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CMA Intermediate · Financial Accounting

Financial Statements of Not-for-Profit Organisations

Not-for-profit organisations such as clubs, trusts and societies exist for service, not profit. They prepare a Receipts and Payments Account (a summary of cash and bank), an Income and Expenditure Account (accrual-based surplus or deficit) and a Balance Sheet. You solve questions by adjusting cash items to accrual basis.

What this chapter covers

This chapter covers how clubs, charitable trusts, societies, hospitals and educational bodies report their finances. They do not measure profit. They measure surplus or deficit of income over expenditure. The three outputs are the Receipts and Payments Account, the Income and Expenditure Account and the Balance Sheet.

The main skill is converting cash records into accrual figures. You take the Receipts and Payments Account, add opening and closing outstanding and prepaid amounts, separate capital items from revenue items, and then build the Income and Expenditure Account. Special items such as subscriptions, donations, legacies, life membership fees and specific funds need careful treatment because some go to income and some go straight to the Balance Sheet.

The chapter links to the rest of Financial Accounting through accrual and matching, adjustments for outstanding and prepaid items, depreciation, and the preparation of a Balance Sheet. It also revisits the trading account idea for activities like a canteen or a bar. If your basic final accounts are solid, this chapter is mostly about careful classification.

This chapter is very scoring because the method is mechanical and the same steps repeat in every question. A full numerical on it often carries step marks for the working notes on subscriptions, stock of consumables and fund treatment, even if one figure goes wrong. It also supplies easy MCQs on definitions, such as what counts as capital receipt or which account shows which item. Once you learn the layout, you can finish these questions quickly and save time for harder chapters.

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

  1. 1Not-for-Profit Organisations: Meaning and FeaturesStart with the purpose and vocabulary, such as surplus, deficit and general fund, so the later statements make sense.
  2. 2Receipts and Payments AccountThis is the raw cash summary that every later statement is built from, so you must read it correctly first.
  3. 3Income and Expenditure AccountNext you learn to convert cash items to accrual and to exclude capital items, which is the core of the chapter.
  4. 4Special Items: Subscriptions, Donations, Legacies and FundsThese items decide whether an amount goes to income or to the Balance Sheet, and need the base statements to be clear first.
  5. 5Trading Activities: Stock of Consumables and Incidental IncomeLearn how to show canteen or bar activity and consumables after the main account layout is familiar.
  6. 6Preparing Balance Sheet from Receipts and Payments AccountThis final topic combines everything: opening balances, adjustments, funds and surplus into one Balance Sheet.

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

Practise this chapter as a fixed routine. The same sequence works for almost every question, and it keeps your written answer easy for the examiner to follow.

  1. Learn the definitions and the format of all three statements. Write each layout from memory until you do not need to look.
  2. For each Receipts and Payments Account, tag every item as revenue or capital, and as relating to the current year or another year.
  3. Prepare working notes for subscriptions, salaries, rent and other items with outstanding or prepaid amounts. Show them separately in your answer.
  4. Memorise the treatment of special items: general donations, specific donations, legacies, life membership fees, entrance fees and specific funds. Make a one-page table for yourself.
  5. Solve at least one full question that goes from Receipts and Payments Account to Income and Expenditure Account to Balance Sheet, then check that the Balance Sheet tallies.
  6. For MCQs, practise quick classification: which statement shows the item, and is it capital or revenue.

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

  • Showing capital receipts or capital payments in the Income and Expenditure Account.

    Fix: Tag each item as capital or revenue first. Only revenue items go to the Income and Expenditure Account.

  • Taking only subscriptions received instead of subscriptions for the year.

    Fix: Always make a subscription working note with opening and closing outstanding and advance amounts.

  • Treating all donations as income.

    Fix: Check whether the donation is for a specific purpose or is general, and follow the instruction given in the question.

  • Wrongly using the full amount of purchases for consumables rather than consumption.

    Fix: First get purchases for the year: cash paid + closing creditors - opening creditors. Then compute consumption as opening stock plus purchases for the year less closing stock.

  • Balance Sheet does not tally because the opening Capital Fund is missing.

    Fix: Find opening assets and liabilities, take the difference as opening Capital Fund, then add surplus or deduct deficit.

  • Including depreciation in the Receipts and Payments Account.

    Fix: Depreciation is a non-cash item. It belongs in the Income and Expenditure Account and reduces the asset in the Balance Sheet.

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

  • Receipts and Payments Account is a summary of cash and bank; it has no accrual items and no non-cash items like depreciation.
  • Income and Expenditure Account is like a Profit and Loss Account; it shows revenue items on an accrual basis and gives surplus or deficit.
  • Capital receipts and capital payments never go to the Income and Expenditure Account.
  • Subscription income for the year = subscriptions received + closing outstanding + opening advance received - opening outstanding - closing advance.
  • Recompute subscriptions with a working note; do not adjust by guessing.
  • Surplus or deficit is added to or deducted from the Capital Fund or General Fund in the Balance Sheet.
  • Specific donations are usually kept as a liability or fund, not taken to income, unless the question states otherwise.
  • Legacies are generally treated as capital receipts unless stated to be for revenue use.
  • Life membership fees are normally capitalised, or credited to income in parts, depending on the question's instruction.
  • For canteen or bar, prepare a trading account and take only the profit or loss to the Income and Expenditure Account.
  • First find purchases for the year: purchases = cash paid for purchases + closing creditors - opening creditors. Then apply: consumed stock = opening stock + purchases for the year - closing stock.
  • The opening Balance Sheet figure of the Capital Fund is the balancing figure of opening assets less opening liabilities.

Financial Statements of Not-for-Profit Organisations practice questions

Financial Statements 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.

Financial Statements of Not-for-Profit Organisations: 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 actual cash and bank transactions, including capital items. The Income and Expenditure Account is based on accrual accounting and shows only revenue items for the year. It ends with a surplus or deficit.

Where does the surplus of a not-for-profit organisation go?

The surplus is added to the Capital Fund or General Fund in the Balance Sheet. A deficit is deducted from it. It is not distributed as profit to members.

Do I need to prepare a Balance Sheet in every question of this chapter?

Not always, but you should be ready for it. Many questions give a Receipts and Payments Account with adjustments and ask for both the Income and Expenditure Account and the Balance Sheet. Practise the full sequence at least a few times.

How should I answer MCQs from this chapter?

Most MCQs test classification, such as whether an item is capital or revenue and which statement it appears in. Read the wording carefully, since small details like specific purpose change the treatment. There is no negative marking, so attempt every question.