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CSR and Social Governance · Financial and Non-financial Reporting of Different Non-Corporate Entities

ICAI Guidance on Accounting for Not-for-Profit Organisations

Updated 11 October 2026 · Fact-checked

A not-for-profit organisation (NPO) keeps accounts on accrual basis, follows applicable ICAI Accounting Standards, and uses ICAI guidance for items the standards do not cover well. Key items are grants (AS 12), donations, earmarked funds, and fixed assets. You recognise each by its nature, condition and restriction.

Understand ICAI Guidance on Accounting for Not-for-Profit Organisations

An NPO exists to serve a cause, not to earn profit for owners. Trusts, societies and Section 8 companies are common examples. Surplus is not distributed. It is applied to the objects. So the accounts must show how funds were received and used, not profit.

The ICAI has no single standard just for NPOs. Instead, the Accounting Standards apply to an NPO as they do to any entity, depending on its size and whether it is a company. Non-company NPOs are classed as Level I, II or III by the ICAI criteria, which decides which standards apply in full and which in a relaxed form. The ICAI has also issued guidance on the subject, and you should know its principles rather than its exact wording. Check the study material for the exact classification limits before the exam.

The core idea is that the nature of a receipt decides its treatment. A grant is assistance, often government, given for a purpose. AS 12 deals with government grants. A grant for a specific asset is shown as a deduction from the asset cost or as deferred income. A grant for revenue expenses is taken to income over the periods in which the related costs are incurred. A grant is recognised only when there is reasonable assurance that conditions will be met and the grant will be received.

A donation is a voluntary receipt. General donations are income of the year. Donations for a specific purpose, or corpus donations given to be held permanently, are credited directly to the relevant fund and not to the income and expenditure account. A donation in kind is recorded at a fair value when it is material.

Funds show restrictions. Typical funds are the corpus or general fund, and earmarked or restricted funds. Income and expenditure of a restricted fund are tracked against that fund. Fixed assets are recorded at cost under AS 10 and depreciated under AS 6 (or the Ind AS equivalent where applicable). An asset bought from a specific fund is shown in the books, and the fund balance is adjusted so the balance sheet still reflects the restriction.

Key rules to remember

Accrual basis
Income when earned, expense when incurred, not when cash moves
Receipts and payments accounts alone are not enough for a proper NPO reporting if accrual is required.
Revenue grant
Income for the year = grant ÷ period of related cost, matched to costs incurred
Recognise only if there is reasonable assurance of compliance with conditions and receipt.
Capital grant for a specific asset
Net asset cost = cost of asset − grant (or show grant as deferred income)
Depreciation is on the reduced cost under the first method, or grant is credited to income over the asset life under the second.
Specific or corpus donation
Credit to the fund directly, not to income and expenditure
General donations go to income.
Fund-wise surplus
Closing fund = opening fund + receipts to the fund + fund income − fund expenses
Track each restricted fund separately.

How to solve ICAI Guidance on Accounting for Not-for-Profit Organisations questions

Use this method for any question on NPO accounting treatment.

  1. 1Identify the entity type and whether the accounting standards apply fully, partly or in relaxed form.
  2. 2Classify each receipt: revenue grant, capital grant, general donation, specific or corpus donation, or donation in kind.
  3. 3Check conditions and restrictions attached to each receipt and whether there is reasonable assurance of compliance.
  4. 4State the recognition rule: income account, fund account, or deduction from asset or deferred income.
  5. 5Treat fixed assets at cost, apply depreciation, and adjust related fund or grant.
  6. 6Show the effect on the income and expenditure account and the balance sheet with figures.
  7. 7Conclude with the disclosure needed, such as accounting policies and fund-wise movements.

Quickest way: Receipt-type decision grid

When to use it: Short-answer questions asking how to treat a given grant, donation or asset.

  1. Ask first: is it for a purpose or general?
  2. If general, it is income of the year.
  3. If specific or corpus, credit it to a fund.
  4. If a grant, ask whether it relates to an asset or to expenses.
  5. Asset grant: reduce cost or defer income. Expense grant: match to costs.
  6. Add one line on AS 12 conditions and disclosure.

Common mistakes in ICAI Guidance on Accounting for Not-for-Profit Organisations

  • Crediting every donation to income

    Students treat all receipts as revenue.

    Fix: Check whether it is corpus or for a specific purpose. Those go to a fund.

  • Recognising a grant when it is only promised

    Cash basis habits carry over.

    Fix: Recognise only with reasonable assurance of meeting conditions and receiving it.

  • Depreciating the full cost after an asset grant while also deducting the grant

    Both methods get mixed.

    Fix: Pick one method: depreciate net cost, or depreciate full cost and release deferred income.

  • Showing the profit and loss account for an NPO

    Format taken from companies.

    Fix: Use income and expenditure account, with surplus or deficit, not profit.

  • Stating that one ICAI standard covers NPOs

    Students look for a single rule.

    Fix: Say that the general accounting standards apply by entity level, supported by ICAI guidance.

Worked examples

Example 1

A trust receives a government grant of ₹6,00,000 to buy equipment costing ₹10,00,000. Life is 10 years, nil residual value, straight line. Show the treatment under the deduction method for year 1.

Show the solution
  1. Grant relates to a specific asset, so deduct it from cost.
  2. Net cost = ₹10,00,000 − ₹6,00,000 = ₹4,00,000.
  3. Annual depreciation = ₹4,00,000 ÷ 10 = ₹40,000.
  4. Balance sheet shows asset at ₹4,00,000 − ₹40,000 = ₹3,60,000 at year end.

Answer: Depreciation for year 1 is ₹40,000 and the asset is shown at ₹3,60,000.

Example 2

A society received ₹5,00,000 as a corpus donation and ₹2,00,000 as a general donation during the year. Explain the treatment.

Show the solution
  1. The corpus donation is meant to be held permanently, so credit it directly to the corpus fund.
  2. Corpus fund increases by ₹5,00,000 and does not pass through income and expenditure.
  3. The general donation has no restriction, so credit it to income and expenditure.
  4. Income for the year rises by ₹2,00,000.

Answer: ₹5,00,000 goes to the corpus fund and ₹2,00,000 is income of the year.

Exam tips

  • Begin answers with the nature of the receipt, then the rule.
  • Mention AS 12 for grants and AS 10 and AS 6 for assets.
  • Use a small figure example to show the entry, even if the question is theory.
  • Do not quote exact classification limits unless you are sure of them from the study material.

Practice questions from Financial and Non-financial Reporting of Different Non-Corporate Entities

ICAI Guidance on Accounting for 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.

ICAI Guidance on Accounting for Not-for-Profit Organisations: frequently asked questions

Is there a separate accounting standard for NPOs in India?

No single standard covers them. The general accounting standards apply according to the entity's classification, and ICAI guidance helps with NPO-specific issues.

How is a government grant for an asset treated?

Either deduct it from the asset cost, or show it as deferred income and release it over the asset life. Recognise it only when conditions are reasonably assured.

Are all donations income of the NPO?

No. General donations are income. Corpus or specific-purpose donations are credited to the relevant fund.

Do NPOs use accrual or cash accounting?

Accrual basis is expected where the standards apply. Small entities may use receipts and payments accounts, but they give less information.