Chapter 8: Accounting for Non-Profit Organizations (NPOs)
8.1 Concept and Features of Non-Profit Organizations
8.1.1 Meaning
Non-Profit Organizations (NPOs) / Non-Trading Concerns are institutions established solely to render social, educational, charitable, healthcare, cultural, sporting, or professional welfare services to their members and society at large, rather than earning and distributing commercial profit.
- Examples in Nepal: Hospitals (e.g., Tilganga Institute of Ophthalmology), Schools/Colleges, Sports & Youth Clubs, Libraries, Chambers of Commerce (FNCCI), Trade Unions, Professional Bodies (ICAN), Red Cross, and NGOs.
8.1.2 Specialized Terminologies in NPO Accounting and Their Treatment
| Term | Meaning | Accounting Treatment in NPO Financial Statements |
|---|---|---|
| 1. Capital Fund (General Fund) | The excess of total assets over external liabilities of an NPO (Assets - Liabilities). Equivalent to Capital in a trading firm. | Shown on the Liabilities side of the Balance Sheet. Annual Surplus is added and Deficit is deducted from it. |
| 2. Subscription | Periodic (monthly/annual) membership fee paid by members to keep their membership alive; the primary recurring revenue of an NPO. | Revenue Receipt: Credited to Income & Expenditure Account (adjusted for outstanding and advance subscriptions). |
| 3. Life Membership Fees | Lump-sum fee paid once by a member to enjoy membership privileges for their entire life. | Capital Receipt: Added directly to Capital Fund (or shown as a separate liability) on the Balance Sheet because it is non-recurring. |
| 4. Endowment Fund | A permanent fund arising from a bequest or gift whose principal must remain intact while only the investment income is used for specified operations. | Capital Receipt: Shown permanently on the Liabilities side of the Balance Sheet. |
| 5. Legacy | Property or money received by an NPO as per the Will of a deceased donor. | Capital Receipt: Shown on the Liabilities side of the Balance Sheet (unless explicitly stated as small/revenue in nature). |
| 6. Donations | Gift of cash or property received from individuals, firms, or institutions. • Specific Donation (e.g., Donation for Building / Pavilion / Tournament) • General Donation (not tied to any condition) | • Specific Donation: Always Capital Receipt → Liabilities side of Balance Sheet. • General Donation: If small/recurring → Income & Expenditure A/c (Cr.); if large/capitalized as per instruction → Balance Sheet (Liabilities). |
| 7. Entrance / Admission Fees | Fee paid by a new member only once at the time of admission. | Treated according to specific question instruction (if silent in NEB exams, generally treated as Revenue Income in I&E A/c, or capitalized to the extent specified, e.g., “Capitalize 50% of Entrance Fees”). |
| 8. Government Grant / Aid | Financial assistance received from the government. • Maintenance / Operational Grant • Development / Building / Equipment Grant | • Maintenance Grant → Revenue Income (I&E A/c Cr.). • Building/Capital Grant → Capital Receipt (Balance Sheet Liabilities). |
| 9. Honorarium | Token payment made to an invited guest speaker, doctor, or artist (not a regular employee) as a mark of gratitude for voluntary services. | Revenue Expense: Debited to Income & Expenditure Account. |
| 10. Sale of Old Newspapers, Periodicals & Used Sports Materials | Proceeds from selling scrap newspapers, magazines, or worn-out balls/bats. | Revenue Income: Credited to Income & Expenditure Account. (Note: For Sale of Old Furniture/Fixed Asset, only the Profit or Loss on sale goes to I&E A/c, while the book value reduces the Asset in the Balance Sheet). |
| 11. Special Fund (e.g., Tournament / Prize Fund) | Fund maintained for a specific recurring event. | Fund-Based Accounting: Shown on Balance Sheet (Liabilities): Opening Fund + Fund Donations + Fund Interest - Tournament/Prize Expenses. |
8.2 Financial Statements of a Non-Profit Organization
An NPO prepares three primary statements at the end of its accounting year:
- Receipts and Payments Account
- Income and Expenditure Account
- Balance Sheet (Opening Balance Sheet if Opening Capital Fund is missing, and Closing Balance Sheet)
8.2.1 Receipts and Payments Account vs. Income and Expenditure Account
| Basis of Difference | Receipts and Payments Account | Income and Expenditure Account |
|---|---|---|
| 1. Nature of Account | It is a Real Account (a summarized Cash and Bank Book). | It is a Nominal Account (equivalent to Profit & Loss Account of a trading firm). |
| 2. Basis of Accounting | Prepared strictly on the Cash Basis of accounting. | Prepared strictly on the Accrual Basis of accounting. |
| 3. Opening & Closing Balances | Starts with Opening Cash/Bank Balance and ends with Closing Cash/Bank Balance. | Has no opening balance; ends with Surplus (Excess of Income over Expenditure) or Deficit (Excess of Expenditure over Income). |
| 4. Capital vs. Revenue Items | Records both Capital and Revenue receipts and payments made in cash during the year. | Records strictly Revenue Incomes and Revenue Expenditures relating to the current year only. |
| 5. Period of Items | Includes cash received or paid for the previous year, current year, and next year. | Includes incomes and expenses belonging exclusively to the current accounting year. |
| 6. Non-Cash Items & Adjustments | Excludes non-cash items like Depreciation, Bad Debts, and Outstanding/Prepaid adjustments. | Includes all non-cash expenses (Depreciation) and accrued/prepaid adjustments. |
| 7. Sides | Debit Side: Receipts; Credit Side: Payments. | Debit Side: Expenditures; Credit Side: Incomes. |
8.3 Calculation of Current Year’s Subscription Income
Subscription is the adjustment most often tested in NEB Grade 11 exams. Work it out in this order:
| Particulars | Amount (Rs.) |
|---|---|
| Total Subscription Received in Cash During the Current Year (as per Receipts & Payments A/c) | XXX |
| Add: | |
| (+) Outstanding Subscription at the END of Current Year (Earned this year, not yet received) → Closing Balance Sheet (Asset) | XXX |
| (+) Advance Subscription received at the BEGINNING of Current Year (Received last year for this year) → Opening Balance Sheet (Liability) | XXX |
| Less: | |
| (-) Outstanding Subscription at the BEGINNING of Current Year (Received this year for last year) → Opening Balance Sheet (Asset) (Note: If any portion is still in arrears, keep that unpaid portion in Closing Balance Sheet Asset too) | (XXX) |
| (-) Advance Subscription received at the END of Current Year (Received this year for next year) → Closing Balance Sheet (Liability) | (XXX) |
| Net Subscription Income for the Current Year (Credited to Income & Expenditure A/c) | XXX |
8.4 Complete Worked Numerical Example (NEB 8-Mark Standard)
Illustration 8.1:
Following is the Receipts and Payments Account of Patan Youth Club, Lalitpur for the year ended the last day of Ashadh 2082:
Receipts and Payments Account
For the Year Ended on the Last Day of Ashadh 2082
| Dr. Receipts | Amount (Rs.) | Cr. Payments | Amount (Rs.) |
|---|---|---|---|
| To Balance b/d (Cash & Bank on 2081-04-01) | 45,000 | By Salaries and Wages | 60,000 |
| To Subscriptions: | By Rent and Electricity | 24,000 | |
| • For 2080/81: Rs. 8,000 | By Honorarium to Coach | 15,000 | |
| • For 2081/82: Rs. 1,20,000 | By Purchase of Sports Equipment (on 2081-10-01) | 80,000 | |
| • For 2082/83: Rs. 12,000 | 1,40,000 | By Tournament Expenses | 22,000 |
| To Entrance Fees | 20,000 | By Printing and Stationery | 6,000 |
| To Life Membership Fees | 35,000 | By Newspapers and Periodicals | 4,000 |
| To Donation for Building | 1,00,000 | By Balance c/d (Cash & Bank at year-end) | 1,62,000 |
| To Tournament Fund Receipts | 30,000 | ||
| To Sale of Old Newspapers | 3,000 | ||
| Total | 3,73,000 | Total | 3,73,000 |
Additional Information:
- On 1st Shrawan 2081 (beginning of the year), the Club owned Building worth Rs. 3,00,000, Furniture worth Rs. 50,000, Sports Equipment worth Rs. 40,000, and Outstanding Subscription for 2080/81 was Rs. 10,000 (Note: Out of Rs. 10,000 opening O/S subscription, Rs. 8,000 was received this year, so Rs. 2,000 is still in arrears).
- Subscription outstanding for the current year 2081/82 is Rs. 15,000.
- Salaries outstanding on the last day of Ashadh 2082 amounted to Rs. 5,000.
- 50% of Entrance Fees and the entire Life Membership Fees are to be capitalized.
- Depreciate Building @ 5% p.a., Furniture @ 10% p.a., and Sports Equipment @ 20% p.a. (Remember: New Sports Equipment of Rs. 80,000 was bought on 1st Magh 2081, so it was used for 6 months).
Required:
- Opening Balance Sheet (to ascertain Opening Capital Fund) as on 1st Shrawan 2081.
- Income and Expenditure Account for the year ended the last day of Ashadh 2082.
- Closing Balance Sheet as on the last day of Ashadh 2082.
Solution:
1. Working Note: Opening Balance Sheet of Patan Youth Club (As on 1st Shrawan 2081)
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Capital Fund (Balancing Figure) | 4,45,000 | Cash and Bank Balance b/d | 45,000 |
| Outstanding Subscription (2080/81) | 10,000 | ||
| Sports Equipment | 40,000 | ||
| Furniture | 50,000 | ||
| Building | 3,00,000 | ||
| Total | 4,45,000 | Total | 4,45,000 |
2. Income and Expenditure Account of Patan Youth Club
For the Year Ended on the Last Day of Ashadh 2082
| Dr. Expenditure | Details (Rs.) | Amount (Rs.) | Cr. Income | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| To Salaries and Wages | 60,000 | By Subscription (Received for 2081/82) | 1,20,000 | ||
| Add: Outstanding Salaries | 5,000 | 65,000 | Add: O/S for 2081/82 | 15,000 | 1,35,000 |
| To Rent and Electricity | 24,000 | By Entrance Fees (50% of 20,000) | 10,000 | ||
| To Honorarium to Coach | 15,000 | By Sale of Old Newspapers | 3,000 | ||
| To Printing and Stationery | 6,000 | ||||
| To Newspapers and Periodicals | 4,000 | ||||
| To Depreciation: | |||||
| • Building (5% of 3,00,000) | 15,000 | ||||
| • Furniture (10% of 50,000) | 5,000 | ||||
| • Sports Equip. (20% on 40,000 for 1 yr + 20% on 80,000 for 6 mos) | 16,000 | 36,000 | By Deficit (Excess of Expenditure over Income) | 2,000 | |
| Total | 1,50,000 | Total | 1,50,000 |
3. Balance Sheet of Patan Youth Club
As on the Last Day of Ashadh 2082
| Capital Fund and Liabilities | Details (Rs.) | Amount (Rs.) | Assets and Properties | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| Capital Fund (Opening) | 4,45,000 | Building | 3,00,000 | ||
| Add: Life Membership Fees | 35,000 | Less: Depreciation @ 5% | (15,000) | 2,85,000 | |
| Add: Entrance Fees (50%) | 10,000 | Furniture | 50,000 | ||
| Less: Deficit for the year | (2,000) | 4,88,000 | Less: Depreciation @ 10% | (5,000) | 45,000 |
| Donation for Building (Specific) | 1,00,000 | Sports Equipment (40,000 + 80,000) | 1,20,000 | ||
| Tournament Fund | 30,000 | Less: Depreciation (8,000 + 8,000) | (16,000) | 1,04,000 | |
| Less: Tournament Expenses | (22,000) | 8,000 | Outstanding Subscriptions: | ||
| Advance Subscription (for 2082/83) | 12,000 | • Still in arrears for 2080/81 (10,000 - 8,000) | 2,000 | ||
| Outstanding Salaries | 5,000 | • For Current Year 2081/82 | 15,000 | 17,000 | |
| Cash and Bank Balance c/d | 1,62,000 | ||||
| Total | 6,13,000 | Total | 6,13,000 |
8.5 NEB Board Exam Practice Questions
Group A: Very Short Answer Questions (1 Mark Each)
- What is a Non-Profit Organization? Give two examples.
- Define Receipts and Payments Account.
- How are Life Membership Fees and Specific Donations treated in the accounts of an NPO?
- What is Honorarium? Where is it shown in NPO accounts?
- What is meant by Capital Fund?
Group B & C: Short and Long Numerical Questions (5 / 8 Marks)
- Differentiate between Receipts and Payments Account and Income and Expenditure Account on any five bases.
- Subscription Calculation (5 Marks): During 2081/82, a club received Rs. 96,000 as subscription. Calculate the subscription to be credited to the Income and Expenditure Account for 2081/82 from the following information:
- Subscription outstanding on 1st Shrawan 2081: Rs. 9,000 (out of which Rs. 7,500 was received in 2081/82).
- Subscription received in advance on 1st Shrawan 2081: Rs. 4,000.
- Subscription received in advance on the last day of Ashadh 2082: Rs. 6,500.
- Total Subscription outstanding on the last day of Ashadh 2082: Rs. 11,500 (Note: Since “Total” O/S on the last day of Ashadh is Rs. 11,500, it already includes the Rs. 1,500 still unpaid from 2080/81; so O/S for current year 2081/82 alone is Rs. 10,000). (Ans: Rs. 96,000 - Rs. 7,500 [received for last yr] + Rs. 4,000 [opening advance] - Rs. 6,500 [closing advance] + Rs. 10,000 [current yr O/S] = Rs. 96,000)
Worked answers to these exercises are in Chapter 8 Solutions.