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Accounting · Financial Statements of Not-for-Profit Organisations

Not-for-Profit Organisations: Meaning and Features

Updated 1 October 2026 · Fact-checked

A not-for-profit organisation (NPO) is set up to serve members or society, not to earn profit for owners. Its accounts use a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. The surplus or deficit goes to the Capital (General) Fund, not to owners as profit.

Understand Not-for-Profit Organisations: Meaning and Features

A not-for-profit organisation (NPO) exists to provide a service. The service may be sport, education, health, culture or charity. It is not run to make money for owners. If it earns more than it spends, the extra is kept and used for its objects. It is not shared out as profit.

In India, common NPOs are clubs, trusts, societies and Section 8 companies. Examples are a cricket club, a library, a school run by a trust, a charitable hospital, a residents' welfare association and a professional body. They are usually formed under laws such as the Societies Registration Act, a trust deed, or the Companies Act. Do not quote section numbers unless the question gives them.

Key features of an NPO:

  • The main aim is service, not profit.
  • It is run by members or trustees, not by owners who take profit.
  • Funds come from subscriptions, donations, grants, legacies, entrance fees and income from events.
  • Any surplus is not distributed to members. It is added to the Capital Fund (also called General Fund or Accumulated Fund).
  • It has rules, a constitution or a trust deed that govern its work.

How the accounts differ from a business: a business has Trading and Profit and Loss Accounts and measures profit. Most NPOs do not trade, so they have no Trading Account. They prepare a Receipts and Payments Account, which is a summary of cash and bank transactions. Then they prepare an Income and Expenditure Account, which works like a Profit and Loss Account and shows the surplus or deficit on the accrual basis. Last comes the Balance Sheet.

The owner's capital in a business is replaced by the Capital Fund in an NPO. Some items need special treatment, such as life membership fees, legacies, specific funds and donations. These are covered in later topics. For this topic, focus on meaning, features, examples and the differences.

Key rules to remember

Capital Fund (opening)
Capital Fund = Total Assets − Total Liabilities
Used when the opening Balance Sheet is not given. Use it at the start of the year, with opening figures only.
Surplus or deficit
Surplus or Deficit = Total Income − Total Expenditure (accrual basis)
Surplus means income exceeds expenditure. Deficit means expenditure exceeds income. It is not called profit or loss.
Closing Capital Fund
Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit) + other items credited to it
Other items depend on the question, such as entrance fees or legacies treated as capital receipts.

How to solve Not-for-Profit Organisations: Meaning and Features questions

Theory questions on NPOs ask you to define, list features, give examples or compare with a business. Use this method.

  1. 1Read the verb: define, explain, distinguish, state or list.
  2. 2Open with a one-line definition: an organisation formed for service, not profit.
  3. 3List the features in short points, each with a brief reason.
  4. 4Give two or three Indian examples, such as a club, a trust and a society.
  5. 5If asked to distinguish, draw two columns: basis, NPO, business. Cover objective, profit, capital, statements prepared and result.
  6. 6Name the result as surplus or deficit, and the capital as Capital Fund.
  7. 7Close with the three statements: Receipts and Payments Account, Income and Expenditure Account, Balance Sheet.

Quickest way: The definition-features-accounts template

When to use it: Use it for 2 to 5 mark theory questions when you have only a few minutes.

  1. Write one sentence on the aim: service, not profit.
  2. Write four to five feature points in short lines.
  3. Add examples in one line.
  4. Add the accounts the NPO prepares and name the surplus or deficit.
  5. For a comparison, write at least four rows of differences and use the correct terms in each.

Common mistakes in Not-for-Profit Organisations: Meaning and Features

  • Calling the result of an NPO profit or loss.

    You are used to business accounts.

    Fix: Write surplus or deficit in the Income and Expenditure Account. Use profit or loss only for a business.

  • Saying an NPO can never earn income.

    Not-for-profit is read as no income.

    Fix: Say it can earn income and surplus, but it cannot share them with members as profit. They go to the Capital Fund.

  • Saying every NPO prepares a Trading Account.

    You copy the business format.

    Fix: Most NPOs do not trade, so no Trading Account is needed. If it runs a canteen or a similar activity, a separate trading statement may be prepared for it.

  • Writing Capital instead of Capital Fund or General Fund.

    Owners' capital is the usual term.

    Fix: Use Capital Fund, General Fund or Accumulated Fund, as the question uses.

  • Treating the Receipts and Payments Account as the same as Income and Expenditure Account.

    Both list income-type and expense-type items.

    Fix: Remember that Receipts and Payments is a cash and bank summary that includes capital items. Income and Expenditure is on the accrual basis and has only revenue items.

Worked examples

Example 1

Define a not-for-profit organisation. State four features and give two examples. (5 marks)

Show the solution
  1. Definition: an NPO is an organisation formed to serve its members or society, not to earn profit for owners.
  2. Feature 1: its main aim is service, such as sport, education or charity.
  3. Feature 2: funds come from subscriptions, donations, grants and entrance fees.
  4. Feature 3: any surplus is not distributed to members. It is added to the Capital Fund.
  5. Feature 4: it is governed by a constitution, trust deed or similar rules.
  6. Examples: a sports club and a charitable trust hospital.

Answer: An NPO is an organisation set up to serve, not to earn profit for owners. It is funded by subscriptions, donations and grants. It keeps its surplus in the Capital Fund. Examples are a sports club and a charitable trust hospital.

Example 2

Distinguish between a business entity and an NPO on any four bases. (4 marks)

Show the solution
  1. Basis 1, objective: business earns profit; NPO provides service.
  2. Basis 2, result: business has profit or loss; NPO has surplus or deficit.
  3. Basis 3, capital: business has owner's Capital; NPO has Capital Fund.
  4. Basis 4, statements: business prepares Trading, Profit and Loss Account and Balance Sheet; NPO prepares Receipts and Payments Account, Income and Expenditure Account and Balance Sheet.

Answer: Business: aim is profit, result is profit or loss, owner's capital, Trading and P&L. NPO: aim is service, result is surplus or deficit, Capital Fund, Receipts and Payments, Income and Expenditure.

Exam tips

  • For a distinguish question, always use a two-column table-style layout with the basis named, and give at least four points.
  • Use the exact terms: surplus, deficit, Capital Fund, Receipts and Payments Account. Each correct term earns marks.
  • Learn three examples from different types: a club, a trust and a society.
  • Link this topic to the Receipts and Payments and Income and Expenditure topics, because numerical questions build on it.
  • Keep theory answers short and point-wise.

Practice questions from Financial Statements of Not-for-Profit Organisations

Not-for-Profit Organisations: Meaning and Features: frequently asked questions

What is a not-for-profit organisation?

It is an organisation formed to serve members or society, not to earn profit for owners. It may earn a surplus, but it keeps it for its objects. Examples are clubs, trusts and societies.

Which accounts does an NPO prepare?

It prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. A Trading Account is prepared only if it carries out a trading activity.

What is the Capital Fund of an NPO?

It is the NPO's equivalent of owner's capital. It equals assets minus liabilities. Surplus is added to it and deficit is deducted from it.

Can an NPO earn a surplus?

Yes. It can earn more than it spends. The surplus is not shared among members as profit. It is added to the Capital Fund and used for the organisation's purposes.