Meaning & Features of NPOs
Not-for-Profit Organisations (NPOs) — clubs, societies, charitable trusts, hospitals, schools, sports associations — exist to provide services to their members or the public, not to earn profit. Since they don't "trade," they don't prepare a Trading or Profit & Loss Account. Instead, they prepare a different set of financial statements.
🎯 Key Features
- Main objective is service, not profit
- Managed by a managing/executive committee, not owners
- Funded by subscriptions, donations, grants, and entrance fees
- Surplus (if any) is not distributed — it's added to Capital Fund
📑 Financial Statements Prepared
- Receipts & Payments Account — a summary of cash book
- Income & Expenditure Account — like a P&L Account
- Balance Sheet — shows financial position on a given date
Receipts & Payments Account
This is simply a summary of the cash book for the year — it records all cash and bank receipts on one side and all payments on the other, regardless of whether they relate to the current year, past year, or future year.
Characteristics
- Real account — follows "Debit what comes in, Credit what goes out"
- Starts with opening cash/bank balance, ends with closing balance
- Records both capital and revenue items
- No distinction between current year and other years' items
- Does not include non-cash items like depreciation
Typical Receipts & Payments
- Receipts: subscriptions, donations, entrance fees, sale of assets, interest received
- Payments: salaries, rent, purchase of fixed assets, printing & stationery
| Receipts | ₹ | Payments | ₹ |
|---|---|---|---|
| To Balance b/d | 10,000 | By Salaries | 18,000 |
| To Subscriptions | 45,000 | By Rent | 12,000 |
| To Donations | 8,000 | By Sports Equipment | 15,000 |
| To Sale of Old Furniture | 2,000 | By Balance c/d | 20,000 |
| Total | 65,000 | Total | 65,000 |
Income & Expenditure Account
This is a nominal account, prepared on the accrual basis — equivalent to a Profit & Loss Account for profit-making entities. It records only revenue items relating to the current year, and the balancing figure is called Surplus (excess of income over expenditure) or Deficit (excess of expenditure over income).
Characteristics
- Prepared on accrual (mercantile) basis, not cash basis
- Includes only revenue items — capital items are excluded
- Includes non-cash items like depreciation and provisions
- Adjusted for outstanding & prepaid, and accrued & advance items
- No opening/closing balance — it starts fresh each year
Result
- Income > Expenditure → Surplus — added to Capital Fund
- Expenditure > Income → Deficit — deducted from Capital Fund
Converting Receipts & Payments into Income & Expenditure
This is the most frequently tested skill in this chapter. Follow these steps:
- Take the Receipts & Payments Account as the base.
- Exclude capital receipts and payments (e.g., purchase/sale of fixed assets, loans taken/repaid) — these go to the Balance Sheet, not the Income & Expenditure A/c.
- Exclude opening and closing cash/bank balances.
- Adjust each revenue item for outstanding, prepaid, accrued, and advance amounts relating to the current year only.
- Add non-cash expenses not in the R&P A/c, such as depreciation on fixed assets and provision for doubtful debts.
- Balance the account — the result is Surplus or Deficit.
Whenever a question gives "opening" and "closing" figures for an item like subscriptions outstanding or prepaid, always draw a small working (or use the formula method) — most marks are lost here due to sign errors, not concept errors.
Treatment of Key Items
| Item | Treatment |
|---|---|
| Subscriptions | Income & Expenditure A/c (adjusted for outstanding & advance, both opening and closing) |
| Entrance Fees / Admission Fees | Generally revenue income (I&E A/c), unless the society's rules capitalise it |
| General Donations | Revenue income — credited to Income & Expenditure A/c |
| Specific Donations (e.g., building fund) | Capital receipt — shown directly on the liabilities side of the Balance Sheet |
| Legacies | Usually treated as capital receipt — added directly to Capital Fund |
| Life Membership Fees | Capital receipt — added directly to Capital Fund (not recurring income) |
| Sale of Old Newspapers / Periodicals | Revenue income — credited to Income & Expenditure A/c |
| Sale of Fixed Assets | Capital receipt — only profit/loss on sale goes to I&E A/c |
| Purchase of Sports Equipment / Fixed Assets | Capital expenditure — shown in Balance Sheet, depreciated over time |
| Consumption of Stationery / Consumables | Opening stock + Purchases − Closing stock = Amount consumed (I&E A/c) |
Specific fund income and expenditure (e.g., "Prize Fund" interest and prize expenses) are not routed through the Income & Expenditure A/c — they are adjusted directly against the specific fund in the Balance Sheet.
Capital Fund & the Balance Sheet
NPOs don't have "Capital" like a business — instead they maintain a Capital Fund / Accumulated Fund, which behaves like owner's equity.
Opening Capital Fund = Total Assets − Total Liabilities (at the start of the year, found via an opening Balance Sheet or statement of affairs).
The closing Capital Fund is arrived at as:
Opening Capital Fund + Surplus (or − Deficit) + Life Membership Fees + Legacies + Specific Donations capitalised.
The Balance Sheet is then prepared in the usual format, showing Capital Fund and other liabilities on one side, and fixed & current assets on the other — exactly like a normal Balance Sheet.
Receipts & Payments vs Income & Expenditure
| Basis | Receipts & Payments A/c | Income & Expenditure A/c |
|---|---|---|
| Nature | Real account (summary of cash book) | Nominal account |
| Basis of accounting | Cash basis | Accrual basis |
| Items recorded | Both capital & revenue items | Only revenue items |
| Period | May include amounts from other years | Relates only to the current year |
| Non-cash items | Not recorded (e.g., depreciation) | Recorded (e.g., depreciation, provisions) |
| Opening/closing balance | Yes (cash/bank balance) | No |
| Result shown | Closing cash/bank balance | Surplus or Deficit |
Quick Revision Summary
Always capital receipts
- Life membership fees
- Legacies
- Specific donations / funds
Always revenue receipts
- Subscriptions
- General donations
- Sale of old newspapers
Formula to remember
- Consumables used = Opening stock + Purchases − Closing stock
- Closing Capital Fund = Opening + Surplus − Deficit + Capitalised items
Common confusion points
- Entrance fees — check if rules say "capitalise"
- Only profit/loss on asset sale hits I&E, not full sale value
- Specific fund income/expenditure bypasses I&E A/c
Practice MCQs
1. Receipts and Payments Account is a:
- Nominal Account
- Real Account
- Personal Account
- None of the above
Answer: B
2. Life membership fees received by a club is generally treated as:
- Revenue income
- Capital receipt, added to Capital Fund
- Liability to be refunded
- Deferred revenue expenditure
Answer: B
3. Income & Expenditure Account is prepared on which basis of accounting?
- Cash basis
- Hybrid basis
- Accrual basis
- None of the above
Answer: C
4. On sale of an old fixed asset, the amount taken to the Income & Expenditure Account is:
- The full sale proceeds
- The original cost of the asset
- Only the profit or loss on sale
- Nothing — it is fully a capital item
Answer: C