How to Prepare the Balance Sheet of a Not-for-Profit Organisation

Understand Preparing Balance Sheet of a Not-for-Profit Organisation

Key formulas to remember

Opening Capital Fund

Capital Fund = Total Assets − Outside Liabilities − Specific Funds (at the opening date)

Include cash and bank balances from the opening of the Receipts and Payments Account. Count outstanding subscriptions as assets. Count advance subscriptions and outstanding expenses as liabilities.

Closing Capital Fund

Opening Capital Fund + Surplus (or − Deficit) + Capitalised items (entrance fees, legacies, general donations)

Add the capitalised items only if the question says to treat them as capital receipts.

Accounting equation of NPO

Assets = Capital Fund + Specific Funds + Outside Liabilities

Use it to check that the closing balance sheet tallies.

Subscription income for the year

Received − Opening Outstanding + Closing Outstanding + Opening Advance − Closing Advance

Opening advance was received last year but belongs to this year. Closing advance was received this year but belongs to next year.

Closing outstanding subscription

Opening Outstanding + Subscription due for the year − Subscription received for the year

Use it when the question gives the amount due rather than the closing outstanding.

Closing value of an asset

Opening Value + Purchases − Sales (book value) − Depreciation

Show the asset at the closing book value on the balance sheet.

How to solve Preparing Balance Sheet of a Not-for-Profit Organisation questions

1. 1List all assets and liabilities at the opening date from the information given. Include the opening cash and bank balance from the Receipts and Payments Account.
2. 2Compute the opening Capital Fund as total assets minus outside liabilities and specific funds.
3. 3Go through the Receipts and Payments Account. Mark each item as revenue (goes to Income and Expenditure), capital (affects an asset or fund), or both.
4. 4Prepare the Income and Expenditure Account with the adjustments and find the surplus or deficit.
5. 5Update each asset: opening value plus purchases less sales less depreciation. Add accrued income and prepaid expenses.
6. 6Update each liability and fund: outstanding expenses, advance income, specific funds with their additions and usage.
7. 7Compute the closing Capital Fund as the opening fund plus surplus (or minus deficit) plus capitalised receipts.
8. 8Write the Balance Sheet with Liabilities on the left and Assets on the right. Check that both totals are equal.

Quickest way: Balancing figure method for objective questions

Common mistakes in Preparing Balance Sheet of a Not-for-Profit Organisation

• Treating the opening cash and bank balance as missing when finding the opening Capital Fund.

  Students look only at the list of assets in the question and forget that the opening balance of the Receipts and Payments Account is also an asset.

  Fix: Always add the opening cash and bank figures to the assets before subtracting liabilities.

• Showing outstanding subscription as a liability.

  The word outstanding is linked to expenses, which are liabilities.

  Fix: Outstanding income is money to be received, so it is an asset. Outstanding expense is a liability. Advance income is a liability. Prepaid expense is an asset.

• Adding capital receipts to income, or leaving them out of the Capital Fund.

  Students are unsure which receipts to capitalise.

  Fix: Capitalise entrance fees, legacies or donations only if the question says so. Then add them to the Capital Fund, not to Income and Expenditure.

• Forgetting to deduct depreciation from the asset on the balance sheet.

  Depreciation is charged in Income and Expenditure, and students assume the asset need not change.

  Fix: Each depreciation charge reduces the asset on the balance sheet. Tick it off in both places.

• Putting the surplus in the balance sheet without adding it to the opening Capital Fund.

  Students copy the Capital Fund as at the opening date and leave it unchanged.

  Fix: Closing Capital Fund = Opening Capital Fund + Surplus − Deficit + Capitalised items. Show it as a single figure.

• Mixing up the sides of the balance sheet.

  Students rely on memory instead of the rule.

  Fix: Capital Fund, specific funds and outside liabilities go on the Liabilities side. All assets, including outstanding income and prepaid expenses, go on the Assets side.

Worked examples