Skip to content

Fundamentals of Accounting · Accounting for Non-Profit Organizations

Non-Profit Organisations: Meaning and Features for CSEET

Updated 11 October 2026 · Fact-checked

A non-profit organisation is set up to serve its members or society, not to earn profit for owners. Any surplus is used for its objects. It keeps a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet, instead of Trading and Profit and Loss Accounts.

Understand Non-Profit Organizations: Meaning and Features

A non-profit organisation (also called a not-for-profit organisation) exists to provide service. Clubs, schools, hospitals, charitable trusts, libraries and sports associations are common examples. The aim is the welfare of members or the public, not profit for owners.

These bodies still earn money and spend money. They get it from subscriptions from members, donations, grants, entrance fees and income from events. They spend it on salaries, rent, books, equipment and running the activities. If income is more than expenditure, the extra is called a surplus. If expenditure is more, it is a deficit. The word "profit" or "loss" is not used.

Key features you should remember:

  • The main motive is service, not profit.
  • Any surplus is not shared among members. It is used to further the objects of the body.
  • It is run by a governing body or managing committee elected by members.
  • Funds come mainly from subscriptions, donations, grants and fees.
  • It is usually governed by its rules, trust deed or the law under which it is registered.
  • Its capital is shown as a Capital Fund or General Fund, not as owner's capital.

The accounting is different because there is usually no buying and selling for profit. So there is no Trading Account or Profit and Loss Account as the main statement. Most non-profit bodies keep only cash records. At the year end they prepare a Receipts and Payments Account, which is a summary of the cash book. Then they prepare an Income and Expenditure Account, which is like a Profit and Loss Account but follows the accrual basis, and a Balance Sheet.

Note that some non-profit bodies do run a business activity, such as a club canteen or a school bookstall. For these, a separate Trading Account may be prepared, and only its profit or loss is carried to the Income and Expenditure Account.

Key rules to remember

Surplus or deficit
Surplus = Total income − Total expenditure (if positive); Deficit = Total expenditure − Total income (if positive)
Surplus is added to the Capital Fund. Deficit is deducted from it.
Capital Fund (opening)
Capital Fund = Total assets − Total liabilities
Used when the opening Balance Sheet is not given. It is the non-profit equivalent of owner's capital.
Closing Capital Fund
Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit)
Specific funds, such as a prize fund, are shown separately, not inside this.
Statement names
Profit-making: Trading A/c, P&L A/c, Balance Sheet. Non-profit: Receipts and Payments A/c, Income and Expenditure A/c, Balance Sheet
Most direct comparison asked in exams.

How to solve Non-Profit Organizations: Meaning and Features questions

Use this method for theory questions on meaning, features and differences, and for short numerical questions that depend on them.

  1. 1Define the term in one line: service motive, no owners' profit, surplus used for objects.
  2. 2List four to six features with a short reason for each.
  3. 3If asked for differences, set out points side by side: motive, capital, surplus, statements prepared, basis of accounting, management.
  4. 4Name the main statements: Receipts and Payments Account, Income and Expenditure Account and Balance Sheet.
  5. 5For numbers, check whether the question needs surplus or deficit, and whether the opening Capital Fund must be found from assets and liabilities.
  6. 6Use the right words: surplus, deficit, Capital Fund, subscriptions. Avoid profit, loss and owner's capital.
  7. 7Close with a one-line example such as a club, school or charitable hospital.

Quickest way: Four-point difference check

When to use it: Use when you have little time and the question asks you to distinguish a non-profit body from a profit-making one.

  1. Motive: service versus profit.
  2. Capital: Capital Fund versus owner's capital.
  3. Result: surplus or deficit versus profit or loss.
  4. Statements: Receipts and Payments, Income and Expenditure, Balance Sheet versus Trading, P&L, Balance Sheet.
  5. Add one example for each side if marks allow.

Common mistakes in Non-Profit Organizations: Meaning and Features

  • Writing that non-profit organisations cannot earn any income or surplus.

    The name suggests no profit at all.

    Fix: Say that they may earn a surplus, but it is not distributed to members and is used for the objects.

  • Using the words profit and loss for a club or trust.

    Students copy the format of a business.

    Fix: Use surplus and deficit, and call the account Income and Expenditure Account.

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

    Both list incomes and expenses, so they look alike.

    Fix: Remember that Receipts and Payments is a cash summary including capital items, and Income and Expenditure follows accrual and only revenue items.

  • Calling the balancing figure of the Balance Sheet owner's capital.

    Habit from sole trader accounts.

    Fix: Name it Capital Fund or General Fund.

  • Saying that all non-profit organisations are charities.

    Charity is the most familiar example.

    Fix: Include clubs, associations, schools and hospitals. Their aim is service to members or society.

Worked examples

Example 1

Define a non-profit organisation and explain any four of its features. (5 marks)

Show the solution
  1. Definition: A non-profit organisation is a body set up to provide service to its members or society, not to earn profit for owners.
  2. Feature 1: Its motive is service. Examples are a sports club or a charitable hospital.
  3. Feature 2: Any surplus is not shared among members. It is used to achieve the objects of the body.
  4. Feature 3: It is managed by a committee elected by its members, under its rules or trust deed.
  5. Feature 4: Its funds come from subscriptions, donations, grants and fees, and its capital is shown as the Capital Fund.

Answer: A non-profit organisation serves members or society, does not distribute its surplus, is run by an elected committee, is funded by subscriptions and donations, and shows its capital as a Capital Fund.

Example 2

A club has total assets of ₹6,50,000 and outside liabilities of ₹1,50,000 at the start of the year. During the year its income was ₹4,20,000 and its expenditure was ₹3,80,000. Find the opening Capital Fund, the surplus or deficit and the closing Capital Fund.

Show the solution
  1. Opening Capital Fund = Assets − Liabilities = ₹6,50,000 − ₹1,50,000 = ₹5,00,000.
  2. Income is ₹4,20,000 and expenditure is ₹3,80,000. Income is more, so there is a surplus.
  3. Surplus = ₹4,20,000 − ₹3,80,000 = ₹40,000.
  4. Closing Capital Fund = ₹5,00,000 + ₹40,000 = ₹5,40,000.

Answer: Opening Capital Fund is ₹5,00,000, surplus is ₹40,000 and closing Capital Fund is ₹5,40,000.

Exam tips

  • Differences between profit and non-profit bodies are asked often. Practise a clean four to six point comparison.
  • Use correct terms. Marks are lost for writing profit, loss or capital instead of surplus, deficit and Capital Fund.
  • Give one example such as a club, school or hospital to support your definition.
  • If a numerical question gives no opening Balance Sheet, find the Capital Fund from assets minus liabilities.
  • Write the three statements in order so the examiner sees you know the full process.

Practice questions from Accounting for Non-Profit Organizations

Non-Profit Organizations: 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.

Non-Profit Organizations: Meaning and Features: frequently asked questions

What is the meaning of a non-profit organisation?

It is an organisation formed to serve its members or the public, not to earn profit for owners. It may earn a surplus, but the surplus is used for its objects and is not shared.

How does accounting for a non-profit organisation differ from a business?

A business prepares Trading and Profit and Loss Accounts. A non-profit body prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. It shows surplus or deficit and a Capital Fund.

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

Their aim is service, not profit, and they usually do not trade. The Income and Expenditure Account serves the same purpose and shows surplus or deficit.

Can a non-profit organisation run a business activity?

Yes. A club may run a canteen, for example. A separate Trading Account may be made for that activity, and its profit or loss is taken to the Income and Expenditure Account.