by Non-Profit Organisations (NPOs) are entities formed for promoting charitable, religious, cultural, educational, or social objectives without any intention of earning profit for distribution among members. Their primary goal is service rather than wealth creation. Examples include trusts, societies, clubs, NGOs, schools, and hospitals.
Though they do not engage in profit-oriented activities, they still require a proper accounting system to track income, monitor expenditures, ensure proper use of funds, and maintain transparency with stakeholders, especially donors and regulators. Accounting in NPOs ensures accountability, audit compliance, and reporting as per legal standards such as the Indian Trust Act, Societies Registration Act, or Companies Act (for Section 8 companies).
Unlike business enterprises, NPOs do not prepare Trading and Profit & Loss Accounts; instead, they maintain:
- Receipts and Payments Account
- Income and Expenditure Account
- Balance Sheet
These help track cash flow, recurring income/expenditure, and the financial position of the organization. The accounting treatment must comply with relevant accounting standards, especially AS-12 (Government Grants) and AS-9 (Revenue Recognition).
Characteristics of Non-Profit Organisations Accounting:
- Service-Oriented Objective
The primary objective of non-profit organisations (NPOs) is to provide services to society rather than earning profits. Their accounting practices reflect this mission by focusing on fund usage, cost management, and service delivery instead of financial gains. Financial statements are designed to highlight how funds are utilised for charitable or social causes, ensuring that the organisation remains accountable to its donors, beneficiaries, and the regulatory authorities governing public welfare entities.
- Absence of Profit and Capital Structure
Unlike business enterprises, NPOs do not have owners or shareholders, so there is no concept of share capital. Instead, funds are raised through donations, grants, and subscriptions, which are accounted for under a capital/general fund. Any surplus generated during the year is added to this fund. The accounting system, therefore, focuses on net assets and resource management, rather than calculating profit margins or return on investment as in commercial accounting.
- Fund-Based Accounting System
NPOs often follow a fund-based accounting system to ensure proper tracking and usage of restricted and unrestricted funds. Restricted funds are donations or grants provided for a specific purpose and must be utilised only for that. Each fund is treated separately in the accounting records, and financial statements are prepared accordingly. This method helps maintain transparency and ensures that donor-imposed conditions are fulfilled, enhancing trust and accountability.
- Use of Receipts and Payments Account
One key feature of NPO accounting is the preparation of a Receipts and Payments Account on a cash basis. This account records all cash and bank transactions, regardless of the accounting period they relate to. It includes both capital and revenue items. This statement provides a summary of cash inflows and outflows and serves as the base for preparing the Income and Expenditure Account and Balance Sheet at the end of the financial year.
- Preparation of Income and Expenditure Account
The Income and Expenditure Account is similar to a profit and loss account but focuses on surplus or deficit rather than profit or loss. It is prepared on an accrual basis, incorporating only revenue items related to the current accounting period. Non-cash items like depreciation and outstanding expenses are also recorded. This account provides a clear picture of the organisation’s financial performance and efficiency in managing recurring income and expenditures.
- Emphasis on Transparency and Accountability
Since NPOs are funded primarily by public donations, grants, and member contributions, their accounting system prioritises transparency and accountability. Financial statements are often shared with donors, governing bodies, and auditors to ensure the proper utilisation of funds. Detailed disclosures regarding fund allocation, restricted use, and performance evaluation help build public trust and credibility, which are vital for the continued support and sustainability of such organisations.
- Lack of Trading Activities
NPOs usually do not engage in trading or business activities, and hence, their accounting does not involve cost of goods sold or gross profit calculations. Even if they generate revenue (e.g., from cultural events, publications, or workshops), it is primarily to support their social objectives, not to earn profit. This significantly influences the structure of their accounts, focusing more on donation tracking, grant utilisation, and programme-wise expenditure rather than conventional sales metrics.
- Legal and Statutory Compliance
NPOs are governed by specific laws such as the Societies Registration Act, Indian Trusts Act, or Companies Act (Section 8) depending on their structure. Their accounting system must comply with these laws and any applicable accounting standards like AS-12 (Government Grants) or AS-9 (Revenue Recognition). Statutory audits, tax exemptions, and donor reporting are integral parts of the accounting process, ensuring financial integrity and legal compliance at every stage of operations.
Types of Non-Profit Organisations:
1. Charitable Trusts
Charitable trusts are one of the oldest forms of NPOs. They are created by a trust deed and governed by the Indian Trusts Act, 1882. These trusts are generally formed by individuals or families to provide long-term support for causes like education, medical aid, welfare of the poor, etc. A trust must have a trustee to manage the operations in line with the objectives laid out in the deed. They enjoy various tax exemptions under the Income Tax Act if registered under Sections 12AA and 80G.
2. Societies
Societies are associations of individuals united by a common cause, usually formed for literary, cultural, scientific, or charitable purposes. They are registered under the Societies Registration Act, 1860, or its state variants. Societies must have a managing committee and a memorandum of association outlining their objectives. They are governed by democratic principles and conduct meetings, maintain minutes, and file annual returns. Societies are often used for running schools, NGOs, welfare projects, and research institutions.
3. Section 8 Companies
A Section 8 Company is formed under the Companies Act, 2013, for promoting commerce, arts, science, education, religion, or environmental protection, without any intention to distribute profits. They enjoy all benefits of a private limited company but operate not-for-profit. These companies have stricter compliance norms but are considered more credible due to their transparent legal framework. Section 8 companies are ideal for corporate-funded CSR initiatives, educational organisations, and national-level NGOs.
4. Religious Organisations
Religious NPOs are set up to promote religious practices, faiths, and spiritual services. Examples include temples, mosques, churches, gurdwaras, and associated trusts or institutions. They may engage in activities like religious education, charity, or spiritual retreats. While they operate as charitable trusts or societies, they are subject to specific rules, especially regarding foreign donations and tax exemptions, as provided under Sections 11 to 13 of the Income Tax Act.
5. Educational Institutions (Non-Profit)
These NPOs are set up to provide schooling, higher education, vocational training, or adult education on a non-profit basis. They can be registered as trusts, societies, or Section 8 companies. These institutions must reinvest all surplus into the educational mission. Many enjoy exemptions under Section 10(23C) of the Income Tax Act. Examples include private schools, charitable universities, and community colleges run by NGOs or philanthropic bodies.
6. Hospitals and Medical Institutions (Non-Profit)
Non-profit healthcare institutions aim to provide affordable or free medical services to the underprivileged. They may function as charitable hospitals, dispensaries, eye camps, or clinics. Such organisations often receive government grants, donor support, and CSR funding. They are usually registered as trusts or societies. Compliance with medical ethics, public health policies, and financial transparency is essential. These NPOs also qualify for tax benefits under Section 80G and 35AC of the Income Tax Act.
7. Clubs and Welfare Associations
These include sports clubs, hobby groups, cooperative housing societies, resident welfare associations (RWAs), and other social or recreational bodies. Although not involved in charitable activities, they function on a non-profit basis for the benefit of members. They collect subscriptions or membership fees and use the funds for common services like security, sports, or maintenance. These organisations may register under the Societies Act or Cooperative Societies Act depending on their structure.
Key Accounting Records Maintained by Non-Profit Organisations:
1. Cash Book
A complete record of all cash and bank transactions, maintained as Receipts and Payments Account, prepared on a cash basis.
2. Receipts and Payments Account
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A summary of all cash transactions (including capital and revenue items) during an accounting period.
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It does not distinguish between current and previous year’s items.
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Non-cash items like depreciation are excluded.
3. Income and Expenditure Account
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Prepared on accrual basis.
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Similar to a profit & loss account but shows surplus or deficit instead of profit or loss.
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Includes only revenue items related to the current period.
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Non-cash items (e.g., depreciation, provisions) are included.
4. Balance Sheet
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Reflects the financial position at year-end.
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Includes assets, liabilities, and capital/general fund.
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Surplus/deficit from Income & Expenditure Account is adjusted in the capital fund.
5. Donations and Grant Registers
Separate registers to track earmarked donations, grants received, and their utilization.
6. Fixed Assets Register
Used to maintain a record of all long-term assets, along with depreciation schedules.
Proper record-keeping ensures transparency, accountability, and supports annual audits and donor compliance.
Accounting Treatment of Common Non-Profit Organisations Items:
1. Donations
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General Donations: Treated as income and shown in the Income & Expenditure A/c.
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Specific Donations: Treated as capital receipts and added to the relevant fund (e.g., Building Fund, Prize Fund).
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Life Membership Fees: Treated as capital receipts.
2. Subscriptions
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Subscription Received in Advance: Treated as a liability.
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Outstanding Subscription: Added to income and shown as an asset.
- Total subscription is calculated as:
Total = Received + Outstanding (current) – Outstanding (previous) – Advance (current) + Advance (previous)
3. Entrance Fees
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If collected from members: Can be treated as either capital or revenue based on policy consistency.
4. Grants and Aid
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General Grants: Treated as income.
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Specific Purpose Grants: Added to the respective fund and used only for that purpose.
5. Sale of Old Newspapers/Assets
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Treated as income in Income & Expenditure Account.
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If the asset is sold, profit/loss on sale is calculated and recorded.
6. Depreciation
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Treated as an expense and recorded in the Income & Expenditure Account.
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Asset value reduced in the Balance Sheet.
7. Honorarium
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Payments to speakers, artists, or guests – treated as revenue expenditure.
8. Capital Fund
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Surplus (excess of income over expenditure) is added to Capital Fund at the end of the year.
Challenges in Non-Profit Organisations Accounting:
- Difficulty in Revenue Recognition
One of the major challenges NPOs face is accurately recognizing revenue. Donations, grants, and contributions often come with conditions or timing mismatches. Determining when to recognize such income—whether on receipt or upon fulfilling donor conditions—requires careful judgment. This issue becomes more complex when income is received for multi-year projects or in-kind contributions. Misclassification can distort the financial results and mislead stakeholders, making revenue recognition a critical concern in NPO accounting.
- Complex Fund-Based Accounting
Non-profit organisations often manage multiple restricted and unrestricted funds, each with specific purposes. Fund-based accounting requires maintaining separate ledgers, ensuring accurate allocation of income and expenses, and preventing fund misuse. Tracking the performance and balances of each fund is resource-intensive and prone to errors. If not properly managed, it can lead to non-compliance with donor conditions, misuse of funds, and loss of credibility among stakeholders and auditors.
- Inconsistent Accounting Expertise
Many NPOs lack access to professional accounting personnel due to limited resources. Volunteers or part-time staff often manage accounts without formal training, which leads to errors in classification, budgeting, and reporting. Unlike commercial businesses that employ qualified accountants, many NPOs rely on outdated or manual systems. The absence of technical know-how makes it difficult to comply with standard accounting practices and legal requirements, increasing the risk of audit issues or regulatory penalties.
- Allocation of Common Expenses
NPOs often incur shared expenses like rent, utilities, or administrative salaries that benefit multiple projects or departments. Allocating these expenses fairly is a major challenge. If the allocation basis is not rational or consistent, it can distort project cost analysis and affect donor reporting. Improper expense distribution may also cause overspending in certain funds and underspending in others, which can lead to trust issues with donors or internal mismanagement.
- Volunteer Services and Non–Monetary Contributions
Volunteers play a crucial role in NPO operations, but their services and contributions are often not recorded in the financial statements. This leads to an undervaluation of organisational capacity and performance. Similarly, donations in-kind such as food, medical supplies, or equipment are difficult to measure and record accurately. The lack of standardized methods to account for these contributions results in financial statements that do not reflect the full scope of resources received.
- Compliance with Multiple Regulations
NPOs must comply with various regulatory requirements, including Income Tax Act, Foreign Contribution Regulation Act (FCRA), Societies Registration Act, and Charitable Trusts Acts. Managing multiple compliances, filing annual returns, and maintaining prescribed records require significant effort and expertise. Failure to comply can lead to penalties, cancellation of tax exemptions, or loss of foreign funding eligibility. This regulatory complexity adds considerable strain to NPOs, especially smaller ones with limited administrative capacity.
- Donor Reporting and Transparency
Donors increasingly demand detailed reporting on how their funds are utilized. This requires NPOs to maintain project-specific accounts, prepare customised reports, and demonstrate impact. Meeting these expectations involves extra time, cost, and skilled manpower. Any mismatch in reports or lack of clarity may result in funding withdrawal or reputational damage. Ensuring transparency while managing multiple donor expectations remains a continuous challenge for non-profits, especially those dependent on grants and public donations.
- Limited Use of Accounting Technology
Many NPOs still use manual or basic accounting systems, which are not equipped to handle the complexities of fund-based accounting, donor tracking, and compliance reporting. Lack of integration between accounting, fundraising, and program management software leads to inefficiencies and duplication of work. The initial cost of accounting software and lack of trained staff prevent many NPOs from adopting modern financial tools, which hinders accuracy, speed, and professionalism in accounting operations.
