Principles of Accounting: Accounting for non profit organisations

• While it is true that the majority of entities exist primarily to make a profit
• There are still a large number of organisations which are not for profit
• While profit is the overriding aim in for profit business
• Non profit organisations are driven by other goals including:
  1. Promoting the interests of their members
  2. Advance a certain agenda
  3. Lobbying
  4. Equal distribution of of wealth
  5. Eradication of poverty
  6. Fighting a certain disease e.g. malaria, cancer etc
  7. Provide entertainment to members etc
• Examples of non profit entities include:
  • Football clubs such as Dynamos
  • Chess clubs
  • Burial societies
  • Funding circles i.e. marounds/ amarounds
  • Charities e.g Oxfam, MSF

Differences between non-profit entities and profit entities

• Because profit is not the main motive non profit entities do not prepare a profit and loss account (income statement)
• Instead they prepare an income and expenditure account
• An income and expenditure account is the equivalent of an Income Statement/Profit and Loss Account in non profit organisations
• It matches income against expenditure incurred in the same period
• If income exceeds expenditure in a given period the excess is known as surplus
• Conversely if expenditure exceeds income the difference is known as deficit

• Non profit entities also prepare  a receipts and payments
• receipts and payment account are a summary of cash and bank accounts in a given period

Accumulated Fund

• Accumulated fund is the equivalent of capital in profit making enterprises
• Accumulated Fund = Assets – Liabilities
• Consequently an Accumulated Fund account is used in non profit entities instead of a Capital Account
• The name accumulated fund is used because this fund is likely made up of funds that accumulated overtime rather than a normal capital injection

Income Statement in non profit entities

• Often non profit organisations have profit making concerns
• An example is when a football club operates a bar
• In such instances an Income statement/Trading and Profit and Loss Account is prepared for that particular concern
• Only transactions pertaining to the concern are included in such an Income Statement
• Any profit made from such a concern is used to fund the activities of the non profit organisation
• The profits are added onto the income side of the income and expenditure account

Subscriptions

• Most non profit making entities rely extensively on subscriptions
• A subscription is a pledge to provide funds to a particular organization or charity
• Subscriptions are often made by members on a regular basis e.g. monthly, quarterly or annually
• A subscriptions account is prepared to ascertain the subscription amount attributable to the period
• This should take account an subscriptions owing and prepaid both at the beginning and end of the period
• This should be done in accordance with the prudence concept

Other forms of income and their accounting treatment

• Lifetime membership fees-often members have to pay a membership fee to join a club
• Such a membership fee lasts for the entire lifetime of an individual’s membership
• The lifetime membership fee should be credited to a lifetime membership account
• An “appropriate” share of such lifetime membership fee should be credited to the Income and Expenditure Account every accounting period
• The exact amount to be transferred is solely at the discretion of the non profit making entity.
• Be sure to follow instructions in the examniation
• The remaining balance in the lifetime membership account is to be treated as a liability (non current liability)
• Donations-are usually shown as profit in the year in which they are made
• Entrance fees-for example collected from people who came to see the team play are treated as income

To access more topics go to the Principles of Accounts Notes.