Chapter 1 — Accounting For Not For Profit Organisation

Fig 1 — Educational Diagram: Not-for-Profit Organisations (NPOs)

Definition
Not-for-Profit Organisations (NPOs) are entities formed for social, cultural, educational, charitable, religious or recreational purposes where the primary objective is not to earn profit for distribution to members. Any surplus earned is retained and used to achieve the organisation's objectives.

Objectives of NPOs

• Promote social, educational, religious or charitable aims.
• Provide services to members or the public rather than distribute profits.
• Maintain transparency and accountability in use of funds.

Characteristics/Features

• Non-distribution constraint: surplus is ploughed back into activities.
• Fund-based accounting: use of specific funds for particular purposes (eg, endowment fund).
• Receipts may be capital or revenue in nature (entrance fees, endowments vs subscriptions, donations).
• Both cash-basis (receipts & payments) and accrual adjustments are needed to show true income/expenditure.

Primary Financial Statements

1. Receipts and Payments Account – a summary of cash and bank transactions for the period (cash book). It includes all receipts and payments, capital and revenue, irrespective of the accounting period.
2. Income and Expenditure Account – an accrual-based statement similar to profit & loss account. It records revenues of the reporting period and matching expenses to arrive at surplus or deficit.
3. Balance Sheet – shows accumulated fund (equivalent of capital), specific funds (endowment, building fund), assets and liabilities at the period end.

How accounts are prepared (flow)
Receipts & Payments Account (cash summary) → make accrual adjustments (outstanding, prepaid, depreciation, outstanding income/expenses, capital vs revenue items) → prepare Income & Expenditure Account (to find surplus/deficit) → prepare Balance Sheet showing Accumulated Fund and other funds.

Common Adjustments and Treatment

• Subscription: adjust for opening and closing outstanding and advance (prepaid) amounts; include only subscription relating to current year in income.
• Donations: general donations are revenue receipts; donations/entrance fees specified for capital purpose or endowment are capital receipts and credited to specific funds or accumulated fund.
• Entrance fees/life membership/ endowment: usually treated as capital (added to accumulated fund or specific fund) unless rules of the organisation state otherwise.
• Depreciation: charged on fixed assets in Income & Expenditure Account to show true surplus/deficit.
• Outstanding and prepaid expenses and incomes: adjust to convert cash figures into accrual basis.

Examples of Journal Entries (illustrative)

• Subscription received partly for next year: Dr Cash; Cr Receipt in Advance (liability) or adjust while preparing I&E.
• Donation for building (capital): Dr Cash; Cr Building Fund / Accumulated Fund (capital receipt).
• Depreciation: Dr Depreciation Expense; Cr Accumulated Depreciation (or directly reduce asset).

Presentation in Balance Sheet
The Balance Sheet of an NPO typically shows Accumulated Fund (opening balance plus surplus/less deficit and adjustments), specific funds (endowment fund, building fund), liabilities and assets (furniture, investments, cash & bank, outstanding subscriptions receivable).

Key Points to Remember

• Receipts & Payments account is not a measure of profit; it is merely a cash summary.
• Income & Expenditure account is prepared on accrual basis and shows surplus/deficit for the period.
• Identify capital receipts and treat them separately (not as income for I&E).
• Maintain fund-wise records where donors require specific application of funds.

Short Worked Example (conceptual)
If Subscription received during year = 1,00,000; Opening outstanding = 5,000; Closing outstanding = 8,000; Opening advance = 2,000; Closing advance = 1,000; then Net subscription income = 1,00,000 + 8,000 - 5,000 - 1,000 + 2,000 = 1,04,000 (see formulas section).

Fig 2 — Educational Diagram: Accounting Principles and Basis

Overview
Accounting principles are the basic rules and assumptions that guide how financial transactions are identified, recorded and reported. For Not-for-Profit Organisations (NPOs) these principles ensure that funds, receipts and expenditures are recorded consistently and fairly so that stakeholders (members, donors, regulators) can judge financial health and stewardship.

Important Accounting Principles (Concepts)

• Entity Concept: The organisation is treated as a separate entity distinct from its members. Personal transactions of members are not recorded in the books of the NPO.
• Money Measurement: Only transactions measurable in monetary terms are recorded.
• Going Concern: Accounts are prepared assuming the organisation will continue to operate in the foreseeable future.
• Accrual (Mercantile) Concept: Income is recognized when earned and expenses when incurred, irrespective of cash receipt or payment.
• Matching Concept: Expenses are matched with the income of the period in which they help earn that income.
• Consistency: Accounting policies and procedures should be applied consistently from year to year to allow comparability.
• Prudence / Conservatism: Do not overstate assets or income; anticipate liabilities and losses but not unrealized gains.
• Materiality: Small or insignificant items need not follow all formal rules if doing so would be costly or not change decisions of users.
• Full Disclosure: All material facts and explanations that affect understanding of the financial statements must be disclosed.

Accounting Conventions
Conventions are customary practices derived from principles—common ones are Consistency, Conservatism (Prudence), and Full Disclosure.

Basis of Accounting: Cash Basis vs Accrual (Mercantile) Basis

• Cash Basis: Transactions are recorded only when cash is received or paid. Simple and easy, often used in small organisations. Example: Subscription is recorded when cash is received.
• Accrual (Mercantile) Basis: Income is recorded when earned and expenses when incurred, regardless of receipt or payment. This is the preferred method for preparing Income & Expenditure Account and Balance Sheet for NPOs because it shows the actual performance of the period.

Why accrual basis is preferred for NPOs

• Shows true surplus or deficit of the period by recognizing outstanding incomes and unpaid expenses.
• Allows matching of incomes and related expenditures (e.g., a grant received for a particular year should be matched with expenses of that year).
• Enables preparation of a Balance Sheet showing receivables, payables and funds.

Capital Receipts vs Revenue Receipts (and Capital Expenditure vs Revenue Expenditure)

• Capital receipts create or enhance capital funds and are not part of recurring income (e.g., donations for building fund, legacy, life membership fees—commonly treated as capital unless policy says otherwise). These are shown in the Balance Sheet.
• Revenue receipts are recurring receipts used for day-to-day running (e.g., annual subscriptions, donations for activities, interest on investments). These are shown in the Income & Expenditure Account.
• Capital expenditure creates assets or increases their utility (e.g., buying a computer for office), shown in Balance Sheet as asset and depreciation charged to Income & Expenditure Account over useful life.
• Revenue expenditure relates to normal operations (e.g., salary, rent) and is charged to Income & Expenditure Account of the period.

Practical application — what to check when recording a receipt:

• Is the receipt recurring and for running expenses? -> Revenue receipt.
• Is the receipt for a specific capital purpose or a one-time donation/legacy/life membership? -> Capital receipt (to be added to capital fund or a specific fund).
• Does the amount relate solely to this accounting period or other periods (advance/arrears)? -> Adjust as outstanding or prepaid under accrual basis.

Reconciliation: From Cash (Receipts & Payments A/c) to Accrual (Income & Expenditure A/c)

To convert surplus as per Receipts & Payments A/c to surplus as per Income & Expenditure A/c:

Surplus as per Receipts & Payments A/c
+ Outstanding incomes at year-end (accrued incomes)
- Outstanding expenses at year-end (accrued liabilities)
- Incomes relating to next period received in advance
+ Expenses paid in advance relating to next period
± Incomes/Expenses of prior period included in R&P (adjust accordingly)
= Surplus as per Income & Expenditure A/c

Presentation in Financial Statements

• Income & Expenditure Account (prepared on accrual basis) shows revenue incomes and expenses and arrives at surplus/deficit.
• Balance Sheet shows funds (capital fund, specific funds like building fund), assets, liabilities, and accumulated surplus.

Key points to remember

• Always state the basis of accounting used in notes to accounts (cash or accrual).
• Use accrual basis for proper matching and true presentation; however, small clubs may maintain simple cash books but must adjust for outstanding and prepaid items when preparing final accounts.
• Follow policies for life membership fees and large donations — classify consistently as capital or revenue and disclose basis.

Fig 3 — Educational Diagram: Receipts and Payments Account

Definition: A Receipts and Payments Account (R&P Account) is a summarized cash book prepared by a not-for-profit organisation at the end of an accounting period. It records all cash and bank receipts and payments (both capital and revenue) during the period, irrespective of whether they relate to the current period or to other periods.

Purpose: To show the movement of cash and bank balances during the year and to give a quick summary of where cash came from and how it was used.

Key characteristics:

• Prepared on a cash (receipts & payments) basis — not accrual basis.
• Includes both revenue and capital items.
• Shows opening and closing cash/bank balances.
• Does not show income earned but not received, or expenses incurred but not paid (those appear in Income & Expenditure A/c and Balance Sheet after adjustments).

Format (simple layout):

Receipts and Payments Account for the year ended DD-MM-YYYY

Receipts (Dr)                             Payments (Cr)
---------------------------------------------------------
To Opening Balance (Cash/Bank)            By Payments (e.g., Salaries)
To Subscriptions                          By Purchase of Assets
To Donations                              By Rent
To Sale of Investments                    By Closing Balance (Cash/Bank)
To Grants                                  
...                                       
Total Receipts                            Total Payments

How it differs from other statements:

• Cash Book: R&P is essentially a condensed cash book for the accounting period.
• Income & Expenditure A/c: Prepared on accrual basis, shows revenue items only and gives surplus/deficit for the period.
• Balance Sheet: Shows financial position at the year end (assets, liabilities, funds).

Conversion to Income & Expenditure Account (brief steps):

1. Start from R&P and extract only revenue receipts and payments (exclude capital items and receipts for fixed-assets).
2. Adjust for accruals and prepayments: add outstanding incomes and subtract incomes received in advance; add expenses outstanding and subtract prepaid expenses.
3. Include depreciation and other non-cash adjustments.
4. The resulting excess of revenue receipts over revenue payments is the surplus (or deficit) to be shown in Income & Expenditure A/c.

Practical notes:

• Subscriptions received in advance and outstanding subscriptions are recorded in the Income & Expenditure A/c adjustments, not separately in R&P (R&P simply records the cash received).
• Donations specifically for fixed assets are recorded in R&P when received but shown in Balance Sheet (as capital) and not in Income & Expenditure as revenue.
• R&P is useful for auditors and managers to verify cash flows and reconcile with bank statements.

Fig 4 — Educational Diagram: Income and Expenditure Account

Definition: An Income and Expenditure Account (I&E) is a nominal account prepared by not‑for‑profit organisations (NPOs) to record their revenue incomes and revenue expenses for an accounting period and to determine the surplus (excess of income over expenditure) or deficit (excess of expenditure over income).

Objective: To measure the net result (surplus/deficit) of the organisation’s operational activities for the period and to show the revenue items on an accrual basis.

Key features:

• Prepared by NPOs (clubs, societies, schools, hospitals etc.).
• Records only revenue items — revenue incomes and revenue expenses. Capital items are excluded.
• Prepared on an accrual basis (includes outstanding and accrued items), not cash basis.
• The surplus (credit balance) is transferred to the Capital/General Fund (shown on the liabilities side of the Balance Sheet). A deficit (debit balance) is shown as deduction from the Fund.

Items commonly shown:

• Incomes: Subscriptions (adjusted for outstanding/advance), donations (general and specific), interest on investments, rent received, commission, income from events, profit on sale of assets (treated as revenue).
• Expenditures: Salaries, rent, utilities, stationery, depreciation, repairs, loss on sale of assets, scholarship payments, competition prizes.

Treatment of special items:

• Subscriptions: Revenue; include subscriptions pertaining to the year — add outstanding and subtract advance/received in advance.
• Entrance/Admission fees: Usually capital in nature (credited to Capital/General Fund or to a specific Fund) unless explicitly treated as revenue by the governing body.
• Donations/Grants: If capital in nature (for building, equipment) they are credited to the Capital/Specific Fund and not shown in I&E. Revenue grants/donations are shown in I&E.
• Sale of fixed assets: The proceeds (capital receipt) affect the Balance Sheet; any profit or loss on sale is treated as revenue and entered in I&E (profit as income, loss as expenditure).
• Depreciation: Shown on the expenditure side as it is a revenue expense.

Format (simple):

Income and Expenditure Account for the Year Ending XXXX

Steps to prepare from books:

• Identify and separate revenue receipts and payments from capital items (use Receipts & Payments Account if available).
• Adjust for accruals: outstanding expenses, prepaid expenses, accrued income, income received in advance.
• Include non‑cash revenue items such as depreciation and loss/profit on sale (profit as income, loss as expense).
• Prepare the I&E with totals and compute surplus/deficit; transfer result to the Fund in the Balance Sheet.

Difference from Profit & Loss Account:

• Purpose: P&L measures profit for distribution to owners; I&E measures surplus for NPOs where profit distribution is not the objective.
• Ownership: P&L belongs to a business; I&E to not‑for‑profit entities.
• Capital receipts (like entrance fees or capital grants) are excluded from I&E; in P&L capital receipts are also excluded.

Useful practical notes: Always check the nature of receipts (capital vs revenue) based on governing rules/constitution; maintain proper schedules for subscriptions, donations and fixed assets so correct treatment is ensured.

Fig 5 — Educational Diagram: Difference between Receipts & Payments and Income & Expenditure

Overview
Receipts & Payments (R&P) and Income & Expenditure (I&E) are two different summary statements used by not-for-profit organisations. R&P is a cash book summary (cash/ bank basis). I&E is an accrual-based statement showing revenue performance for the period (income earned vs. expenses incurred).

Key differences

• Basis: R&P = Cash / Bank basis (records all cash receipts and payments). I&E = Accrual basis (records incomes earned and expenses incurred during the period).
• Purpose: R&P shows the cash position (incoming and outgoing cash). I&E shows operational performance (surplus or deficit) for the accounting period.
• Contents:
  • R&P includes both revenue and capital items (e.g., sale of land, purchase of fixed assets, capital donations) and receipts/payments of any nature.
  • I&E includes only revenue items: revenue incomes (e.g., subscriptions, donations for revenue, interest, grants for revenue) and revenue expenses (e.g., salaries, rent, depreciation).
• Timing/period: R&P records receipts/payments actually made during the period. I&E records incomes/expenses attributable to the period whether cash is received/paid or not (use of adjustments like outstanding, prepaid, accrued).
• Treatment of capital items: Capital receipts/payments (donation for building, sale/purchase of fixed assets) appear in R&P but are excluded from I&E; they are shown in the Balance Sheet / Capital Fund.
• Closing balance: R&P closing balance = cash & bank balance (asset). I&E closing balance = surplus (excess of income over expenditure) or deficit (vice versa), which is transferred to General/Capital Fund on the Balance Sheet.
• Depreciation: Not shown in R&P (non-cash). Charged in I&E as an expense.
• Format & Users: R&P is simple chronological summary for internal cash control; I&E is an accrual statement used to know operational results and prepare Balance Sheet.

How to convert R&P to I&E (brief steps)

1. Identify revenue receipts and revenue payments from R&P; ignore capital receipts/payments.
2. Adjust receipts for outstanding and advance incomes: add closing outstanding incomes, subtract opening outstanding incomes; subtract closing advance (received in advance), add opening advance.
3. Adjust payments for outstanding and prepaid expenses: add closing outstanding expenses, subtract opening outstanding expenses; subtract closing prepaid, add opening prepaid.
4. Include non-cash items like depreciation, provisions, amortisation as expenses in I&E.
5. Calculate surplus/deficit = Total income (adjusted) - Total expenditure (adjusted). Transfer surplus/deficit to the fund in the Balance Sheet.

Practical significance
R&P gives a clear picture of liquidity (cash availability) while I&E tells whether the organisation’s regular activities produced a surplus or a deficit during the period. Both are needed: R&P for cash control, I&E for financial performance and for preparing the Balance Sheet.

Fig 6 — Educational Diagram: Balance Sheet of Not-for-Profit Organisations

Definition & purpose
A Balance Sheet of a Not-for-Profit Organisation (NPO) — often called the Statement of Financial Position — shows the financial position of the organisation at a specific date. It records funds (capital and reserves), special/earmarked funds, liabilities and the assets owned by the NPO. Unlike for‑profit entities, the primary objective is service, not profit; therefore the Balance Sheet emphasises funds (restricted and unrestricted) rather than owner’s capital and drawings.

Key characteristics

• Shows Accumulated Fund (or General Fund) instead of Owner’s Equity.
• Contains special funds (e.g., Building Fund, Endowment Fund) and shows whether funds are restricted for specific purposes.
• Assets are shown at their book value (cost less accumulated depreciation for fixed assets); investments usually shown at cost (or as prescribed).
• Income & Expenditure Account determines the surplus/deficit that flows into Accumulated Fund.

Main components

• Liabilities & Funds
  • Accumulated Fund (Opening Balance ± Surplus/Deficit for the year)
  • Special/Earmarked Funds (Building Fund, Endowment Fund, Prize Fund, Sinking Fund)
  • Reserves and Surplus (if any)
  • Loans and Other Liabilities (outstanding expenses, creditors, etc.)
  • Subscriptions received in advance (shown as current liability)
• Assets
  • Fixed Assets (Buildings, Furniture) shown at written‑down/book value after depreciation
  • Investments (sometimes categorized as earmarked vs general)
  • Current Assets: Cash & Bank balances, Subscription Outstanding (debtors), Prepaid expenses

Treatment of common items

• Subscriptions: Current year subscription shown in Income & Expenditure Account; outstanding subscription is an asset; subscription received in advance is a liability.
• Donations: If a donation is for a specific purpose (e.g., building), it is credited to a Special Fund (liability). If it is a general donation for day-to-day running, it is revenue and shown in Income & Expenditure Account (and the surplus flows to Accumulated Fund).
• Life membership fees and entrance fees: normally treated as capital receipts and added to Accumulated Fund (unless the organisation’s policy is different and they are treated as revenue—follow governing rules).
• Depreciation: Charged to Income & Expenditure Account; fixed assets appear in the Balance Sheet at cost less accumulated depreciation (book value).
• Endowment/Corpus Fund: Corpus (principal) is usually non‑spendable and shown as a fund/liability; only income from it is available for use per restrictions.

Format (general layout)
The Balance Sheet is prepared with Liabilities & Funds on the left (or top) and Assets on the right (or bottom). Key line items include Accumulated Fund (with opening balance and adjustments), each special fund, loans/creditors, then assets and investments.

Flow from Income & Expenditure to Balance Sheet
Surplus or deficit shown by the Income & Expenditure Account is transferred to the Accumulated Fund (or to a specific fund if restricted). Thus, Balance Sheet reflects the opening Accumulated Fund plus net surplus/deficit and other capital receipts/adjustments.

Practical notes for CBSE Class 12

• Always show special funds separately under funds & liabilities; do not net them with general funds.
• Depreciation reduces asset values in the Balance Sheet; accumulated depreciation is not shown separately in CBSE format—fixed assets are shown at written‑down value.
• When preparing the Balance Sheet after preparing Income & Expenditure Account, carry the surplus/deficit to the Accumulated Fund in the Balance Sheet.

Short sample layout (illustrative)

Balance Sheet of XYZ Club as at 31 March 20XX

Liabilities & Funds:                      Assets:
Accumulated Fund (Opening)   200,000    Fixed Assets (Furniture, Buildings)   150,000
Add: Surplus for the year      10,000    Less: Accumulated Depreciation       (20,000)
Accumulated Fund (Closing)    210,000    Net Fixed Assets                      130,000
Building Fund (restricted)     50,000    Investments (Building Fund)           45,000
Sinking Fund                   20,000    Current Assets:
Creditors & Outstanding Exp.   15,000      Cash & Bank                         60,000
Subscription Received in Adv.   5,000      Subscription Outstanding             40,000
                                             Prepaid expenses                    5,000
Total Liabilities & Funds    300,000    Total Assets                        300,000

Note: Exact presentation may vary but the principles remain: segregate funds, present assets at book value, and show obligations clearly.

Fig 7 — Educational Diagram: Capital Fund / Accumulated Fund

Definition
Capital Fund (also called Accumulated Fund) of a not-for-profit organisation is the accumulated balance of surpluses and deficits of the organisation since its inception. It is analogous to the proprietor's capital in a business and represents the residual interest of the organisation: Total Assets minus Total Liabilities.

Nature and purpose

• It is a permanent fund showing retained surpluses (or accumulated deficits) available for general use unless part of it is earmarked as a specific fund (e.g., building fund, endowment fund).
• It grows by annual surpluses (Income > Expenditure) and by capital receipts (donations specifically for capital) and is reduced by annual deficits and by transfers/appropriations out of surplus to specific funds or reserves.

How it is calculated (conceptually)

• Opening Accumulated Fund = Closing Fund of previous year (or = Total Assets at opening date − Total Liabilities at opening date).
• Surplus (or Deficit) for the year = Total Income − Total Expenditure (as shown in the Income and Expenditure Account).
• Closing Accumulated Fund = Opening Accumulated Fund + Surplus (or − Deficit) + Capital Receipts (donations for capital, sale of investments held for capital etc.) − Appropriations / Transfers (if surplus is allocated to specific funds/reserves).

Presentation in the Balance Sheet
The Accumulated Fund appears on the liabilities side (Funds and Liabilities). Typical layout:

• Accumulated Fund / Capital Fund (closing balance)
• Less: Specific Funds (if shown separately, e.g. Building Fund, Endowment Fund) or alternatively these specific funds are shown as separate line items under Funds.

Accounting treatment points

• Surplus shown in Income and Expenditure Account is transferred to the Accumulated Fund (it is an appropriation).
• Donations specifically received for capital-purpose (e.g., for a new building) are treated as capital receipts and added to the Fund (or transferred to a Building Fund).
• Purchase of fixed assets from cash does not by itself change the Fund (it converts one asset into another); only surplus/deficit and capital receipts/appropriations change the Fund balance.

Key distinctions

• Accumulated Fund (general) vs Specific Funds: Specific funds are portions of the fund earmarked for special purposes; they may be shown separately but together they form the total funds of the organisation.
• Capital receipts vs Revenue receipts: Capital receipts for specific capital purposes increase the Fund; revenue receipts (subscriptions, grants for running expenses) affect the Income & Expenditure Account and ultimately the surplus/deficit transferred to the Fund.

Simple closing-note
In a one-line formula: Closing Capital Fund = Opening Capital Fund + Net Surplus/Deficit + Capital Receipts − Appropriations/Transfers.

Fig 8 — Educational Diagram: Special Funds (Building, Endowment, Memorial, Sinking, etc.)

Overview
Special funds are designated capital or revenue reserves created by not-for-profit organisations to meet specified future needs. These funds arise from donations, legacies, transfers from surplus, or planned annual contributions and are maintained separately to ensure the purpose is strictly honoured.

Common Types

• Building Fund – created to construct or renovate buildings. Donations/collections credited here; used only for building-related expenditure.
• Endowment Fund – a capital sum gifted to the organisation; the capital is retained intact and only income/interest is used (example: scholarships).
• Memorial Fund – created in memory of a person; can be for capital purchase (books, bench) or recurring awards (prize money).
• Sinking Fund – created to replace or renew an asset in future. Organisation makes periodic contributions and invests them until the replacement is needed.

Accounting Nature and Treatment

• Capital vs Revenue: Most special funds created from donations/legacies are capital receipts (capitalised as fund), but income/interest earned on funds is revenue.
• Presentation: Special funds appear in the Balance Sheet under Capital Funds / Reserves & Surplus or in a separate head “Special Funds” on the liabilities side. Investments held against these funds are shown on the asset side.
• Receipts & Payments vs Income & Expenditure: Receipt of a donation for a special fund is recorded in the Receipts & Payments A/c and credited to the specific Fund account in the organization's books. Interest earned on investments is credited to Income & Expenditure A/c (or to the Fund if the terms require it) and/or reinvested into the fund as specified.
• Utilisation: When fund money is spent for the specified purpose, debit the appropriate asset or expense account and credit the fund account (or transfer from fund investments).

Typical Journal Entries

1) On receiving donation for Building Fund:
   Bank A/c           Dr.
       To Building Fund A/c

2) On investing a part of fund:
   Investments A/c    Dr.
       To Bank A/c

3) Interest on investment (credited to Income & Expenditure):
   Bank A/c           Dr.
       To Interest (Income) A/c
   (Then transfer interest to fund if required)

4) Transfer interest to Fund (if policy is to add to fund):
   Interest (Income) A/c   Dr.
       To Building/Endowment Fund A/c

5) On expenditure for building:
   Building (Asset) A/c   Dr.
       To Bank A/c
   (And) Building Fund A/c   Dr.
       To Building A/c   OR
   Building A/c            Dr.
       To Building Fund A/c  (presentation depends on method adopted)

6) Sinking Fund annual contribution:
   Profit & Loss (or Appropriation) A/c   Dr.
       To Sinking Fund A/c

7) On replacement using sinking fund:
   New Asset A/c        Dr.
       To Bank A/c
   Sinking Fund A/c     Dr.
       To New Asset A/c (or Bank A/c)

Key Principles

• Maintain separate accounts for each special fund (ledger control) and show related investments distinctly.
• Do not use the capital of an endowment fund; use only income as per donor’s terms.
• Disclose purpose and balance of each fund in financial statements for transparency.

How It Appears in Final Accounts

• Balance Sheet (Liabilities): Special Funds (with balances)
• Balance Sheet (Assets): Investments held for special funds shown under investments or long-term/short-term assets
• Income & Expenditure A/c: Interest/income earned on investments is shown as income (unless transferred to the fund as per terms)

Note: Exact presentation and journal practice can vary; always follow the organisation’s accounting policy and donor conditions.

Fig 9 — Educational Diagram: Subscriptions

Definition

Subscriptions are periodic amounts payable by members of a not-for-profit organisation (club, society, association, school etc.) for running its normal activities. Annual subscriptions are revenue receipts of the organisation; life membership fees and admission fees are usually treated as capital receipts.

Types of Subscriptions

• Annual/periodic subscription – revenue; credited to Income & Expenditure Account.
• Life membership fee / Admission fee – capital in nature; credited to Capital/General Fund (or a specific life membership fund).
• Outstanding (arrears) – subscription due but not received at year-end (asset).
• Advance (prepaid) – subscription received for next period (liability).
• Honorary members – usually not required to pay subscription.

Recording and Adjustments

Subscriptions received in cash/bank are recorded when received. To show the correct subscription income for the accounting year, adjustments are needed for opening outstanding, closing outstanding, opening advance and closing advance because cash receipts may relate to previous or future years.

Basic Journal Entries (common)

• On receipt of subscription: Cash/Bank Dr; To Subscriptions (or Subscriptions Received) Cr.
• When recognizing outstanding at year-end: Outstanding Subscriptions Dr; To Subscriptions Cr.
• When recognizing advance (prepaid) at year-end: Subscriptions Dr; To Advance Subscriptions (Liability) Cr.
• Life membership/admission fee received: Cash/Bank Dr; To General Fund (or Life Membership Fund) Cr.

Treatment in Final Accounts

• Income & Expenditure Account (Income side): Subscription income for the year (after necessary adjustments).
• Balance Sheet: Outstanding Subscriptions shown under Current Assets; Advance Subscriptions shown under Current Liabilities. Life membership/admission fee added to Capital/General Fund.

Why adjustments are needed

Cash received during the year can include (a) payments relating to last year (opening outstanding), (b) payments for the current year, and (c) payments for the next year (advances). To recognise income in the year it belongs to, we remove receipts that relate to previous year and add amounts belonging to current year though not yet received.

Fig 10 — Educational Diagram: Donations and Grants

Definition & nature
Donations and grants are voluntary receipts received by not‑for‑profit organisations (NPOs) without consideration in return. They may be given by individuals, trusts, corporations or government bodies. Accounting treatment depends on the nature and purpose: whether the receipt is corpus/capital in nature (to be kept intact), revenue in nature (to be used for current activities) or restricted to a specific purpose.

Types
- By purpose: Unrestricted (general) donations — can be used for any purpose; Restricted donations — given for a specified purpose (e.g. building fund, library fund).
- Endowment: donor gives a sum as permanent capital (corpus). Only the income/interest is used; the principal is kept intact.
- By source: private donations, corporate donations (CSR), government grants/subsidies.

Classification in accounts
- Receipts & Payments Account: all donations and grants are recorded as receipts on a cash basis when received.
- Income & Expenditure Account: only revenue receipts relevant to the accounting period are shown as income. Capital receipts (corpus, endowments, capital grants) are not shown as income; they are credited to appropriate funds or treated as deferred income.
- Balance Sheet: capital receipts (endowment fund, building fund, capital grants not yet recognized) appear on the liabilities side under Funds and Reserves; specific funds are shown separately.

Treatment principles and common entries
- Unrestricted donation (for general purposes): recorded as income in Income & Expenditure.
- Donation for specific fund (e.g. building fund, library fund): credited to that specific fund (shown on Balance Sheet). The expenditure on that purpose is charged to that fund.
- Endowment: amount credited to Endowment Fund (capital). The corpus is invested; the investment income is shown in Income & Expenditure.
- Donation of fixed asset: record the asset at fair value; credit the appropriate fund (often a specific fund or capital fund).
- Government grants: classify as capital grants (for acquiring fixed assets or capital projects) or revenue grants (to meet recurring expenses). Capital grants are either credited to a capital fund or treated as deferred income and recognized systematically over the useful life of the related asset.

Key accounting journal entries (typical)

1. Cash donation (general):
   Dr Bank A/c
       Cr Donations A/c (I&E)

2. Donation to Building Fund (specific):
   Dr Bank A/c
       Cr Building Fund A/c (Balance Sheet)

3. Endowment received:
   Dr Bank A/c
       Cr Endowment Fund A/c (Balance Sheet)

4. Donation of fixed asset (e.g. building) specifically for use:
   Dr Fixed Asset A/c (at fair value)
       Cr Building Fund A/c / Donations A/c (depending on policy)

5. Government capital grant received for asset (treated as deferred income):
   Dr Bank A/c
       Cr Capital Grants (liability) A/c
   On systematic recognition: Dr Capital Grants A/c
                              Cr Income A/c (or transfer to Fund)

6. Interest on endowment investment (used as income):
   Dr Bank A/c
       Cr Interest/Income A/c (I&E)

Recognition & matching
Grants and donations should be matched with the expenses they are intended to support. If a grant is for future periods or for purchase of a long‑lived asset, recognition as income should be spread over the periods that benefit (e.g. straight‑line over useful life).

Practical points / CBSE emphasis
- Always classify receipts first (capital vs revenue; restricted vs unrestricted).
- In Income & Expenditure show only revenue nature receipts; capital receipts go to Balance Sheet funds.
- For endowments, show corpus under funds and the income derived in Income & Expenditure.
- For government grants, identify whether the grant is capital or revenue and treat accordingly (defer and amortize capital grants).

Fig 11 — Educational Diagram: Legacy and Bequests

Definition
A legacy (or bequest) is a gift of money or property left to a not-for-profit organisation by a person under his/her will. Legacies are receipts arising from the estate of a deceased person and are important sources of capital for charities, trusts and other not-for-profit organisations.

Types of Legacies

• Pecuniary (Money) Legacy – a fixed sum of money left (e.g., Rs. 50,000).
• Specific Legacy – a particular asset bequeathed (e.g., a house, painting, jewellery).
• Demonstrative Legacy – a money legacy payable from a specified source (e.g., Rs. 1,00,000 to be paid from sale of shares).
• Residuary Legacy – the remainder of the estate after debts and other legacies are paid (e.g., 30% of the residue).

Recognition and Measurement
Legacies are generally treated as capital receipts. They are normally recorded in the books only when receipt is certain (i.e., the amount is received or probate/administration makes it certain). If the legacy is an asset, it is recorded at its fair market value on the date of receipt.

Accounting Treatment & Journal Entries

• Cash (pecuniary) legacy received:
  Bank A/c Dr
      To Capital Fund (or Specific Fund) A/c
• Specific asset (e.g., building) received:
  Building A/c (at market value) Dr
      To Capital Fund (or Specific Fund) A/c
• Legacy in form of investments/securities:
  Investments A/c Dr (at market value)
      To Capital Fund (or Specific Fund) A/c
• If legacy is given for a specific purpose (e.g., scholarship), it is credited to a Specific Fund (or named fund) rather than the General/Capital Fund.

Presentation in Financial Statements
Legacies credited to Capital Fund or a designated Specific Fund are shown under Funds and Liabilities in the Balance Sheet. If the legacy is meant to be expended on revenue items (rare), the terms will determine whether the amount is treated as capital or shown as income; normally terms creating an enduring asset or corpus make it capital.

Special Considerations

• Probable but not yet received legacies are treated as contingent assets and are not recorded until realization is reasonably certain.
• If a legacy is to be used for income (for example, the testator specifies that only interest is to be used), the capital is credited to a specific fund and only income arising from it is used in the Income & Expenditure Account.
• If the legacy is residuary and the amount becomes known only after settlement, record when amount is ascertained/received.

Summary
Legacies/bequests increase the capital base of a not-for-profit organisation and are treated as capital receipts. Correct identification of type and terms of the will determines whether the amount goes to Capital Fund, a Specific Fund or (very rarely) to revenue.

Fig 12 — Educational Diagram: Income from Investments, Interest, Rent and Other Incomes

Overview
For Not-for-Profit Organisations (NPOs) income is recognized when it is earned (accrual basis) and is classified as revenue of the period. Income from investments, interest, rent and other incomes are recurring revenue items that increase the organisation’s surplus (excess of income over expenditure) and affect the Income & Expenditure Account and the Balance Sheet.

Types & Treatment

• Income from Investments – Includes dividends, interest on securities and profit on sale of investments. Investments are shown on the Balance Sheet as current or fixed depending on intention. Income is credited to Income & Expenditure Account when earned.
• Interest – Interest on bank deposits, fixed deposits, bonds and securities. Recognised as income in the period to which it relates. If interest is accrued but not received, record as "Interest Outstanding" (asset). If received in advance, treat as "Interest Received in Advance" (liability) and adjust on accrual.
• Rent – Rent from letting rooms/halls/buildings or from leases. Recognise rent for the period earned. If rent is paid/received in advance or outstanding, show as prepaid rent (asset) or rent outstanding (asset) / rent received in advance (liability) accordingly.
• Other Incomes – Miscellaneous receipts such as sale of old newspapers, magazine income, admission fees (if revenue in nature), commission, subsidies, fines, etc. Determine whether each item is revenue (goes to Income & Expenditure) or capital (added to capital/corpus) by nature.

Accrual Concepts & Adjustments

• Income is recorded when earned, not necessarily when received. Use Outstanding (receivable) and Received in Advance (liability) adjustments.
• Sale of investments: difference between sale proceeds and carrying cost is recorded as profit or loss in the Income & Expenditure Account.
• Permanent endowment investments: income generally credited to specific fund (e.g., Endowment Fund) or to Income & Expenditure depending on terms of gift.

Typical Journal Entries

1. Interest earned but not received (accrual):
   Interest Outstanding A/c      Dr
       To Interest Received/Income A/c

2. Interest received (on receipt):
   Bank A/c                     Dr
       To Interest Received/Income A/c
   (or, if earlier accrued: Bank Dr; Interest Outstanding Cr)

3. Rent earned but not received (accrual):
   Rent Outstanding A/c         Dr
       To Rent Income A/c

4. Rent received in advance:
   Bank A/c                     Dr
       To Rent Received in Advance (Liability)

5. Sale of investment:
   Bank A/c                     Dr
   (or Investments A/c Dr if purchase back)
       To Investments A/c
       To Profit on Sale of Investments (if sale > cost)
   (If loss, debit Loss on Sale of Investments)

Presentation

• Income accounts (Interest, Rent, Dividends, Profit on Sale of Investments, Other Incomes) are shown on the Credit side of the Income & Expenditure Account.
• Outstanding incomes are shown under Current Assets in the Balance Sheet.
• Income received in advance is shown under Current Liabilities.

Points to Remember

• Classify receipts into revenue or capital by nature (e.g., sale of a fixed asset is capital; sale of old newspapers is revenue).
• Follow the accrual principle: adjust for outstanding and prepaid/received in advance items.
• Follow any specific trust or donation conditions — some incomes may be credited to a specific fund.

Fig 13 — Educational Diagram: Sale of Assets and Investments

Overview
In Not-for-Profit Organisations (NPOs), the sale of a fixed asset or investments requires removal of the asset/investment from the books and recognition of any profit or loss. The accounting treatment depends on whether the asset/investment was bought from the General Fund (Income & Expenditure) or from a Specific Fund (e.g., Building Fund, Endowment Fund). Profit or loss on sale normally flows to the Income & Expenditure Account unless the asset/investment belongs to a specific fund, in which case it adjusts that fund.

Key steps when an asset is sold

• Determine Net Book Value (NBV) = Cost of asset − Accumulated depreciation.
• Record cash/bank receipt for the sale proceeds.
• Remove the asset (credit Asset account with original cost) and remove accumulated depreciation (debit Accumulated Depreciation account).
• Any difference between sale proceeds and NBV is a profit (gain) or loss: transfer it to Income & Expenditure A/c unless the asset was held for a specific fund—then transfer to that fund.

Journal entry pattern (asset with accumulated depreciation)

When asset is sold:
  Bank A/c (or Cash) Dr.        Sale proceeds
  Accumulated Depreciation Dr.  Accumulated depreciation on asset
      To Asset A/c              Original cost of asset
      To Gain on Sale A/c       (If proceeds > NBV)   OR
  Loss on Sale A/c Dr.          (If proceeds < NBV)
      (Transfer gain/loss to Income & Expenditure A/c or specific fund)

Sale of investments
Investments are removed at cost. If sale proceeds differ from cost, the gain or loss is recognised. If investments were purchased from a specific fund, sale proceeds and any gain/loss affect that fund; otherwise they affect Income & Expenditure.

Journal entry pattern (investments)

  Bank A/c Dr.                Sale proceeds
      To Investments A/c      Cost of investments sold
      To Gain on Sale A/c     (If proceeds > cost)
  OR
  Loss on Sale A/c Dr.        (If proceeds < cost)

Special fund treatment
If an asset or investment was bought out of a Special Fund (e.g., Building Fund): on sale, the cash and any realised gain/loss should be credited/debited to that same fund — not to the General Income & Expenditure A/c — because those resources legally belong to that fund.

Presentation in Financial Statements

• Assets/investments sold are removed from the Balance Sheet.
• Realised gains are shown as income in Income & Expenditure A/c (or credited to the specific fund).
• Realised losses are shown as expenses in Income & Expenditure A/c (or debited to the specific fund).

Practical notes

• Always identify the fund that financed the asset/investment: treatment differs for general vs specific funds.
• Maintain clear supporting work showing NBV calculation and the journal entries.
• For partial sales (e.g., sell some units of a portfolio), treat cost on a specific identification or as per organisation policy.

Fig 14 — Educational Diagram: Depreciation and Provision for Doubtful Debts

Overview
In a Not-for-Profit Organisation (NFO), accounting aims to show the true surplus or deficit of the period. Two important adjustments are depreciation (to allocate cost of fixed assets over their useful life) and provision for doubtful debts (to show debtors at their likely realisable value). Both are charged to the Income & Expenditure Account and shown appropriately in the Balance Sheet.

Depreciation

• Meaning: Systematic allocation of the cost of a tangible fixed asset over its useful life to reflect usage, obsolescence or wear and tear.
• Objective: Match asset cost with the benefits received in each accounting period and present the asset at a realistic carrying amount in the Balance Sheet.
• Where shown: Depreciation is an expense and is charged to the Income & Expenditure Account. In the Balance Sheet the asset is shown at its written down value (cost less accumulated depreciation).
• Common methods used:
  • Straight Line Method (Fixed Installment Method)
  • Diminishing Balance Method (Reducing Balance Method)
• Accounting entries:
  • Method using Depreciation Account: Depreciation A/c Dr. To Asset A/c (or To Accumulated Depreciation A/c). Then close Depreciation A/c to Income & Expenditure A/c.
  • Direct (common in practice for NFOs): Income & Expenditure A/c Dr. To Asset A/c (or To Accumulated Depreciation A/c) to record the charge directly to Income & Expenditure.
• Special funds/endowment treatment (brief): If an asset is purchased out of a specific fund or endowment, the asset is capitalized and depreciation is still charged to Income & Expenditure. Many organisations also transfer an equivalent amount from the specific/endowment fund to Income & Expenditure to protect the real value of that fund; follow the organisation's policy or textbook guidance.

Provision for Doubtful Debts

• Meaning: An estimate created to cover the expected loss on sundry debtors who may not pay. It is a contra-asset (shown as a deduction from Sundry Debtors in the Balance Sheet).
• Objective: Present debtors at their net realisable value and reflect a realistic picture of collectible amounts.
• Where shown: The provision expense (Provision for Doubtful Debts) is charged to the Income & Expenditure Account. In the Balance Sheet show Sundry Debtors less Provision for Doubtful Debts.
• Creation and accounting entries:
  • To create or increase provision: Income & Expenditure A/c Dr. To Provision for Doubtful Debts A/c.
  • When a specific debt becomes bad and written off: First record Bad Debts A/c Dr. To Debtor A/c. If a provision already exists, it may be used: Provision for Doubtful Debts A/c Dr. To Bad Debts A/c (to the extent of the provision) or directly Provision for Doubtful Debts A/c Dr. To Debtors A/c when writing off against provision.
• Notes:
  • Provision is an estimate and is made periodically (often as a percentage of closing debtors).
  • Provision reduces the net asset value of debtors and helps avoid overstating income.

Practical impact on financial statements
Both depreciation and provision reduce the reported surplus (or increase deficit) in Income & Expenditure Account for the year. On the Balance Sheet, depreciation reduces the carrying amount of fixed assets and provision reduces the net receivables (debtors).

Fig 15 — Educational Diagram: Outstanding and Prepaid Expenses, Accrued and Received-in-Advance Income

Definitions

Outstanding (Accrued) Expenses: Expenses that have been incurred during the accounting period but are not yet paid at the balance sheet date. They are current liabilities.

Prepaid (Advanced) Expenses: Expenses that have been paid in cash during the accounting period but relate to future accounting periods (not yet incurred). They are current assets.

Accrued (Outstanding) Income: Income that has been earned during the accounting period but is not yet received in cash at the balance sheet date. It is a current asset (receivable).

Income Received in Advance (Unearned Income): Income received in cash during the accounting period but relating to future periods (not yet earned). It is a current liability.

Accounting Treatment & Where They Appear

• Effect on Income & Expenditure A/c (I&E A/c):
  • Outstanding expenses: add to expenses (increase expense side of I&E).
  • Prepaid expenses: subtract from expenses (reduce expense side of I&E).
  • Accrued income: add to incomes (increase income side of I&E).
  • Income received in advance: subtract from incomes (reduce income side of I&E).
• Effect on Balance Sheet:
  • Outstanding expenses: shown under current liabilities.
  • Prepaid expenses: shown under current assets.
  • Accrued income: shown under current assets (receivables).
  • Income received in advance: shown under current liabilities.

Typical Adjusting Journal Entries

1) Outstanding expense (not paid but incurred)
   Expense A/c    Dr
       To Outstanding Expenses A/c (Liability)
   (To record expense incurred but not paid)

2) Prepaid expense (paid but not incurred)
   Prepaid Expenses A/c (Asset)    Dr
       To Expense A/c
   (To transfer amount to next period as an asset)

3) Accrued income (earned but not received)
   Accrued Income A/c (Asset)    Dr
       To Income A/c
   (To record income earned but not received)

4) Income received in advance (received but not earned)
   Income A/c    Dr
       To Income Received in Advance A/c (Liability)
   (To transfer unearned income to liability)

Illustrative placement in Final Accounts

• Income & Expenditure A/c (extract):
  • Expenses side: Original expenses + Outstanding expenses - Prepaid expenses
  • Income side: Original incomes + Accrued incomes - Incomes received in advance
• Balance Sheet (extract):
  • Current assets: Prepaid expenses, Accrued income (receivables)
  • Current liabilities: Outstanding expenses, Income received in advance

Key Points / Tips

• Recognition is based on accrual accounting: match income/expenses to the period they belong to, not when cash changes hands.
• Some items may already have been recorded in books incorrectly (e.g., advance received credited to income). Adjusting entries correct their period allocation.
• Every adjusting entry affects both the I&E A/c (to show correct surplus/deficit) and the Balance Sheet (to show correct assets/liabilities).

Fig 16 — Educational Diagram: Transfer between Funds and Appropriations

Meaning
In not-for-profit organisations (NPOs), 'funds' are separate accounting pools maintained for specific purposes (e.g., General Fund, Building Fund, Endowment Fund, Reserve Fund). 'Appropriation' means allocating or setting aside part of a surplus (excess of income over expenditure) to one or more of these funds. 'Transfer between funds' is the movement of amounts from one fund to another as per the organisation's rules, donors' conditions or management decisions.

Why transfers and appropriations are needed

• To honour donors' restrictions (e.g., donation given for a library must go to Library/Building Fund).
• To create reserves for future contingencies (Reserve Fund).
• To fund depreciation, repairs or capital expenditure (Depreciation/Replacement Fund, Building Fund).
• To show proper accountability and transparency—each fund shows its own receipts, payments and balance.

General principles and accounting treatment

• Surplus or deficit for the year is determined by the Income & Expenditure Account. A surplus is appropriated (allocated) to funds by journal entries.
• Donations given for a specific purpose are credited directly to the respective specific fund (not to General Fund).
• Transfers can be made either directly from the Income & Expenditure Account (i.e., debit I&E, credit Specific Fund) or by first closing surplus into General Fund and then transferring from General Fund to specific funds (both approaches accepted; practice depends on constitution/policy).
• When a fund is used to buy an asset (e.g., Building Fund used to construct a building), the asset appears in the Balance Sheet under Fixed Assets and the fund balance reduces accordingly.
• Presentation: Funds appear under the liabilities/equity side of the Balance Sheet (e.g., General Fund, Specific Funds). Each fund’s closing balance = opening balance + receipts credited + transfers in - payments debited - transfers out.

Typical journal entries

• Donation for a specific purpose (Building Fund):
  

  Bank A/c Dr.
    To Building Fund

• Donation for general purposes (General Fund):
  

  Bank A/c Dr.
    To General Fund

• Surplus of Income & Expenditure transferred to General Fund:
  

  Income & Expenditure A/c Dr.
    To General Fund

• Appropriation of surplus to a specific fund (direct):
  

  Income & Expenditure A/c Dr.
    To Reserve Fund / Building Fund

  Or (via General Fund):
  

  General Fund Dr.
    To Reserve Fund / Building Fund

• Transfer from General Fund to Building Fund to meet construction:
  

  General Fund Dr.
    To Building Fund

• When a fund pays for an asset (e.g., building constructed):
  

  Building (Fixed Asset) Dr.
    To Bank A/c
    (and the fund which financed it is reduced in fund-accounting presentation)

How transfers affect financial statements

• Income & Expenditure Account shows operational result (surplus/deficit). That result is transferred (appropriated) to funds and does not appear as 'profit' but as allocation among funds.
• Balance Sheet shows each fund balance under funds/corpus. After appropriation, closing balances reflect transfers.

Practical notes for CBSE/Examination

• Always state the purpose of a transfer (donor’s restriction, creation of reserve, asset replacement, etc.).
• Show journal entry used (direct from I&E or via General Fund) and adjust the Balance Sheet fund balances accordingly.
• When asked to prepare Income & Expenditure A/c and Balance Sheet, pass surplus to General Fund (unless question specifies transfer to a special fund) and then show further appropriations as separate transfers.

Fig 17 — Educational Diagram: Preparation of Financial Statements from Receipts & Payments

Overview
A Receipts & Payments (R&P) account is a summary of cash and bank receipts and payments during the year for a not-for-profit organisation (NFPO). It is a book of original entry (cash book type) and does not show incomes and expenditures on accrual basis. To prepare financial statements (Income & Expenditure Account and Balance Sheet) we must convert the R&P figures to accrual basis and separate capital items from revenue items.

Objective
Prepare: (1) Income & Expenditure Account (similar to Profit & Loss Account) to find surplus/deficit for the year; (2) Balance Sheet showing funds, assets and liabilities at year end.

Main principles / classification

• Revenue receipts/ payments: recurring items relating to the current period (e.g., annual subscriptions, donations for general purposes, interest, rent) — treated in Income & Expenditure.
• Capital receipts/ payments: non-recurring, create or acquire assets or corpus (e.g., life membership fees, specific donations for building, sale or purchase of fixed assets) — shown in Balance Sheet under funds and adjustments, not in I&E (except gains/losses on sale).
• Personal items (e.g., receipts from sale of old stores) are treated according to nature — generally capital unless revenue in nature).

Step-by-step procedure to prepare I&E and Balance Sheet from R&P

1. Start with R&P statement: note opening and closing cash & bank balances (these appear in Balance Sheet as current assets).
2. Classify each item in R&P as revenue or capital. Put capital receipts (e.g., life membership, donation for building) aside to adjust capital/fund; capital payments (e.g., purchase of furniture, building) are added to assets or deducted from fund.
3. For revenue incomes (subscriptions, interest, rent, donation for general purposes) adjust for accruals and prepayments/advances (explained below) to arrive at income for the year — post these to Income & Expenditure Credit side.
4. For revenue expenses (salaries, printing, electricity) adjust payments for outstanding and prepaid to get expense for the year — post these to Income & Expenditure Debit side. Add depreciation for fixed assets to expenses.
5. Compute surplus/deficit = Total Revenue Incomes − Total Revenue Expenses. Carry this to Balance Sheet (increase/decrease General Fund or relevant fund).
6. Prepare Balance Sheet: list Funds (opening fund + capital receipts + surplus − capital payments), fixed assets (net of depreciation), current assets (including closing cash & bank balances), and current liabilities (outstanding expenses, creditors).

Adjustments (how to treat common items)

• Subscriptions — Method: take subscription received from R&P, add Opening Outstanding (arrears), deduct Closing Outstanding, deduct subscription received in advance for next year (closing advance), and add any opening advance relevant to current year. The result = Subscription income for I&E.
• Expenses (e.g., salaries, electricity) — Start with payment made (R&P), add Closing Outstanding (unpaid expenses for current year), deduct Opening Outstanding (paid this year but relates to previous year). Also adjust for prepaid amounts: deduct Closing Prepaid, add Opening Prepaid (if a prepayment made earlier pertains to this year).
• Donations — If donation is for a specific purpose (building, equipment) treat as capital receipt and add to the specific fund; if for general purposes and recurring treat as revenue (income). Corpus donations (to be invested) are capital.
• Life membership and entrance fees — Usually capital receipts (add to capital fund) unless rules of the organisation treat them otherwise.
• Purchase of fixed asset — Capital payment: asset recorded in Balance Sheet at cost. Depreciation charged in I&E. Payment shown in R&P is not an expense in I&E.
• Sale of fixed asset — Proceeds are a capital receipt; remove asset from assets column at book value and record any gain or loss in I&E (gain = receipt − net book value goes to credit; loss goes to debit).
• Interest, rent, dividends — Revenue income; adjust for accrued and received-in-advance similarly.

Format reminders
Income & Expenditure Account: Debit side = Expenses & Losses; Credit side = Incomes & Gains. Balance Sheet: Funds & Liabilities on left (or as per format), Assets and Receivables on right. Closing cash & bank balance in R&P agree with Balance Sheet cash & bank.

Common mistakes to avoid

• Showing capital receipts in Income & Expenditure (they belong to Balance Sheet funds).
• Forgetting depreciation on fixed assets (remember that purchase is capital, depreciation is annual expense).
• Not adjusting subscriptions and other incomes/expenses for outstanding/prepaid items.

Fig 18 — Educational Diagram: Adjusting and Closing Entries

Definition & purpose
Adjusting entries are journal entries made at the end of the accounting period to record incomes and expenses in the period to which they relate (accrual basis). For not‑for‑profit organisations (NPOs) they convert the Receipt & Payment information into the Income & Expenditure Account and Balance Sheet so that revenue items are matched to the correct period. Closing entries are the journal entries that close temporary accounts (income and expense accounts) and transfer the net result (surplus or deficit) to the Capital / General Fund or appropriate specific fund.

Why they are needed (for NPOs)

• Receipt & Payment is a cash/book summary; it does not show incomes earned or expenses incurred but not paid. Adjustments make the accounts accrual‑based.
• Closing entries transfer periodic results to the Accumulated/General Fund so the Balance Sheet shows the correct fund balance at year end.

Common types of adjusting entries

• Outstanding (accrued) expenses — expense incurred but not yet paid (e.g., salary outstanding). Record expense and liability.
• Prepaid expenses — expense paid in advance (e.g., insurance paid for next year). Reduce expense for the current period and show as asset.
• Accrued income — income earned but not yet received (e.g., interest earned). Record income and receivable.
• Income received in advance — receipt relating to future period (e.g., subscription received in advance). Record as liability and exclude from current year income.
• Depreciation — systematic allocation of the cost of fixed assets to periods benefited.
• Subscription adjustments — subscriptions outstanding or received in advance; often common in clubs/societies.
• Specific / capital receipts — donations for building or endowments: shown in Balance Sheet under specific funds, not in Income & Expenditure.

General format of adjusting journal entries (examples)

• Outstanding expense: Expense A/c Dr. To Outstanding Expense (liability) A/c
• Prepaid expense: Prepaid Expense (asset) A/c Dr. To Expense A/c
• Accrued income: Accrued Income (asset) A/c Dr. To Income A/c
• Income received in advance: Income A/c Dr. To Income Received in Advance (liability) A/c
• Depreciation: Depreciation A/c Dr. To Asset A/c (or Accumulated Depreciation)

From adjusting entries to final statements
After adjustments, prepare the Income & Expenditure Account by posting incomes and adjusted expenses. The balance (Excess of Income over Expenditure = surplus OR Excess of Expenditure over Income = deficit) is transferred to the Accumulated/General Fund via closing entry. The Balance Sheet shows the closing balance of the General Fund (Opening Fund + Surplus − Deficit + Capital receipts for the period) and the adjusted values of assets and liabilities (including outstanding, prepaid, accrued items and depreciation).

Closing entries — procedure

1. Close each expense account into Income & Expenditure Account: Income & Expenditure A/c Dr. To Expense A/c (for each expense).
2. Close each income account into Income & Expenditure Account: Income A/c Dr. To Income & Expenditure A/c (for each income).
3. Determine balance of Income & Expenditure (surplus or deficit).
4. Transfer surplus/deficit to General Fund: If surplus, Income & Expenditure A/c Dr. To General Fund A/c; if deficit, General Fund A/c Dr. To Income & Expenditure A/c.

Presentation in final statements

• Income & Expenditure Account shows only revenue incomes and expenses for the period (after adjustments). Surplus/Deficit appears on its appropriate side and is transferred to General Fund.
• Balance Sheet displays the General Fund (opening balance ± surplus/deficit ± capital receipts) and current assets/liabilities including prepaid, outstanding, accrued and depreciation adjustments.

Key points to remember

• Do not record capital receipts (e.g., building donation) in Income & Expenditure — they go to specific or general fund in Balance Sheet.
• Adjustments ensure matching principle — expenses matched with incomes of the same period.
• Always pass journal entries for adjustments before preparing Income & Expenditure Account.

Fig 19 — Educational Diagram: Notes to Accounts and Disclosures

Definition & purpose
Notes to Accounts and Disclosures are explanatory statements that accompany the Income & Expenditure Account and the Balance Sheet of a not-for-profit organisation (NPO). They explain accounting policies used, give details of significant items, and provide additional information required for fair presentation and understanding of the financial statements.

Why they matter
They increase transparency and help users (members, donors, regulators) to interpret the numbers — e.g., how receipts have been classified (capital v. revenue), restrictions on funds, contingent liabilities, and valuation methods.

Typical structure

• Heading: "Notes to Accounts" with the period and name of the organisation.
• Numbered notes (1, 2, 3 …). Each note deals with one topic: accounting policies, fund balances, investment details, loans, contingencies, etc.
• Grouped: (a) Significant Accounting Policies; (b) Notes to Balance Sheet (fundwise details); (c) Notes to Income & Expenditure Account; (d) Other disclosures (contingent liabilities, events after reporting date).

Common disclosures for Not‑for‑Profit Organisations

• Significant accounting policies: basis of accounting (accrual), treatment of subscriptions, donations, life membership/entrance fees, capitalization policy, depreciation method (SLM/WDV), valuation of investments (cost/market), treatment of endowment and specific funds.
• Classification of receipts: which receipts are treated as capital (e.g., building donation, life membership if specified as corpus) and which as revenue (annual subscriptions, donations for day‑to‑day activity unless specifically restricted).
• Fund disclosures: opening and closing balances of Capital Fund, General Fund, Specific Funds (e.g., Building Fund, Scholarship Fund), Endowment Fund; purpose/restrictions of each specific fund.
• Investments: schedule with face value, cost, market/carrying value and interest/dividend earned.
• Fixed assets & depreciation: gross block, additions, disposals, accumulated depreciation and net book value; method & rates of depreciation.
• Receivables and payables: subscriptions in arrears, outstanding expenses, loans and advances.
• Contingent liabilities & commitments: guarantees, pending litigations, capital commitments.
• Related party & trustee disclosures: any remuneration/payments to trustees, or transactions with related entities.
• Significant events after balance sheet date

How to prepare concise notes (practical steps)

1. List accounting policies first (short bullet points).
2. Give fundwise balances and explain the nature/purpose of each fund.
3. Provide schedules for assets (esp. investments) and major liabilities.
4. Explain any unusual or non‑recurring items (prior period, extraordinary receipts/payments).
5. Disclose contingent liabilities, commitments and related party info as separate numbered notes.

Presentation tip (CBSE style)
Number notes and refer to them from the Balance Sheet/Income & Expenditure Account where appropriate (e.g., "Note 4: Investments" next to Investments figure). Keep wording precise — examiners look for correct classification and clear explanation.

Fig 20 — Educational Diagram: Audit, Internal Control and Governance Issues

Overview
For not-for-profit organisations (NPOs) the primary goals are to ensure that resources are used for the stated objectives and to provide reliable financial information to stakeholders (trustees, donors, beneficiaries, regulators). Audit, internal control and governance together provide assurance that funds are protected, spent appropriately and reported transparently.

Audit (in NPO context)

• Definition & objective: An audit is an independent examination of financial records, vouchers and reports to express an opinion on whether the financial statements present a true and fair view and whether funds are used according to the organisation’s objects and donor restrictions.
• Types of audit: statutory/mandatory audits (by law or trust deed), voluntary audits, internal audit and special/forensic audits.
• Scope & focus areas: verification of receipts (donations, grants, subscriptions), classification of funds (corpus, restricted/designated, general), expenditure on programs vs administration, compliance with grant terms, bank and cash controls, asset verification, minutes and resolutions authorizing transactions.
• Audit report types: Unqualified (clean), Qualified, Adverse, Disclaimer — depending on findings and limitations.

Internal Control

• Definition: Internal controls are policies, procedures and practices designed to provide reasonable assurance about the achievement of objectives: reliable financial reporting, effective operations and compliance with laws and donor conditions.
• Key components: control environment (tone at the top), risk assessment, control activities (authorisations, segregation of duties, reconciliations), information & communication, monitoring (including internal audit).
• Specific control practices for NPOs: segregation of duties for receipts and payments; pre-numbered receipts and vouchers; dual signatories on bank accounts; regular bank reconciliations; petty cash imprest system; donor-restricted fund accounting; fixed asset register and periodic physical verification; approval of budgets and monitoring against them.
• Internal check vs internal audit: Internal check refers to day-to-day division of tasks (built-in checks). Internal audit is an independent review function that evaluates the adequacy of internal controls and compliance.

Governance Issues

• Board/trustee duties: fiduciary duty, oversight of strategy and funds, ensuring lawful activity and that funds further objects of the organisation.
• Transparency & accountability: timely financial statements, disclosure of related-party transactions, publication of annual reports, clear reporting to donors and regulators.
• Conflicts of interest: disclose and manage conflicts (e.g., contracts with trustees), require recusal and formal approval procedures.
• Fund misuse & restrictions: ensuring donor-imposed conditions are respected; set up separate ledgers/funds for restricted grants and demonstrate utilization.
• Risk management & ethics: fraud risk, reputational risk, compliance risk — mitigated through policies (anti-fraud, whistleblower, procurement, travel & expense) and an audit committee.

Audit procedures typical for NPOs

• Plan based on materiality and risk (programs with large grant flows attract higher audit scrutiny).
• Test bank reconciliations, vouch receipts (donation slips, grant agreements), examine supporting invoices for payments, confirm fund balances with donors where needed.
• Verify accounting treatment of restricted funds, endowments and transfers between funds.
• Check minutes and board resolutions authorising significant transactions and remuneration.
• Carry out substantive tests of payroll, procurement and asset purchases; perform analytical review (trends, ratios) to detect anomalies.

Common weaknesses & governance failures

• Weak segregation of duties leading to embezzlement (one person handling receipts and bank reconciliation).
• Non-compliance with donor restrictions or inadequate documentation for fund usage.
• Lack of transparent reporting, inadequate minutes and board oversight, or undisclosed related-party transactions.
• No whistleblower policy or ineffective internal audit function.

Best practice recommendations

• Establish clear fund accounting (separate ledgers for corpus, restricted and general funds).
• Adopt written financial policies (procurement, travel, petty cash, asset management).
• Create an independent audit committee and a functioning internal audit unit or outsourced internal audit.
• Ensure regular external audits, publish an annual report, disclose governance policies and related-party transactions.
• Train staff and trustees on fiduciary responsibilities and ethics.

Outcome
When audit, internal control and governance are strong, an NPO demonstrates credibility to donors and regulators, reduces fraud/loss, ensures funds are used effectively for beneficiaries, and produces reliable financial information for decision making.

Fig 21 — Educational Diagram: Practical Problem Types and Examination Approach

Overview
Accounting for Not-for-Profit Organisations (NPOs) in Class 12 focuses on three linked statements: Receipt & Payment Account (R&P), Income & Expenditure Account (I&E) and Balance Sheet (or Statement of Affairs/fund position). Practical problems test your ability to classify receipts/payments as revenue or capital, prepare those three statements, and make adjustments (subscriptions, donations, depreciation, outstanding/advance items, etc.).

Common Practical Problem Types

• Prepare Receipt & Payment Account from raw cash/bank transactions.
• Convert R&P to Income & Expenditure Account using adjustments (outstanding/advance subscriptions, depreciation, outstanding/ prepaid expenses, interest earned, etc.).
• Prepare Balance Sheet / Funds Statement showing General Fund, Specific Funds (building fund, sports fund), Capital Fund and fixed assets & investments.
• Treatment of special items: life membership fees, entrance fees, endowments, specific donations, legacies, sale/purchase of assets, sinking fund, insurance policies taken for assets (e.g., replacement fund), investments and interest on investments.
• Problems with receipts classified as capital vs revenue and appropriation/transfer between funds (e.g., transfer of surplus to specific fund).

Classification rules (short)
Always ask: is the receipt/payment recurring/related to running activities (revenue) or a one-time / creates asset or reduces liability (capital)? Examples: subscriptions, fees, interest, sale of services = revenue; donation specifically for building or corpus = capital.

Step-by-step Examination Approach

1. Read the question fully. Note the financial year, opening balances and any fund restrictions or special instructions.
2. List opening balances: cash/bank, funds (general & specific), investments, fixed assets, outstanding/advance items.
3. Prepare a Receipt & Payment Account classification: put all cash/bank receipts on the receipts side and payments on the payments side. This is a raw cash summary (no accrual adjustments).
4. From R&P and given adjustments, prepare the Income & Expenditure Account (accrual basis):
   • Include revenue incomes (subscriptions — adjusted; interest; fees; revenue donations).
   • Include revenue expenses (salaries, rent, depreciation, utilities, maintenance).
   • Do adjustments: add outstanding incomes, deduct income received in advance; add prepaid expenses as deduction, add outstanding expenses as addition.
5. Compute surplus/deficit = Total Income (I&E credit) – Total Expenditure (I&E debit). Mention it clearly and show workings for each adjustment.
6. Prepare the Balance Sheet / Funds Statement: bring forward opening fund balances, add surplus/less deficit, add capital receipts (capital donations, life membership, entrance fees if capital), show specific fund balances, fixed assets (net of depreciation), investments, current assets and liabilities.
7. Check arithmetics: closing cash in Balance Sheet should match closing cash in R&P.

Presentation & Exam Tips

• Always show workings for adjustments separately (calculations of subscription to be credited, depreciation, interest accruals, etc.). Marks are often awarded for correct workings even if final presentation has minor errors.
• Underline final figures and label funds clearly (General Fund, Building Fund, Capital Fund, etc.).
• If question states a donation "for building" treat it as specific (building) fund — not general.
• Treat life membership fees and entrance fees as capital unless question specifies they are to be treated as revenue (or a part to revenue). If unsure, mention the usual treatment in a short note and proceed as required by question text.
• Depreciation is always an expenditure in I&E and reduces asset value in Balance Sheet.
• When investments are sold, show sale proceeds in R&P; remove cost and accumulated gain/loss appropriately (gain on sale of investment may be capital or revenue depending on nature—usually revenue if investments are part of current assets unless specifically part of endowment corpus).

Common adjustments & their treatments (quick reference)

• Subscriptions: adjust for opening outstanding/advance and closing outstanding/advance to arrive at subscription income for I&E.
• Donation: capital donation → added to capital/specific fund; revenue donation → credited to I&E.
• Life membership & entrance fees: normally capital and added to Capital Fund (unless stated otherwise).
• Outstanding expenses: add to I&E as expense and show as current liability in Balance Sheet.
• Prepaid/Advance expenses: deduct from expense in I&E and show as current asset in Balance Sheet.
• Interest on investments: accrue to I&E (adjust for interest outstanding/received in advance).
• Sinking/Replacement fund: if contributions set aside, show as specific fund or as investment against a fund with accompanying disclosure.

Common mistakes to avoid

• Mixing capital and revenue receipts without justification.
• Not showing depreciation in I&E or not reducing asset value in Balance Sheet.
• Not adjusting subscription for opening/closing balances.
• Not reconciling closing cash between R&P and Balance Sheet.

Follow the structured approach, show workings clearly and label funds and adjustments — this maximises marks and reduces errors.