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CSEET · Fundamentals of Accounting

Accounting for Non-Profit Organizations for CSEET

Accounting for non-profit organizations records the money of clubs, trusts and societies that exist for service, not profit. You start with the Receipts and Payments Account (a cash summary), adjust it for accruals and capital items to get the Income and Expenditure Account (surplus or deficit), then prepare the Balance Sheet.

What this chapter covers

A non-profit organization, such as a sports club, a school society or a charitable trust, does not aim to earn profit. It collects subscriptions, donations and grants, and spends them on its objects. Because there is no trading profit, it does not prepare a Profit and Loss Account. It prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet.

The chapter is a step-by-step conversion. The Receipts and Payments Account is a summary of cash and bank transactions. It is the starting point, and often the only data you are given. The Income and Expenditure Account is the equivalent of the Profit and Loss Account. It follows the accrual basis, so it takes only revenue items of the current year and shows a surplus or a deficit. The Balance Sheet then shows assets, liabilities and the capital fund.

This chapter uses ideas from the rest of Paper 2: the difference between capital and revenue items, outstanding and prepaid expenses, accrued income, depreciation, and the Balance Sheet format. If those basics are weak, this chapter will feel hard. If they are strong, this chapter is mostly careful adjustment work, and it is very scoreable in a written paper.

Paper 2 is a written paper where step-by-step working earns marks, and this chapter is made of clear, rule-based steps. Questions usually give a Receipts and Payments Account with adjustments and ask for the Income and Expenditure Account and Balance Sheet. If you know the rules for subscriptions, donations and funds, you can score well even when the numbers are long. You also revise capital and revenue treatment, accruals and depreciation, so the effort helps other chapters too. Since you need at least 40% in every paper, a reliable chapter like this helps protect your Paper 2 score.

Accounting for Non-Profit Organizations: topics in the order to study them

  1. 1Non-Profit Organizations: Meaning and FeaturesLearn what these bodies are and why they use different statements before you touch any numbers.
  2. 2Receipts and Payments AccountThis is the raw cash summary. You must read it correctly because every later statement is built from it.
  3. 3Income and Expenditure AccountOnce you understand the cash record, learn how to convert it to an accrual-based surplus or deficit.
  4. 4Special Items: Subscriptions, Donations, Legacies and FundsThese items decide what goes to income and what goes to the capital fund. They are the main source of errors, so study them after the basic account.
  5. 5Balance Sheet and Conversion from Receipts and PaymentsThis ties everything together: you build the opening Balance Sheet, the income statement and the closing Balance Sheet in one problem.

How to prepare Accounting for Non-Profit Organizations

Treat this chapter as a repeatable procedure. Practise the same sequence on many problems until it becomes automatic.

  1. Learn the difference between the three statements: Receipts and Payments is cash-based and includes capital and revenue items; Income and Expenditure is accrual-based and has revenue items only; the Balance Sheet shows position on the last day.
  2. Practise reading a Receipts and Payments Account. Mark each line as revenue income, revenue expense, capital receipt, capital payment, or opening/closing balance.
  3. Learn the subscription adjustment: Subscription income = Received − opening outstanding (last year's arrears received this year) + closing outstanding (arrears at the end of this year) − closing advance (received this year for next year) + opening advance (received last year for this year). Use a working table for each item and check it against the Balance Sheet.
  4. Memorise the treatment of special items: general donations go to income; specific donations go to a named fund or capital; legacies are capital receipts unless the question says otherwise; entrance fees are normally treated as capital receipts, but treat them as income if the question says so. When an old asset is sold, remove the asset at its book value. The difference between the sale proceeds and the book value is a profit or loss on sale, shown in the Income and Expenditure Account (or adjusted in the capital fund, if the question says so).
  5. Build the opening Balance Sheet first. Opening capital fund = opening assets − opening liabilities. Then prepare the Income and Expenditure Account and add the surplus to the capital fund.
  6. Solve at least one full conversion problem each day for a week. Write each working note clearly, because partial marks come from correct steps.
  7. Finish by timing yourself. A full problem should take about 25 to 30 minutes, so practise a clean layout and a quick cross-check of the Balance Sheet totals.

Common mistakes in Accounting for Non-Profit Organizations

  • Copying every Receipts and Payments item into the Income and Expenditure Account.

    Fix: Classify each line first. Only revenue items for the current year go to the Income and Expenditure Account.

  • Taking the subscription received as the subscription income.

    Fix: Use a subscription working: add current-year dues and subtract amounts relating to other years. Then cross-check it with the Balance Sheet.

  • Treating all donations as income.

    Fix: Read each donation line. General donations go to income; specific ones go to a fund or to capital.

  • Leaving out the opening Balance Sheet.

    Fix: Prepare it from the opening balances in the Receipts and Payments Account and the notes. Capital fund is the balancing figure.

  • Showing the surplus on the wrong side of the Balance Sheet.

    Fix: Add a surplus to the capital fund on the liabilities side; deduct a deficit from it.

  • Forgetting to adjust outstanding and prepaid items for both years.

    Fix: For each expense item: expense = cash paid + opening prepaid − closing prepaid − opening outstanding + closing outstanding. Opening prepaid was paid last year but belongs to this year; closing prepaid was paid this year but belongs to next year. Do this in a small table every time.

Last-day revision: Accounting for Non-Profit Organizations

  • Non-profit bodies earn no profit; their surplus belongs to the organization and is added to the capital fund.
  • Receipts and Payments Account is a summary of cash and bank transactions; it starts with opening balances and ends with closing balances.
  • Income and Expenditure Account is a nominal account prepared on the accrual basis; it shows surplus or deficit.
  • Capital receipts and capital payments never appear in the Income and Expenditure Account.
  • Opening capital fund = total opening assets − total opening outside liabilities.
  • Subscription income for the year = subscriptions relating to the current year, whether received or not; exclude arrears of earlier years and advances for the next year.
  • Specific donations go to the named fund or capital; general donations are income.
  • Legacies are capital receipts unless the question says otherwise; entrance fees are normally capital receipts, but follow the question if it treats them as income.
  • On sale of an old asset, remove the asset at its book value; the difference between sale proceeds and book value is a profit or loss on sale, shown in the Income and Expenditure Account (or adjusted in the capital fund, if the question says so).
  • Depreciation, outstanding expenses and prepaid expenses are adjusted in the Income and Expenditure Account; they are not in the Receipts and Payments Account.
  • Closing Balance Sheet: capital fund = opening fund + surplus (or − deficit) + capital items added. Entrance fees and legacies are normally capital receipts, so add them unless the question treats them as income.
  • Stock of consumables used = opening stock + purchases − closing stock.
  • Always check that both sides of the Balance Sheet agree.

Accounting for Non-Profit Organizations practice questions

Accounting for Non-Profit Organizations in other exams

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

Accounting for Non-Profit Organizations: frequently asked questions

What is the difference between the Receipts and Payments Account and the Income and Expenditure Account?

The Receipts and Payments Account is a summary of actual cash and bank transactions and includes capital and revenue items of any year. The Income and Expenditure Account is on the accrual basis, includes only revenue items of the current year, and shows a surplus or deficit.

Why do non-profit organizations not prepare a Profit and Loss Account?

They do not run for profit, so they do not have trading profit. They prepare an Income and Expenditure Account, which shows whether income was enough to meet expenses in the year.

How is the capital fund calculated?

The capital fund is total assets minus outside liabilities at a given date. It increases with a surplus and with capital items such as entrance fees and legacies, which are normally capital receipts, unless the question treats them as income. It decreases with a deficit.

Is this chapter hard for beginners?

It is manageable if you know basic accounting terms and practise the same steps on several problems. Most mistakes come from skipping classification of items, not from difficult calculations.