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CMA Foundation · Fundamentals of Financial and Cost Accounting

Financial Statements of a Not-for-Profit Organisation

A not-for-profit organisation, such as a club or charitable trust, serves members rather than earning profit. It prepares a Receipts and Payments Account (cash summary), an Income and Expenditure Account (accrual-based surplus or deficit) and a Balance Sheet. To solve questions, adjust each item for outstanding and advance amounts, then carry results across.

What this chapter covers

This chapter covers how clubs, societies, hospitals, schools and charitable trusts record and report their finances. These bodies exist to serve members or a cause, so they do not calculate profit. They report a surplus or deficit instead.

You start with the Receipts and Payments Account, which is a summary of cash and bank transactions. You then convert it into the Income and Expenditure Account, which follows the accrual basis and shows only revenue items for the year. Capital receipts and payments, such as the sale of an asset or the purchase of furniture, do not go to the Income and Expenditure Account. They go to the balance sheet. Only related revenue effects, such as depreciation or the profit or loss on sale of an asset, are shown in the Income and Expenditure Account. Entrance fees are usually capitalised, but treat them as revenue income if the question says so or if the amount is small and recurring. Special items like subscriptions, donations, legacies and funds need careful treatment, as does the result of activities such as a canteen or bar. The last step is the balance sheet, which brings it all together.

The chapter links closely to the rest of Paper 2. It uses the accrual concept, the difference between capital and revenue items, depreciation, outstanding and prepaid expenses, and final accounts from earlier chapters. If those basics are weak, this chapter will feel hard. If they are strong, it becomes a scoring area because the rules are fixed and the numbers are simple.

This chapter is numerical and rule-based, so practice improves your accuracy. Commonly practised topics include finding subscription income for the year, treating donations and legacies, and building a balance sheet from a given receipts and payments account. Since each paper has 50 MCQs of 2 marks and there is no negative marking, a quick and accurate method for these calculations helps you secure marks. The chapter also strengthens your grip on accrual accounting, which helps in other parts of Paper 2.

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

  1. 1Meaning and Features of Not-for-Profit OrganisationsStart here to understand why these bodies show surplus or deficit and why their accounts differ from a business.
  2. 2Receipts and Payments AccountIt is a simple cash summary and the starting point for every later statement.
  3. 3Income and Expenditure AccountOnce you know the cash record, you learn to convert it to the accrual basis and separate revenue from capital items.
  4. 4Special Items: Subscriptions, Funds, Legacies and DonationsThese items cause most errors, so study them after you can build the basic income and expenditure account. Include the treatment of income from activities such as a canteen or bar.
  5. 5Preparing Balance Sheet of a Not-for-Profit OrganisationIt needs everything before it: opening balances, the surplus, funds and capital items.

How to prepare Financial Statements of a Not-for-Profit Organisation

Aim to become fast and accurate with the standard adjustments. Most marks come from knowing where each item goes.

  1. Read the meaning and features once, and be clear on terms like surplus, deficit, capital fund and general fund.
  2. Learn the format of the Receipts and Payments Account and practise sorting items into receipt or payment, and into revenue or capital.
  3. Practise converting a receipts and payments account into an income and expenditure account, adjusting for outstanding and prepaid items.
  4. Make a short table of special items: subscriptions, entrance fees, donations, legacies, specific funds and sale of assets, and note where each one goes.
  5. Solve full problems that end in a balance sheet, and check that both sides total the same.
  6. Practise questions on canteen or similar trading activities as short numerical drills.
  7. In the last days, solve timed MCQs and review every wrong answer to find which rule you missed.

Common mistakes in Financial Statements of a Not-for-Profit Organisation

  • Putting capital items such as purchase of furniture or sale of an asset in the Income and Expenditure Account.

    Fix: Ask for each item whether it is revenue or capital. Only revenue items go in the Income and Expenditure Account.

  • Getting subscription income wrong by missing arrears or advance amounts.

    Fix: Use a subscription account or the step-by-step formula and check that outstanding and advance items from both years are included.

  • Treating all donations as income, or all donations for a stated purpose as capital.

    Fix: Read the wording closely. If the stated purpose is capital in nature, treat it as a capital receipt and show it in the balance sheet. If the stated purpose is revenue in nature, such as prizes or an event, treat it as income unless the question says otherwise.

  • Including depreciation incorrectly or ignoring it.

    Fix: Always check the adjustments for depreciation and charge it to the Income and Expenditure Account.

  • Forgetting the opening capital fund when preparing the balance sheet.

    Fix: If not given, calculate it from opening assets and liabilities, then add the surplus or deduct the deficit.

  • Showing the profit of a canteen or trading activity as gross sales instead of the net result.

    Fix: Prepare a small trading account first and carry only the profit or loss to the Income and Expenditure Account.

Last-day revision: Financial Statements of a Not-for-Profit Organisation

  • Not-for-profit bodies show a surplus or deficit, not profit or loss.
  • Receipts and Payments Account is a summary of cash and bank, with opening and closing balances.
  • Income and Expenditure Account follows the accrual basis and has only revenue items.
  • Capital receipts and payments themselves are not shown in the Income and Expenditure Account. Only related revenue effects, such as depreciation or profit or loss on sale of an asset, appear there.
  • Subscription income = Subscriptions received − Opening outstanding (arrears of last year, received this year) + Closing outstanding − Closing advance (received for next year) + Opening advance (received last year for this year).
  • Subscriptions are generally treated as revenue income.
  • Entrance fees are usually capitalised, but they are treated as revenue income if the question says so or if the amount is small and recurring.
  • General donations are normally revenue income. Donations for a specific purpose that is capital in nature (building, endowment, fixed asset) are capital receipts. A donation for a specific revenue purpose (for example prizes or an event) is revenue unless stated otherwise.
  • Legacies are usually capitalised unless stated to be revenue in nature.
  • Surplus increases the capital fund; deficit reduces it.
  • Opening capital fund = opening assets − opening liabilities.
  • Outstanding expenses and income receivable appear in the balance sheet on the proper side.
  • Profit from a canteen or similar activity is shown on the credit side of the Income and Expenditure Account, a loss on the debit side.

Financial Statements of a Not-for-Profit Organisation practice questions

Financial Statements of a Not-for-Profit Organisation in other exams

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

Financial Statements of a Not-for-Profit Organisation: frequently asked questions

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

The Receipts and Payments Account is a summary of cash and bank transactions and includes both capital and revenue items. The Income and Expenditure Account follows the accrual basis, includes only revenue items for the year and shows the surplus or deficit.

Why do not-for-profit organisations show surplus instead of profit?

Their aim is to serve members or a cause, not to earn profit for owners. So the excess of income over expenditure is called a surplus, and it is added to the capital fund.

Are donations always capital receipts?

No. General donations are normally treated as revenue income, while donations for a specific purpose or for a building or endowment are usually capital receipts. Read the question wording to decide.

How should I practise this chapter for the MCQ exam?

Practise short numerical drills on subscriptions, adjustments and balance sheet totals, and learn the treatment of special items. Since there is no negative marking, attempt every question and eliminate options that clearly misplace capital items.