts and Payments Account, Income and Expenditure Account, Balance Sheet, subscriptions, donations, and special funds.
Core rules
- Receipts and Payments Account is a cash summary: all receipts (capital and revenue) and payments, opening and closing cash and bank. It is not an income statement.
- Income and Expenditure Account is prepared on accrual basis: revenue income and revenue expenses only. Surplus or deficit is transferred to Capital Fund.
- Subscription: show accrued subscription as an asset; subscription received in advance as a liability. Adjust opening and closing figures in the income.
- Donations: general donations are revenue; specific donations for a purpose are capital receipts, credited to a fund. Legacies are usually capital.
- Life membership fees are capital receipts, credited to Life Membership Fund, and transferred to income over the expected period or as per policy.
- Assets are depreciated; sale of an asset goes to the Income and Expenditure Account for profit or loss, with the asset removed at book value.
Worked example
Subscriptions received ₹90,000. Opening outstanding ₹8,000; closing outstanding ₹12,000; opening advance ₹5,000; closing advance ₹7,000. Subscription income = 90,000 − 8,000 + 12,000 + 5,000 − 7,000 = ₹92,000. Reasoning: opening outstanding was received this year, so subtract; closing outstanding is earned but not received, so add; opening advance was earned this year, add; closing advance is next year's income, subtract.
Traps
Treating the closing cash balance as surplus; crediting a building donation to general income; ignoring depreciation on assets; and adding all subscriptions received without adjusting outstanding and advance amounts.