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Financial Accounting · Financial Statements of Not-for-Profit Organisations

Not-for-Profit Organisations: Meaning, Features and Types

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 stays in the organisation and is used for its objects. Its accounts are summarised in a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet, not a Trading and Profit and Loss Account.

Understand Not-for-Profit Organisations: Meaning and Features

A business exists to earn profit for its owners. A club, school, hospital run by a trust or a charitable society exists for a different reason. It serves its members or the public. Money comes in as subscriptions, donations, grants and fees, and is spent on the activities of the organisation.

The key idea is that no owner takes the surplus. If receipts exceed expenses, the surplus is added to the Capital Fund (also called General Fund or Accumulated Fund). If expenses exceed income, the deficit reduces that fund. Members cannot share the surplus among themselves. Because of this, we do not talk of "profit" or "loss". We say surplus or deficit.

Main features of an NPO:

  • The objective is service, not profit.
  • It is usually run by a society, trust or a company registered for charitable purposes, with a governing body or managing committee.
  • Funds come mainly from subscriptions, donations, grants, entrance fees and legacies.
  • There is no proprietor, so owners' capital is replaced by the Capital Fund.
  • Surplus is applied to the objects of the organisation and is not distributed.
  • Many NPOs keep only cash records, so accounts are often prepared from the cash book.

Common types with examples: clubs and sports associations (a cricket club, a gymkhana), educational bodies (a trust-run school or college), health bodies (a charitable hospital, a blood bank society), religious and charitable trusts, and professional or trade associations (a chamber of commerce, a residents' welfare association).

Accounting differs from a business in these ways. A business starts from the Trading and Profit and Loss Account. An NPO starts from the Receipts and Payments Account, which is a summary of the cash book. It then prepares the Income and Expenditure Account on the accrual basis, which is like a Profit and Loss Account but covers only revenue items. A business Balance Sheet shows Capital. An NPO Balance Sheet shows Capital Fund plus special funds. Some NPOs also run a canteen or a bar. They then prepare a separate trading account for that activity and carry only the profit or loss to the Income and Expenditure Account.

Key rules to remember

Surplus or deficit
Surplus or Deficit = Total Income − Total Expenditure
Surplus if income is more. Deficit if expenditure is more. Do not call it profit or loss.
Capital Fund (opening)
Capital Fund = Total Assets − Outside Liabilities − Special/Specific Funds (e.g. prize fund, building fund)
Used when the opening Balance Sheet is not given. Deduct outside liabilities and every special or specific fund from the assets. What remains is the Capital Fund.
Closing Capital Fund
Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit) + Capitalised items
Legacies and specific donations are capital receipts. They go to the Capital Fund or the relevant fund in the Balance Sheet, not to Income and Expenditure. Entrance fees are capitalised unless the question treats them as revenue. Always check the question's instruction.
Receipts and Payments Account basis
Receipts and Payments Account = Summary of cash book (cash and bank, all items, any period)
It includes capital and revenue items and has an opening and closing balance.

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

For theory questions on NPO meaning, features, types or differences, follow a fixed structure so no mark-bearing point is missed.

  1. 1Read the verb. "Define", "explain features", "distinguish" and "list types" each need a different answer shape.
  2. 2Open with a one-line definition: service objective, no owner profit, surplus kept for the objects.
  3. 3List features as short numbered points. Give five or six, each in one line with a reason.
  4. 4If types are asked, group them (clubs, educational, health, religious, associations) and give a real example for each.
  5. 5For "distinguish", draw two columns with points such as objective, owner, statement prepared, term for result, source of funds and fund name.
  6. 6Close with the accounting consequence: Receipts and Payments Account, Income and Expenditure Account and Balance Sheet with Capital Fund.
  7. 7For numerical parts, find the Capital Fund by Assets − Liabilities − Special Funds and state the surplus or deficit clearly.

Quickest way: Five-point comparison for 'NPO vs business' questions

When to use it: Use this when the question asks for differences or features and time is short.

  1. Write the headings: objective, ownership, source of funds, statements prepared, result and equity name.
  2. Fill the business side first: profit, proprietor or partners, sales and capital, Trading and Profit and Loss Account, profit or loss, Capital.
  3. Fill the NPO side: service, members or trustees with no profit sharing, subscriptions and donations, Receipts and Payments Account plus Income and Expenditure Account, surplus or deficit, Capital Fund.
  4. Add one example of each type in a line.
  5. Check that you have used the words surplus, deficit and Capital Fund.

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

  • Calling the result of an NPO a profit or loss.

    Students carry over business terms.

    Fix: Use surplus for an excess of income over expenditure and deficit for the reverse. Marks are often lost on wording.

  • Saying an NPO cannot earn any surplus or income.

    "Not for profit" is read as "must make no money".

    Fix: Say it can earn a surplus, but the surplus is not shared by owners and is used for its objects.

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

    Both list receipts and payments of the year.

    Fix: Remember that the first is a cash summary with capital and revenue items. The second is on the accrual basis and has only revenue items.

  • Writing Capital instead of Capital Fund in the Balance Sheet.

    Habit from sole proprietor accounts.

    Fix: Use Capital Fund, General Fund or Accumulated Fund. There is no proprietor.

  • Giving types without examples or listing only clubs.

    Clubs are the most common example in problems.

    Fix: Cover clubs, educational, health, religious and charitable bodies and associations, with an example for each.

Worked examples

Example 1

Define a not-for-profit organisation and state any four of its features. Give two examples.

Show the solution
  1. Definition: an NPO is an organisation formed to provide service to its members or society, not to earn profit for owners. Its surplus is used for its objects.
  2. Feature 1: the objective is service, such as sport, education, health or charity.
  3. Feature 2: there are no owners who take the surplus. It is added to the Capital Fund.
  4. Feature 3: funds come from subscriptions, donations, grants and entrance fees.
  5. Feature 4: it is run by a managing committee or trustees and usually keeps cash-based records, so it prepares a Receipts and Payments Account first.
  6. Examples: a sports club and a charitable hospital run by a trust.

Answer: An NPO serves members or society and does not distribute profit. Features: service objective, no owner share in surplus, funds from subscriptions and donations, run by a committee with cash-based records. Examples: a sports club and a trust hospital.

Example 2

On 1 April 2026 the Mumbai Residents' Welfare Association had cash ₹40,000, investments ₹2,00,000, furniture ₹60,000 and outstanding expenses ₹10,000. Find the Capital Fund. During the year income was ₹3,50,000 and expenditure ₹3,20,000. Find the closing Capital Fund, assuming no other items.

Show the solution
  1. Total assets = 40,000 + 2,00,000 + 60,000 = ₹3,00,000.
  2. Liabilities = outstanding expenses ₹10,000. There are no special funds.
  3. Opening Capital Fund = 3,00,000 − 10,000 = ₹2,90,000.
  4. Surplus = 3,50,000 − 3,20,000 = ₹30,000.
  5. Closing Capital Fund = 2,90,000 + 30,000 = ₹3,20,000.

Answer: Opening Capital Fund is ₹2,90,000. The surplus is ₹30,000. Closing Capital Fund is ₹3,20,000.

Exam tips

  • For a "distinguish" question, use a two-column table-style layout with at least five points. Each point earns a mark.
  • Always use the words surplus, deficit and Capital Fund. Examiners look for them.
  • Give an example for every type you name. It shows you understand the concept.
  • For MCQs, watch for options that call the result a profit or that say an NPO cannot earn income. Both are wrong.
  • Link the theory to the statements: Receipts and Payments Account, Income and Expenditure Account and Balance Sheet. This sets up the later numerical topics.

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

Not-for-Profit Organisations: Meaning and Features in other exams

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

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

What is the meaning of 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 the surplus is used for its objects and is not shared among members.

What is the difference between a profit-making and a not-for-profit organisation?

A profit-making entity aims at profit for its owners and prepares Trading and Profit and Loss Accounts. An NPO aims at service, shows surplus or deficit, and prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet with a Capital Fund.

Which statements does an NPO prepare?

It prepares the Receipts and Payments Account, the Income and Expenditure Account and the Balance Sheet. If it runs a trading activity such as a canteen, it also prepares a separate trading account for it.

What are examples of not-for-profit organisations?

Examples include sports clubs, charitable hospitals, trust-run schools, religious trusts, chambers of commerce and residents' welfare associations.