CBSE Class 11 Accountancy: Accounting for Not-for-Profit Organisation NCERT Solutions

Not-for-Profit Organisations (NPOs) are entities established with the primary objective of promoting social welfare or providing services to a specific group or the public at large, rather than generating financial profit for their owners or members. These organisations are typically governed by a board of trustees or a managing committee. Common examples of NPOs include educational institutions (schools, colleges), healthcare facilities (hospitals, clinics), charitable trusts, religious organisations, sports clubs, and professional associations. Their main sources of income usually consist of donations, grants, membership subscriptions, and fees for services. Since profit generation is not their goal, NPOs do not prepare a Trading and Profit and Loss Account. Instead, they maintain a Receipts and Payments Account, an Income and Expenditure Account, and a Balance Sheet to report their financial activities and position.

The Receipts and Payments Account is a financial statement prepared by Not-for-Profit Organisations that serves as a summary of all cash and bank transactions recorded in the Cash Book over an accounting period. It is a real account in nature. All cash and bank receipts are recorded on the debit (Receipts) side, and all cash and bank payments are recorded on the credit (Payments) side. This account begins with the opening balances of cash and bank and concludes with the closing balances of cash and bank, which are determined as the balancing figure at the end of the accounting period. It includes both capital and revenue items, and transactions relating to the current, previous, and future accounting periods if cash has been received or paid. The primary purpose of this account is to ascertain the closing cash and bank balances and to provide an overview of the cash inflows and outflows of the organisation during the period.

The Income and Expenditure Account is a nominal account prepared by Not-for-Profit Organisations at the end of an accounting period. It is analogous to the Profit and Loss Account prepared by business entities. Its main purpose is to determine the surplus (excess of income over expenditure) or deficit (excess of expenditure over income) for the period. This account records all revenue income and gains on the credit side and all revenue expenses and losses on the debit side. It is prepared on the accrual basis of accounting, meaning it includes all incomes earned and expenses incurred during the current accounting period, regardless of whether cash has been received or paid. Outstanding expenses and prepaid incomes are adjusted, as are accrued incomes and incomes received in advance. The balancing figure of this account represents either a surplus (if income exceeds expenditure) or a deficit (if expenditure exceeds income).

The key features of the Receipts and Payments Account are as follows:

1. Nature: It is a Real Account, reflecting the actual cash and bank balances of the organisation. It is essentially a summarised version of the Cash Book.
2. Nature of Transactions: It records only transactions that involve cash or bank receipts and payments. Non-cash items such as depreciation, profit or loss on sale of assets, and outstanding expenses are not included.
3. Inclusion of Capital and Revenue Items: It records all cash receipts and payments, irrespective of whether they are of a capital nature (like purchase of a large asset) or revenue nature (like rent payment).
4. Opening and Closing Balances: The account commences with the opening cash and bank balances and concludes with the closing cash and bank balances, which are determined as the balancing figure.
5. Purpose: Its main purpose is to show the cash position of the organisation at the end of the accounting period and to summarise the total cash inflows and outflows during that period.

To prepare the Income and Expenditure Account from the Receipts and Payments Account, the following systematic steps are undertaken:

1. Transfer Revenue Payments to Expenditure Side: All items of revenue expenditure that were paid during the current accounting period, as shown on the Payments side of the Receipts and Payments Account, are transferred to the debit (Expenditure) side of the Income and Expenditure Account.
2. Transfer Revenue Receipts to Income Side: Similarly, all items of revenue receipts shown on the Receipts side of the Receipts and Payments Account are transferred to the credit (Income) side of the Income and Expenditure Account.
3. Adjust for Outstanding and Prepaid Expenses: For expenses recorded on the Payments side, any amounts that are outstanding (incurred but not yet paid) for the current period are added to the related expense. Conversely, any expenses that were paid in advance (prepaid) for future periods but relate to the current period's accounting are also adjusted accordingly. This ensures expenses are recognised in the period they are incurred.
4. Adjust for Accrued and Advance Income: For incomes recorded on the Receipts side, any income that has accrued (earned but not yet received) during the current period is added to the related income. Income received in advance for future periods but pertaining to the current period's accounting is also adjusted. This ensures income is recognised when earned.
5. Include Non-Cash Items: Non-cash expenses, such as depreciation on assets or amortisation of intangible assets for the current accounting period, must be debited to the Expenditure side of the Income and Expenditure Account. Similarly, non-cash incomes or appreciation in asset values may be credited to the Income side if relevant.
6. Calculate Surplus or Deficit: After all the revenue items have been transferred and adjusted, both the Income and Expenditure sides are totalled. If the total of the Income side exceeds the total of the Expenditure side, the difference is termed as 'Surplus' and is debited to the Income and Expenditure Account. If the total of the Expenditure side exceeds the total of the Income side, the difference is termed as 'Deficit' and is credited to the Income and Expenditure Account.

Subscription refers to the amount of money that members of a Not-for-Profit Organisation (NPO) pay periodically to maintain their membership status. It is a principal source of income for many NPOs, such as clubs, associations, and societies. Subscriptions can be received on a monthly, quarterly, half-yearly, or annual basis.

In the Receipts and Payments Account, the total amount of subscription received during the year is shown on the Receipts side. This total may include subscriptions relating to the current year, previous years, and future years.

To calculate the actual subscription income to be shown in the Income and Expenditure Account for the current year, adjustments are necessary. The calculation typically involves:

• Adding subscriptions outstanding at the end of the current year (income earned but not yet received).
• Subtracting subscriptions received in advance for the current year (received in previous years but pertaining to the current year).
• Adding subscriptions received in advance for future years (received in the current year but pertaining to future years).
• Subtracting subscriptions outstanding from the previous year (pertaining to the previous year but received in the current year).

The adjusted amount represents the total subscription income earned during the current accounting period and is shown on the credit side of the Income and Expenditure Account.