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Fundamentals of Financial and Cost Accounting · Financial Statements of a Not-for-Profit Organisation

Meaning and Features of Not-for-Profit Organisations

Updated 10 October 2026 · Fact-checked

A **not-for-profit organisation (NPO)** is set up to serve members or society, not to earn profit for owners. Any surplus is used for its objects and is not shared among members. It prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. Where it runs a trading activity such as a canteen, it also prepares a Trading Account or a statement of profit on it.

Understand Meaning and Features of Not-for-Profit Organisations

A business exists to earn profit for its owner. A club, school, hospital trust or charity exists for a different purpose. It may promote sports, education, health, culture or relief of the poor. Such bodies are called not-for-profit organisations.

They still earn income and spend money. Clubs collect subscriptions. Trusts receive donations. Schools charge fees. But the aim is service. If income is more than expenditure, the excess is called a surplus. If expenditure is more, it is a deficit. These words are used in place of profit and loss.

The key feature is that the surplus is not distributed to members as profit. It is kept in the capital fund or used for the objects of the body. Members contribute through entrance fees and subscriptions. Management is usually by a committee elected by members.

Examples in India include sports clubs, Rotary clubs, charitable trusts, hospitals run by trusts, educational societies, chambers of commerce and professional bodies such as ICMAI. They are commonly formed as trusts, societies or Section 8 companies.

Accounting differs because there is no owner and no profit motive. Such bodies prepare a Receipts and Payments Account (a summary of cash and bank), an Income and Expenditure Account (accrual basis, which replaces the Profit and Loss Account) and a Balance Sheet. Where the body carries out a trading activity, such as a canteen, bar or sale of publications, it also prepares a Trading Account or a statement of profit on that activity. The owner's capital is replaced by the Capital Fund (or General Fund).

Key formulas to remember

Surplus or deficit
Surplus = Total Income − Total Expenditure (if positive); Deficit = Total Expenditure − Total Income (if positive)
Used in place of net profit or net loss. Surplus is added to the Capital Fund; deficit is deducted.
Capital Fund (opening)
Capital Fund = Total Assets − Total Liabilities
Used when the opening Balance Sheet is not given. It replaces the proprietor's capital.
Closing Capital Fund
Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit) + Entrance fees and legacies treated as capital
Apply only the capital items that the question says are capitalised.

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

Most questions on this topic ask you to identify an NPO, its features, or the differences from a profit-making entity. Use this method.

  1. 1Read the question and find the purpose of the body: service or profit.
  2. 2Check who gets the surplus. If it is kept for the objects and not shared, it is an NPO.
  3. 3Match the term. Surplus or deficit means NPO. Profit or loss means a business.
  4. 4Recall the statements: Receipts and Payments Account, Income and Expenditure Account and Balance Sheet.
  5. 5Replace business terms: capital becomes Capital Fund, profit becomes surplus, owner becomes members.
  6. 6Eliminate options that mention drawings, proprietor or profit distribution to members.
  7. 7Pick the option that matches the exact feature or difference asked.

Quickest way: Service-versus-profit test

When to use it: Use it for any MCQ asking whether a body is an NPO or which term or statement belongs to it.

  1. Ask: is the aim service or profit?
  2. Look for the words: surplus, deficit, Capital Fund, subscriptions. These point to an NPO.
  3. Look for: Receipts and Payments Account. It is the basic statement for NPOs and is typically used by them, though it is only a summary of cash and bank and any entity can prepare one.
  4. Reject options that share the surplus among members.
  5. Mark the answer and move on.

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

  • Thinking an NPO can never earn a surplus.

    The name suggests it must not earn anything.

    Fix: Remember that NPOs can earn a surplus. It simply is not distributed to members; it is used for the objects.

  • Writing profit and loss instead of surplus and deficit.

    Students carry business terms to every statement.

    Fix: Use surplus and deficit, and Capital Fund instead of capital, for every NPO.

  • Saying Receipts and Payments Account is the same as Income and Expenditure Account.

    Both list money items and look similar.

    Fix: Receipts and Payments is a summary of cash and bank, including capital items. Income and Expenditure is on accrual basis and has revenue items only.

  • Believing every NPO is a trust.

    Trust is the example used most often.

    Fix: Clubs, societies, associations and Section 8 companies are also NPOs. Learn all the forms.

  • Assuming NPOs keep no books or have no Balance Sheet.

    Students think no profit means no full accounts.

    Fix: They prepare a Balance Sheet every year, along with the other two statements.

Worked examples

Example 1

Which of the following is a feature of a not-for-profit organisation? (A) Surplus is distributed among members as dividend (B) The main aim is service to members or society (C) Trading Account is always prepared (D) Capital is contributed by one proprietor

Show the solution
  1. Test each option with the service-versus-profit idea.
  2. Option A is wrong because the surplus is not distributed.
  3. Option C is wrong because a Trading Account is prepared only where the body has a trading activity such as a canteen, not always.
  4. Option D is wrong because there is no single proprietor; the fund is built from members' contributions and surpluses.
  5. Option B states the main aim of an NPO.

Answer: (B) The main aim is service to members or society.

Example 2

A club has assets of ₹5,00,000 and liabilities of ₹1,50,000 at the start of the year. It earns income of ₹2,40,000 and incurs expenditure of ₹2,10,000. What is the Capital Fund at the end of the year, ignoring other capital items? (A) ₹3,50,000 (B) ₹3,80,000 (C) ₹4,40,000 (D) ₹3,20,000

Show the solution
  1. Opening Capital Fund = ₹5,00,000 − ₹1,50,000 = ₹3,50,000.
  2. Surplus = ₹2,40,000 − ₹2,10,000 = ₹30,000.
  3. Closing Capital Fund = ₹3,50,000 + ₹30,000 = ₹3,80,000.

Answer: (B) ₹3,80,000

Exam tips

  • Questions are mostly definition-based. Learn the four or five features by heart.
  • Watch the word pairs: surplus and profit, Capital Fund and capital. Examiners place the wrong one in options.
  • Know examples: clubs, trusts, societies, hospitals, schools and professional bodies.
  • Remember the three statements and what each shows. Differences between them are a favourite question.
  • If a number question appears, find the opening Capital Fund first from assets less liabilities.

Practice questions from Financial Statements of a Not-for-Profit Organisation

Meaning and Features of 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.

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

What is a not-for-profit organisation?

It is a body formed to serve its members or society rather than earn profit for owners. Any surplus is used for its objects and not shared among members. Clubs, charitable trusts and societies are common examples.

What are the main features of a not-for-profit organisation?

Its aim is service, not profit. It is run by a committee, funded by subscriptions, donations and fees, and its surplus is not distributed. It keeps a Capital Fund instead of owner's capital.

How does accounting for an NPO differ from a profit-making entity?

A business prepares Trading and Profit and Loss Accounts and a Balance Sheet. An NPO prepares a Receipts and Payments Account, an Income and Expenditure Account (which replaces the Profit and Loss Account) and a Balance Sheet. If it has a trading activity such as a canteen, it also prepares a Trading Account or a statement of profit on it. It uses surplus, deficit and Capital Fund.

Is a not-for-profit organisation allowed to earn income?

Yes. It can earn income from fees, subscriptions, investments and activities. The restriction is that the surplus cannot be shared among members as profit.