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CA Foundation · Accounting

Financial Statements of Not-for-Profit Organisations: CA Foundation Accounting Guide

A not-for-profit organisation (NPO) serves a social purpose, not profit. Its accounts are a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. To solve questions, adjust for outstanding and prepaid items, separate capital from revenue, then build the Income and Expenditure Account and Balance Sheet.

What this chapter covers

This chapter covers how clubs, trusts, schools, hospitals and societies report their money. They do not aim at profit, so there is no Profit and Loss Account. Instead you prepare a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet.

The core skill is converting cash records into accrual-based figures. The Receipts and Payments Account is a summary of cash and bank flows. The Income and Expenditure Account is the revenue statement on accrual basis. You move from one to the other by removing capital items and adjusting for outstanding and prepaid amounts.

This chapter links to the rest of Paper 1. It uses the accrual concept, the capital versus revenue distinction and adjustments for outstanding and prepaid items from earlier chapters. It also uses the format of the Balance Sheet. Treat it as an application chapter: if your basics are weak, it will show quickly.

This chapter is worth your effort because questions are usually numerical and follow a repeatable pattern. If you learn one fixed working format, you can earn step marks even when one figure goes wrong. Examiners reward clear workings, correct classification of capital and revenue items, and a properly laid out Income and Expenditure Account and Balance Sheet. The chapter is also scoring because it tests logic more than memory. Practise it enough and it becomes one of the more predictable parts of the paper. Papers 1 and 2 have no negative marking, so always attempt every part and show your workings.

Financial Statements of Not-for-Profit Organisations: topics in the order to study them

  1. 1Not-for-Profit Organisations: Meaning and FeaturesStart here to understand why these entities use different statements and what terms like corpus and subscriptions mean.
  2. 2Receipts and Payments AccountIt is a simple cash summary and the base from which later statements are built.
  3. 3Income and Expenditure AccountThis is the main statement, and it needs the contrast with the cash-based account to be clear first.
  4. 4Treatment of Special ItemsSubscriptions, donations, entrance fees and legacies need rules before you can adjust figures correctly.
  5. 5Accounting for Specific ActivitiesActivities like a canteen, a sports event or a dinner need their own mini-accounts, which feed into the main statement.
  6. 6Balance Sheet of Not-for-Profit OrganisationsOnce income and expenditure is clear, you can show capital fund, assets and liabilities in the right place.
  7. 7Preparing Final Accounts from Receipts and PaymentsThis combines everything and is the typical exam question, so it comes last.

How to prepare Financial Statements of Not-for-Profit Organisations

Prepare this chapter by learning one working format and then repeating it on many questions until the order of steps feels automatic.

  1. Learn the meaning of each key term first: corpus or capital fund, general fund, subscriptions, donations, entrance fees, legacies and specific funds.
  2. Write out the format of the Receipts and Payments Account, the Income and Expenditure Account and the Balance Sheet from memory until you do not need to look.
  3. Practise the core conversion: take each item from the Receipts and Payments Account and decide if it is revenue (goes to Income and Expenditure) or capital (goes to the Balance Sheet).
  4. For subscriptions and similar items, use a small working note: subscriptions received + closing outstanding − opening outstanding − closing advance + opening advance = income for the year. Show it as a note beside your answer. Subscriptions that relate to earlier years but were received this year are excluded from current-year income. That is why opening outstanding is deducted.
  5. Solve questions on specific activities separately, find the profit or loss of each, and then carry only that net figure into the Income and Expenditure Account.
  6. Compute the opening capital fund as opening assets minus opening liabilities, then add the surplus (or deduct the deficit) and any capitalised items to get the closing capital fund. Then prepare the closing Balance Sheet.
  7. Do full-length questions under time. Check that the Balance Sheet tallies, and write working notes clearly for step marks.

Common mistakes in Financial Statements of Not-for-Profit Organisations

  • Copying every Receipts and Payments item into the Income and Expenditure Account

    Fix: Tick each item and ask whether it is capital or revenue, and whether it belongs to this year. Only current-year revenue items go in.

  • Ignoring outstanding and prepaid amounts

    Fix: Read all adjustments before you start and cross each one off as you use it. Prepare a working note for each major item.

  • Getting the opening capital fund wrong

    Fix: List all opening balances from the data and the opening Receipts and Payments Account, then take assets minus liabilities.

  • Showing gross figures for activities like canteen or events

    Fix: Prepare a separate trading-style working, find the profit or loss, and carry the net result only, unless the question says otherwise.

  • Treating all donations and entrance fees the same way

    Fix: Check whether the receipt is for a specific purpose or general, and whether it is recurring. Follow the question's instructions and state your treatment in a note.

  • Submitting a Balance Sheet that does not tally

    Fix: Re-check that the surplus or deficit has been added to or deducted from the capital fund, and that each adjustment appears in both statements.

Last-day revision: Financial Statements of Not-for-Profit Organisations

  • An NPO works for service, not profit, so it has no Profit and Loss Account.
  • The Receipts and Payments Account is a summary of cash and bank transactions. Opening cash/bank balances appear on the receipts (debit) side; closing balances are the balancing figures carried down on the payments (credit) side. A bank overdraft reverses the side.
  • The Income and Expenditure Account is on accrual basis and includes only revenue items of the current year.
  • Capital receipts and capital payments never go to Income and Expenditure; they go to the Balance Sheet.
  • Subscriptions for the year are shown as income of that year, whether received or not: received, plus closing outstanding, less opening outstanding, less closing advance, plus opening advance. Subscriptions relating to earlier years that were received in this year are excluded from current-year income.
  • Show a net surplus or deficit in the Income and Expenditure Account, and add it to or deduct it from the capital fund.
  • Opening capital fund equals opening assets minus opening liabilities.
  • Profit or loss on specific activities such as a canteen is shown as a net figure on the correct side.
  • Check each special item: is it capitalised, treated as revenue, or kept as a specific fund as per the question?
  • Finish by checking that the Balance Sheet totals tally.

Financial Statements of Not-for-Profit Organisations practice questions

Financial Statements of Not-for-Profit Organisations: frequently asked questions

What is the difference between a Receipts and Payments Account and an Income and Expenditure Account?

The Receipts and Payments Account is a summary of cash and bank flows and includes both capital and revenue items of any period. The Income and Expenditure Account is on accrual basis and includes only revenue items belonging to the current year. It shows the surplus or deficit.

Is there a Profit and Loss Account in a not-for-profit organisation?

No. Because the aim is not profit, the result is shown as a surplus or deficit in the Income and Expenditure Account. If the organisation runs a commercial activity, a separate account may be prepared for it.

How do I find the opening capital fund?

Add up all opening assets and subtract opening liabilities. The result is the capital fund at the start. Use the opening balances in the Receipts and Payments Account along with any other information given.

Is this chapter theory or numerical?

It is mostly numerical, but you must know the meaning of key terms and the treatment of special items to classify figures correctly. Be ready to explain your treatment briefly in working notes.