Non-profit accounting refers to the unique system of recordation and reporting that is applied to the business transactions engaged in by a nonprofit organization. A nonprofit entity is one that has no ownership interests, has an operating purpose other than to earn a profit, and which receives significant contributions from third parties that do not expect to receive a return. Nonprofit accounting employs the following concepts that differ from the accounting by a for-profit entity:
- Net assets. Net assets take the place of equity in the balance sheet, since there are no investors to take an equity position in a nonprofit.
- Donor restrictions. Net assets are classified as being either with donor restrictions or without donor restrictions. Assets with donor restrictions can only be used in certain ways, frequently being assigned only to specific programs. Assets without donor restrictions can be used for any purpose.
- A nonprofit exists in order to provide some kind of service, which is called a program. A nonprofit may operate a number of different programs, each of which is accounted for separately. By doing so, one can view the revenues and expenses associated with each program.
- Management and administration. Costs may be assigned to the management and administration classification, which refers to the general overhead structure of a nonprofit. Donors want this figure to be as low as possible, which implies that the bulk of their contributions are going straight to programs.
- Fund raising. Costs may be assigned to the fund raising classification, which refers to the sales and marketing activities of a nonprofit, such as solicitations, fund raising events, and writing grant proposals.
- Financial statements. The financial statements produced by a nonprofit entity differ in several respects from those issued by a for-profit entity. For example, the statement of activities replaces the income statement, while the statement of financial position replaces the balance sheet. Both for-profit and nonprofit entities issue a statement of cash flows. Finally, there is no nonprofit equivalent for the statement of stockholders’ equity, since a nonprofit has no equity.
Characteristics of Not-for-Profit Organizations
- Service Motive: These organisations have a motive to provide service to its members or a specific group or to the general public. They provide services free of cost or at a bare minimum price as their aim is not to earn the profit. They do not discriminate among people on the basis of their caste, creed or colour. Examples of services provided by them are education, food, health care, recreation, sports facility, clothing, shelter, etc.
- Members: These organisations are formed as charitable trusts or societies. The subscribers to these organisations are their members.
- Management: The managing committee or the executive committee manages these organisations. The members elect the committee.
- Source of Income: The major sources of income of not-for-profit organisations are subscriptions, donations, government grants, legacies, income from investments, etc.
- Surplus: The surplus generated in the due course is distributed among its members.
- Reputation: These organisations earn their reputation or goodwill on the basis of the good work done for the welfare of the public.
- Users of accounting information: The users of the accounting information of these organisations are present and potential contributors as well as the statutory bodies.
The not-for-profit organisations also require to prepare the final accounts or the financial statements at the end of the accounting year as per the accounting principles. The final accounts of these organisations consist of:
- Receipts and Payments A/c: It is the summary of the cash and bank It helps in the preparation of Income and Expenditure A/c and Balance Sheet. We also need to submit it to the Registrar of Societies along with Income and Expenditure A/c and Balance Sheet.
- Income and Expenditure A/c: It is similar to the Profit and Loss A/c and ascertains the surplus or deficit if any.
- Balance Sheet: We prepare it in the same manner as the Balance Sheet of concerns with a profit motive.