Accounting for Not-for-Profit Organisations

The full picture

Every organisation needs to account for money, but the reason it handles money differs. A business earns revenue to make profit for its owners. A not-for-profit organisation (NPO) — a sports club, a charitable trust, a school managed by a society, a temple committee — collects money only to run its activities. Because no profit is distributed to members, the accounting statements NPOs prepare are different from the ones you studied for sole traders and companies. CBSE Class 12 focuses on three key statements: the Receipts & Payments account, the Income & Expenditure account, and the Balance Sheet.

The Receipts & Payments (R&P) account is simply a summary of the cash book for the whole year. Every rupee that came in — membership fees, donations, government grants, interest on fixed deposits, proceeds from selling old assets — appears on the receipts (left) side. Every rupee that went out — salaries, printing, sports equipment purchased, rent paid — appears on the payments (right) side. The R&P always opens with the cash and bank balance from last year's closing, and closes with the cash and bank balance at the end of this year. Crucially, R&P records only real cash and bank transactions; donated assets, outstanding expenses, and depreciation do not appear here at all.

The Income & Expenditure (I&E) account is the NPO's equivalent of the Profit & Loss account. It is prepared on accrual basis — income is recorded when it is earned, expenses when they are incurred, regardless of when cash actually moves. Unlike R&P, I&E covers only revenue items: it excludes capital receipts (such as a government grant to buy a building) and capital payments (such as the purchase of that building). If income exceeds expenditure the result is a surplus; if expenditure exceeds income the result is a deficit. The surplus or deficit is then transferred to the Capital Fund (also called General Fund) on the Balance Sheet.

Adjustments are the part students find tricky, but the logic is straightforward. Outstanding expenses are expenses incurred this year but not yet paid — they increase the expense figure in I&E and appear as a current liability on the Balance Sheet. Prepaid expenses are amounts paid this year for a benefit that belongs to next year — they reduce this year's expense and appear as a current asset. Subscriptions and fees received in advance belong to the next year — they are income of next year, not this year, so they sit as a liability now. Accrued income (earned but not yet received) is income of this year and appears as a current asset. Depreciation on fixed assets reduces their book value even though no cash leaves — it appears as an expense in I&E but not in R&P.

Capital receipts deserve special attention because students often confuse them with income. A legacy (bequest in a will), a life membership fee, a specific donation to build a sports hall, or a government grant to purchase equipment — all of these are capital receipts. They do not flow through I&E. Instead they are credited directly to specific funds or the Capital Fund on the Balance Sheet. The purchased asset then appears as a fixed asset, and depreciation on that asset will reduce the fund each year. A revenue grant (say, a government grant to pay staff salaries) is different — it funds day-to-day operations and is treated as income in I&E.

The Balance Sheet of an NPO looks familiar but has one important difference: there are no owner's equity or share capital heads. Instead, the net worth section is called the Capital Fund or General Fund. It opens with last year's balance, and this year's surplus (or deficit from I&E) is added to (or subtracted from) it. Specific funds like the Sports Fund or Prize Fund appear separately. Fixed assets, investments, cash and bank balances, and current liabilities all appear in their usual places. Together, the R&P and I&E accounts feed into the Balance Sheet to present the complete financial picture of the NPO.

An Indian example

Imagine the Delhi Badminton Club, a members' sports society. During the year it collected ₹3,60,000 in annual subscriptions, received a ₹5,00,000 government grant to build a new court (capital receipt), earned ₹18,000 interest on its fixed deposit, and spent ₹2,40,000 on coach salaries, ₹60,000 on shuttles and equipment, and ₹40,000 on hall rent. At year-end, ₹20,000 of salary is still unpaid and ₹10,000 rent paid in March covers the current and next two months (March, April, and May). In the R&P account the full ₹5,00,000 grant appears on the receipts side — cash did arrive. But in the I&E account that grant is absent because it is capital, not revenue. The I&E shows income of ₹3,60,000 + ₹18,000 = ₹3,78,000, and expenses of salary ₹2,40,000 + ₹20,000 outstanding = ₹2,60,000, plus equipment ₹60,000, plus rent ₹40,000 − ₹6,667 prepaid = ₹33,333 — giving a healthy surplus. The ₹5,00,000 grant goes straight to a Building Fund on the Balance Sheet, and the new court under construction appears as a fixed asset. That difference between R&P and I&E is precisely what the examiner is testing.

Key concepts covered

• Receipts & Payments account
• Income & Expenditure account
• Balance sheet
• Treatment of items

Common misconceptions to watch for

• Misconception: 'R&P and I&E show the same thing — both are just summaries of income and expenses.' Reality: R&P is cash-based and includes every receipt and payment, capital or revenue; I&E is accrual-based and covers only revenue items. A capital grant, for example, appears in R&P (cash was received) but is completely excluded from I&E.
• Misconception: 'Any donation or grant received by an NPO is income and goes into the I&E account.' Reality: only revenue grants and general donations that fund day-to-day operations are income. A specific donation to build a hall, a life membership fee, or a grant to purchase an asset is a capital receipt — it bypasses I&E and is credited directly to a specific fund or the Capital Fund on the Balance Sheet.
• Misconception: 'The opening cash balance should not be included in R&P because it is from last year.' Reality: the opening cash and bank balance is always the first line on the receipts side of R&P. Without it, the closing balance calculated will be wrong by exactly that amount and will not match the actual cash in the organisation's hands.