Accounting for Non Profit Making Organizations, preparation of financial statements of NPOs


Financial statements of non-profit-making bodies

 In this tutorial we look at the fi nancial statements of organizations such as clubs and societies, which are not primarily set up for the purpose of trading and making a profi t (although they may engage in some trading activities, for example, running a bar for the use of members and visitors).

 Accounting terminology for non-profit-making bodies

Some organizations exist, not with the main intention of making profi ts in the long term, but with the objective of providing facilities to their members or others who may benefi t from their activities. These organizations are often clubs and societies. They may have trading activities, and they will often engage in profi table activities that increase the net assets of the organization. However, this increase in net assets is not attributed directly to the members, but is used to expand and improve the organization, or to provide benefi ts for those whom the organisation exists to support.

 Local government is another example of a non-profi t-making organization, but the fi nancial statements of local government are outside the scope of your syllabus. The fi nancial statements prepared for these organizations are similar to those prepared for other trading organizations described earlier in this text, and they utilise the same accounting concepts and principles, but some of the terminology used is different. It is usual for the following to be prepared for these organizations.

 Receipts and payments account . This is a summary of the organization’s cash and bank  transactions for a period. It is common for these organizations to operate a single-entry accounting system and thus the receipts and payments account is the starting point for the preparation of other accounting statements.

Income and expenditure statement (or account). This is similar to the income statement of a trading organization. It shows the income and expenditure of a particular period and follows the same accounting principles as described for trading organizations earlier in this text. The word ‘ income ’ is used rather than revenue. Also, instead of using the terms profi t and loss , the difference between the income and expenditure of the period is referred to as surplus or defi cit . The reason for this is that the organization does not, in principle, exist in order to make a profi t. Sometimes, however, the organization has sections within itself or holds specifi c events with the deliberate intent of making profi ts that are used to subsidise the costs of the organization’s other activities: for example, it may have a bar selling drinks at a profi t, or might hold a dinner dance for which tickets are sold. In these circumstances a separate ‘ trading account ’ is prepared for each such activity. The profi t or loss arising is transferred to the income and expenditure account.

Statement of financial position

The statement of fi nancial position of a non-trading organization is similar to that of a sole trader, showing assets and liabilities at the statement of fi nancial position date. However, the organization does not have an owner. The equivalent of the owner’s capital is referred to as the accumulated fund .c

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