Back to: Financial Accounting
Good day, students. I trust you all are doing well. I hope you had a restful weekend and are ready to delve into today’s lesson on Financial Accounting.
Accounting for Non-Profit Organisations
Introduction:
In our previous lessons, we’ve explored various aspects of financial accounting, including the preparation of financial statements for profit-oriented entities. Today, we will shift our focus to non-profit organisations (NPOs), which, despite not distributing profits to members, require sound financial management and reporting.
Definition and Characteristics of Non-Profit Organisations:
Non-profit organisations are entities established for purposes other than generating profit. They aim to serve public or mutual benefits, such as charitable, educational, religious, or social purposes. Key characteristics include:
No profit distribution: Any surplus generated is reinvested to further the organisation’s objectives.
Voluntary membership: Members join voluntarily and may not receive financial benefits.
Public accountability: They are accountable to donors, members, and regulatory bodies.
Funding sources: Primarily funded through donations, grants, and membership fees.
Financial Statements for Non-Profit Organisations:
Non-profit organisations prepare specific financial statements to reflect their activities.
Receipts and Payments Account: A summary of cash transactions during the accounting period.
Income and Expenditure Account: Similar to a profit and loss account, it shows the surplus or deficit for the period.
Receipts and Payments Account:
This account records all cash receipts and payments, irrespective of the accounting period to which they relate. It is a straightforward record of cash transactions.
Format:
Receipts
Payments
Opening Balance
Payments to Creditors
Donations Received
Salaries
Membership Fees
Rent
Grants
Utilities
Sale of Assets
Purchase of Equipment
Closing Balance
Closing Balance
The closing balance in the receipts and payments account becomes the opening balance for the next period. (
Income and Expenditure Account:
This account is prepared to determine the surplus or deficit for the period. It follows the accrual basis of accounting, recognising income and expenses in the period they occur, not when cash is received or paid.
Format:
Income
Expenditure
Membership Fees
Salaries
Donations (Accrued)
Rent
Grants (Accrued)
Utilities
Interest Income
Depreciation
Other Income
Other Expenses
Surplus/Deficit
Understanding the financial reporting for non-profit organisations is crucial, as it ensures transparency and accountability. By accurately preparing receipts and payments accounts, income and expenditure accounts, and balance sheets, NPOs can effectively manage their resources and demonstrate their financial health to stakeholders.