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

Which of the following best describes a not-for-profit organisation (NPO)?

A not-for-profit organisation is set up to serve its members or society, not to earn profit for owners. It may generate a surplus, but that surplus is applied to its objectives and is not distributed among members as profit or dividend.

  1. AAn entity set up mainly to render service to its members or society, with surplus applied to its objectives and not distributed as profit to membersCorrect
  2. BAn entity set up to maximise profit and distribute it among its members as dividend
  3. CAn entity that is prohibited from earning any surplus in any year
  4. DAn entity that is run only by the government and cannot be formed by private persons

Explanation

An NPO is formed to serve a charitable, social, cultural or sporting purpose rather than to earn profit for owners. It may earn a surplus, but the surplus is used for its objectives and is not shared among members. Option C is wrong because NPOs can earn surplus; the restriction is on distributing it.

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