Financial Reporting · Not-for-profit and public sector entities

Accounting for Not-for-Profit Organisations: Income and Expenditure Account

Updated 11 October 2026 · Fact-checked

A not-for-profit entity exists to serve members or a cause, not to make profit. You convert its cash records to the accruals basis. Then you prepare an income and expenditure account (showing a surplus or deficit) and a statement of financial position, where the accumulated fund replaces equity.

Understand Accounting for Not-for-Profit Organisations

A club, society or charity does not have owners who expect profit. It has members or beneficiaries. So its accounts show whether income covered the cost of running the activities. The result is called a surplus or deficit, not a profit or loss.

Small clubs often keep only a receipts and payments account. This is a summary of cash in and out. It ignores accruals, prepayments, inventory and depreciation. It does not show a surplus. The income and expenditure account is the accruals-based equivalent of the statement of profit or loss. It records income earned and expenses incurred for the year, whether or not cash moved.

The main income is usually subscriptions. You recognise only the subscriptions that belong to the year. Cash received for earlier years (arrears) and for later years (advance) is stripped out. Other items include donations, grants and legacies. A donation or grant for general use is normally income when received or when entitlement is clear. One given for a specific purpose or for capital is often held in a separate restricted fund or credited to the accumulated fund. Grants for assets follow the IAS 20 idea: the grant is released to income over the asset's life, either as deferred income or by deducting it from the asset's cost.

Activities such as a bar or café are shown as a trading account. Only the profit or loss from the activity goes into the income and expenditure account. The accumulated fund is the club's equivalent of equity. It equals net assets (assets less liabilities). Each year's surplus is added to it and each deficit is deducted. When no opening balance is given, you work it out from the opening assets and liabilities.

Key rules to remember

Accumulated fund (opening): Accumulated fund = total assets − total liabilities; Use this when the opening fund is not given. Include arrears of subscriptions as an asset and subscriptions in advance as a liability.
Subscriptions for the year: Income = cash received − opening arrears + closing arrears + opening advance − closing advance; Or build a subscriptions ledger account and find the income as the balancing figure. This is the figure for the income and expenditure account.
Surplus or deficit: Surplus (deficit) = total income − total expenditure; Income includes subscriptions, donations and profit on activities. Expenditure includes depreciation and accrued expenses. Capital items are excluded.
Closing accumulated fund: Closing fund = opening fund + surplus (or − deficit); Add other items taken directly to the fund, such as capital donations or legacies, if the question treats them that way.
Profit on an activity (e.g. bar): Profit = sales − (opening inventory + purchases − closing inventory) − direct costs; Adjust purchases for payables first. Show only the net profit or loss in the income and expenditure account.
Life membership: Annual income = life membership fee ÷ expected years of membership; Hold the unreleased balance as a liability or deferred income. Follow the method the question states.

How to solve Accounting for Not-for-Profit Organisations questions

Use the same order for any club or charity question. It stops you missing adjustments and makes the accumulated fund fall out cleanly.

1Read the question and note what is asked: the income and expenditure account, the statement of financial position, or just one figure such as the accumulated fund.
2If the opening accumulated fund is not given, list opening assets and liabilities and take the difference.
3Convert cash items to accruals. Use a ledger account for subscriptions and for each expense with accruals or prepayments.
4Prepare a separate trading account for any bar, café or shop. Carry only the net profit or loss across.
5Write the income and expenditure account. Put income first, then expenses including depreciation. Exclude purchases of non-current assets, loan repayments and drawings-like items.
6Deal with donations, grants, legacies and life memberships according to the information given. Decide if each goes to income, a restricted fund or the accumulated fund.
7Prepare the statement of financial position. Add the surplus to the opening fund. Include subscription arrears as a current asset and subscriptions in advance as a current liability.
8Check that net assets equal the closing fund. If not, find the missing adjustment.

Quickest way: Ledger-account shortcut

When to use it: Use this when the question gives a receipts and payments account plus a list of opening and closing balances, and time is short.

Write the subscriptions account first. Put cash in on the credit side and the opening and closing balances in their normal places. The balancing figure is income.
Do the same for any expense with an accrual or prepayment. Opening accrual, closing prepayment and cash are the usual inputs.
Calculate the bar or café profit in one line: sales − cost of sales − direct costs.
Add up income and expenses. The difference is the surplus or deficit.
Calculate opening net assets once. Closing fund = opening fund + surplus. Use this as a check on the statement of financial position.

Common mistakes in Accounting for Not-for-Profit Organisations

Using the cash received for subscriptions as the income figure.
The receipts and payments account looks like the answer, and students copy it across.
Fix: Always adjust for opening and closing arrears and advance. Build a subscriptions account and use the balancing figure.
Adding arrears when you should deduct them, or the reverse.
Students memorise the signs instead of understanding them.
Fix: Think about what the cash contains. Opening arrears collected relate to last year, so deduct. Closing arrears are earned but unpaid, so add. Do the opposite for advance.
Putting the purchase of equipment or the repayment of a loan through the income and expenditure account.
These are payments in the receipts and payments account, so they look like expenses.
Fix: Capital payments go to the statement of financial position. Only depreciation of the asset is an expense.
Showing bar sales and bar costs separately in the income and expenditure account.
Students copy every line from the question.
Fix: Prepare a separate trading account and show only the net profit or loss. Adjust for inventory and payables in that account.
Calling the surplus 'profit' and leaving the fund as 'capital' or 'equity' inconsistently, or omitting the surplus from the fund.
The terminology differs from a normal company, so students forget to transfer the result.
Fix: Use surplus or deficit and accumulated fund. Always add the surplus to the opening fund in the statement of financial position.
Taking a restricted donation or capital grant straight to income.
Students treat every receipt as income because cash came in.
Fix: Read the condition attached. Restricted gifts go to a separate fund until spent. A grant for an asset is released over the asset's life.

Worked examples

Example 1

A sports club's subscription records for the year show: cash received $12,600. Opening balances: subscriptions in arrears $400 and subscriptions received in advance $250. Closing balances: arrears $500 and received in advance $300. Calculate the subscriptions income for the income and expenditure account.

Show the solution

Start with cash received: $12,600.
Deduct opening arrears of $400. This cash was received this year but belongs to last year: 12,600 − 400 = 12,200.
Add closing arrears of $500. These are earned this year but not yet received: 12,200 + 500 = 12,700.
Add opening advance of $250. It was received last year but belongs to this year: 12,700 + 250 = 12,950.
Deduct closing advance of $300. It was received this year but belongs to next year: 12,950 − 300 = 12,650.

Answer: Subscriptions income for the year is $12,650.

Example 2

A club has these opening balances: clubhouse $70,000; equipment $14,000; bar inventory $1,200; subscriptions in arrears $400; cash $3,000; trade payables $900; subscriptions in advance $250. For the year: bar sales $18,000; bar purchases $10,400; closing bar inventory $1,600; bar staff wages $3,000; subscriptions income $9,000; competition entry fees $800; general expenses $4,200; depreciation of equipment $1,500. (a) Calculate the opening accumulated fund. (b) Calculate the bar profit. (c) Calculate the surplus and the closing accumulated fund.

Show the solution

(a) Total opening assets = 70,000 + 14,000 + 1,200 + 400 + 3,000 = $88,600.
Total opening liabilities = 900 + 250 = $1,150.
Opening accumulated fund = 88,600 − 1,150 = $87,450.
(b) Cost of bar sales = 1,200 + 10,400 − 1,600 = $10,000.
Gross profit on bar = 18,000 − 10,000 = $8,000.
Bar profit after wages = 8,000 − 3,000 = $5,000.
(c) Total income = subscriptions 9,000 + bar profit 5,000 + competition fees 800 = $14,800.
Total expenditure = general expenses 4,200 + depreciation 1,500 = $5,700.
Surplus = 14,800 − 5,700 = $9,100.
Closing accumulated fund = 87,450 + 9,100 = $96,550.

Answer: (a) Opening accumulated fund $87,450. (b) Bar profit $5,000. (c) Surplus $9,100 and closing accumulated fund $96,550.

Exam tips

In objective questions, the subscriptions calculation is the favourite. Write the four adjustments in order and check the sign of each by asking what the cash contains.
Know the difference between a receipts and payments account (cash only) and an income and expenditure account (accruals). A one-line definition is often tested.
In a constructed response question, lay out the answer with clear headings: workings first, then the income and expenditure account, then the statement of financial position. Show your workings so marks are available even if a figure is wrong.
Read how a donation, grant or legacy is described. Words such as 'restricted', 'for the purchase of' or 'to the capital fund' decide where it goes.
Objective questions are marked all or nothing. Recheck the arithmetic of the final figure before you select an option.

Practice questions from Not-for-profit and public sector entities

Accounting for Not-for-Profit Organisations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting for Not-for-Profit Organisations: frequently asked questions

What is the difference between a receipts and payments account and an income and expenditure account?

A receipts and payments account is a summary of cash received and paid in the period. It ignores accruals, prepayments, inventory and depreciation. An income and expenditure account uses the accruals basis and shows the surplus or deficit for the year.

How do I calculate the accumulated fund of a club?

If it is not given, add up the opening assets and deduct the opening liabilities. The result is the opening accumulated fund. Each year you add the surplus or deduct the deficit to get the closing fund.

How do I treat subscriptions in advance and in arrears?

Only subscriptions that belong to the year count as income. Remove arrears brought forward and advance carried forward from cash received. Add arrears carried forward and advance brought forward. A subscriptions ledger account makes this easy.

How are grants and donations treated in charity accounts?

It depends on the conditions. A general grant or donation is income. A restricted one is held in a separate fund until spent. A grant for a non-current asset is normally released to income over the life of the asset, in line with the IAS 20 approach.

Do clubs record profit?

No. Clubs and charities report a surplus or deficit, because their purpose is to serve members or a cause. A club may still run a trading activity, such as a bar, and report the profit of that activity within the income and expenditure account.