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

Not-for-Profit Entities: Characteristics and Objectives for ACCA

Updated 11 October 2026 · Fact-checked

A not-for-profit entity exists to deliver a service or social purpose, not to earn profit for owners. It is funded by donations, grants, subscriptions or taxes, has no shareholders, and is judged on service delivered and use of funds. You answer exam questions by comparing purpose, funding, owners and stakeholder needs with a commercial business.

Understand Not-for-Profit Entities: Characteristics and Objectives

A commercial business exists to make a profit for its owners. Success is measured by profit, return on capital and growth in shareholder wealth. Financial statements are built around those aims.

A not-for-profit entity exists for another reason. Examples are charities, clubs, societies, schools and trade associations. Its aim is to provide a service or benefit to its members or to society. It may make a surplus, but the surplus is reinvested in the purpose. It is not shared out to owners.

A public sector entity is owned or controlled by government. Examples are hospitals, state schools, local authorities and government agencies. Its aim is to provide public services. It is mainly funded by taxation and government grants, and it is accountable to the public and to elected bodies.

Funding is the biggest difference. A business earns income from customers who buy its goods. A not-for-profit entity often receives money from people who get nothing directly in return, such as donors and taxpayers. Those funders want to know the money was used properly and for the stated purpose.

This changes what stakeholders expect. Investors in a company want profit and dividends. Donors, members, regulators and the public want to see stewardship, value for money and the service actually delivered. So non-financial measures matter much more. Many entities still use IFRS-based accounts, but the key figure is often the surplus or deficit and the fund position, not profit and return.

Key rules to remember

Surplus or deficit: Surplus or deficit = Income − Expenditure; Used instead of profit or loss. A surplus is reinvested, not distributed to owners.
Accumulated fund: Accumulated fund = Net assets (assets − liabilities) of the entity; Replaces owners' equity. It is built up from past surpluses and any capital contributed.
Value for money (three Es): Value for money = Economy + Efficiency + Effectiveness; Economy is low cost of inputs. Efficiency is the best output from inputs. Effectiveness is achieving the objectives.

How to solve Not-for-Profit Entities: Characteristics and Objectives questions

Use this method for any question asking you to describe, compare or explain a not-for-profit or public sector entity.

1Identify the type of entity: charity, club, public body or other. State its main purpose.
2Say who owns it or controls it. Note that there are no shareholders who share profits.
3List where the money comes from: donations, grants, subscriptions, taxes or trading.
4Name the key stakeholders and what each wants, such as donors, members, government and beneficiaries.
5Compare with a commercial business on purpose, funding and performance measures.
6State how performance is judged: service delivered, value for money and use of funds, as well as the surplus.
7Link your points to the scenario. Use its facts, not general statements only.
8Finish with a short conclusion that answers the exact question asked.

Quickest way: Purpose, Funding, Users

When to use it: Use this for Section A or B objective questions and for a quick structure in a written answer.

Ask: is the aim profit for owners, or a service or social purpose?
Ask: who pays, and do they receive goods in return?
Ask: who needs the information, and what do they want to know?
Pick the option that matches all three. Reject any option that mentions shareholders' returns as the main aim.

Common mistakes in Not-for-Profit Entities: Characteristics and Objectives

Saying a not-for-profit entity cannot make a surplus.
The name sounds like it must break even.
Fix: State that it can make a surplus. The difference is that the surplus is kept and used for the purpose, not paid to owners.
Treating profit as the main performance measure.
Students are used to commercial ratios.
Fix: Add service delivered, value for money and use of funds. Mention non-financial measures.
Listing only shareholders as users.
Commercial examples dominate the syllabus.
Fix: Name donors, members, beneficiaries, government and regulators, and say what each needs.
Confusing public sector with not-for-profit.
Both avoid profit as an aim.
Fix: Public sector means government owned or controlled. A charity is not-for-profit but is usually private.
Giving generic points not tied to the scenario.
Students recall a memorised list.
Fix: Quote the entity's facts, such as its funders or services, in each point.
Using 'equity' and 'dividends' for a club or charity.
Company terms are habit.
Fix: Use accumulated fund, surplus or deficit, and no distributions.

Worked examples

Example 1

A city hospital is owned by the government and is funded mainly by taxation. Explain two ways its objectives and stakeholder expectations differ from those of a listed private hospital group.

Show the solution

Objectives: the public hospital aims to provide healthcare to the population. The private group aims to earn profit and increase shareholder wealth.
Funding: the public hospital is funded by taxes and government grants. The private group is funded by patients' fees, insurers, shareholders and lenders.
Stakeholders: the public hospital must satisfy taxpayers, government and patients about service quality and value for money. The private group's shareholders want profit, dividends and share price growth.
Performance: the public hospital is judged on waiting times, outcomes and cost control. The private group is judged on profit and return on capital.

Answer: The public hospital's objective is service, funded by tax and judged on value for money and outcomes. The private group's objective is profit for shareholders, funded by fees and capital, and judged on returns.

Example 2

A sports club has 400 members who pay annual subscriptions. In the year, income was $90,000 and expenditure was $84,500. Explain whether the club is a not-for-profit entity and state the result for the year.

Show the solution

Purpose: the club exists to provide sport facilities to its members, not to make profit for owners.
Funding: income is mainly member subscriptions. Members are both funders and users.
Calculate the result: Income − Expenditure = $90,000 − $84,500 = $5,500.
This is a surplus of $5,500. It is added to the accumulated fund and kept for the club's purpose, not distributed as dividends.

Answer: Yes, it is a not-for-profit entity. The result is a surplus of $5,500, which increases the accumulated fund and is not paid to members as profit.

Exam tips

Always compare with a commercial business: purpose, ownership, funding, performance and users. Examiners reward structured comparison.
In objective questions, reject options that say the main aim is to maximise return for owners.
Use correct terms: surplus or deficit, accumulated fund, stewardship, value for money.
In written answers, tie each point to the scenario's funders and services to earn the application marks.
Remember performance measures are not only financial. Mention non-financial indicators briefly.

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

Not-for-Profit Entities: Characteristics and Objectives in other exams

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

Not-for-Profit Entities: Characteristics and Objectives: frequently asked questions

What is the main difference between profit and not-for-profit entities?

A profit-making entity exists to earn returns for its owners. A not-for-profit entity exists to deliver a service or social purpose. Any surplus is kept for that purpose.

Can a not-for-profit entity make a surplus?

Yes. It needs a surplus to keep operating and to fund future services. The surplus is not distributed to owners.

Who are the main users of not-for-profit accounts?

Donors, members, grant providers, regulators, government and beneficiaries. They mainly want to see proper use of funds and the service delivered.

Is a public sector entity the same as a not-for-profit entity?

No. A public sector entity is owned or controlled by government. Many are not-for-profit, but charities and clubs are usually private bodies.