Preparation of Financial Statements of a Not for Profit Organisation

The preparation of financial statements of a Not for Profit Organization (NPO) is an essential part of financial reporting, providing insights into the organization’s financial health and transparency. Unlike profit-oriented businesses, the focus of an NPO is on serving the community rather than maximizing profits. Therefore, the structure and approach to preparing financial statements differ. For Commerce students, understanding this process is important, as it forms the foundation for non-profit accounting. This guide will walk you through the steps of preparing financial statements for an NPO with an example for better understanding.

What is a Not-for-Profit Organization (NPO)?

A Not-for-Profit Organization is an entity that operates for social, cultural, educational, religious, or charitable purposes rather than for generating profit. NPOs typically reinvest any surplus back into the organization to further their goals. Financial statements for an NPO aim to show how resources are utilized and how the organization fulfills its mission.

The financial statements of an NPO typically include:

1. Receipts and Payments Account: A summary of all cash transactions during the period.
2. Income and Expenditure Account: Similar to a profit and loss account but designed for nonprofits.
3. Balance Sheet: A snapshot of the financial position at the end of the accounting period.

Steps in Preparing Financial Statements for an NPO

1. Prepare the Receipts and Payments Account

The Receipts and Payments Account is a summary of all cash and bank transactions over the accounting period. This includes both revenue and capital receipts and payments, regardless of the accounting period they belong to.

Example: Let’s assume the following receipts and payments for an educational NPO:

• Receipts:
  • Donations: ₹50,000
  • Membership Fees: ₹20,000
  • Grants: ₹30,000
  • Sale of old equipment: ₹10,000
  • Interest on bank deposits: ₹5,000
• Payments:
  • Rent: ₹15,000
  • Salaries: ₹25,000
  • Utility Bills: ₹10,000
  • Office Supplies: ₹5,000
  • Purchase of equipment: ₹20,000

The Receipts and Payments Account would look like

Net Receipts: ₹1,15,000 – ₹75,000 = ₹40,000 surplus.

2. Prepare the Income and Expenditure Account

The Income and Expenditure Account is prepared on an accrual basis, showing the net surplus or deficit for the year. Only revenue items are considered, and capital items (such as the purchase of equipment) are excluded. It works similarly to the Profit and Loss Account for profit-based businesses.

Example: Based on the above data, assume the NPO earned some additional income during the year and incurred further expenses.

• Incomes:
  • Donations: ₹50,000
  • Membership Fees: ₹20,000
  • Interest on deposits: ₹5,000
  • Tuition Fees from Students: ₹40,000
• Expenses:
  • Salaries: ₹25,000
  • Rent: ₹15,000
  • Utility Bills: ₹10,000
  • Stationery: ₹5,000

The Income and Expenditure Account would look like this:

Net Surplus: ₹1,15,000 – ₹55,000 = ₹60,000 surplus for the year.

3. Prepare the Balance Sheet

The Balance Sheet for an NPO provides a snapshot of the organization’s assets, liabilities, and capital fund (the net worth of the organization). The capital fund is increased by the surplus or decreased by the deficit from the Income and Expenditure Account.

Example: Assume the NPO has the following assets and liabilities:

• Assets:
  • Cash in hand: ₹40,000
  • Furniture: ₹30,000
  • Equipment: ₹50,000
• Liabilities:
  • Creditors: ₹20,000
  • Bank Loan: ₹25,000

The Capital Fund at the beginning of the year was ₹35,000. With the surplus of ₹60,000 from the Income and Expenditure Account, the new Capital Fund is ₹95,000.

Now, the Balance Sheet would look like this:

Thus, the Balance Sheet shows the NPO’s financial position, with total liabilities equaling total assets.

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