Questions
7 questions per board paper
Difficulty
Medium
Importance
Key for Class 12 boards
Overview
Not-for-Profit Organisations (NPOs) focus on service rather than profit, requiring a unique approach to accounting compared to commercial businesses. Mastering this topic is essential for Class 12 exams as it tests your ability to handle fund-based accounting, subscription adjustments, and the transition from cash-basis to accrual-basis accounting.
Receipts and Payments Account
This is a summary of the cash book, recording all cash and bank transactions of an NPO during an accounting period. It is a real account that includes both capital and revenue items but ignores non-cash items like depreciation.
- Starts with opening balance of cash/bank
- Records actual cash received and paid
- Includes both capital and revenue nature transactions
- Excludes all outstanding expenses and accrued incomes
- Follows the cash basis of accounting
Income and Expenditure Account
This account is analogous to the Profit & Loss account of a business, prepared on an accrual basis to determine the surplus or deficit for the period. It only records revenue items pertaining to the current accounting year.
- Prepared on accrual basis
- Only revenue items included
- Matches current year expenses against current year income
- Balance results in Surplus or Deficit
- Excludes capital receipts and capital payments
Balance Sheet of NPOs
The Balance Sheet is prepared to ascertain the financial position of the NPO at the end of the year. Unlike commercial firms, NPOs use a 'Capital Fund' or 'General Fund' instead of Capital account, which is adjusted by the surplus or deficit.
- Capital Fund = Assets minus Liabilities
- Opening balance of Capital Fund is adjusted for current year's Surplus/Deficit
- Specific funds like Building Fund or Prize Fund are shown on the liabilities side
- Life Membership Fees are typically capitalized
Subscription and Fund-Based Accounting
Subscription is the primary source of income for most NPOs and requires careful adjustment for outstanding, accrued, and received-in-advance amounts. Fund-based accounting involves recording income and expenses related to specific projects in designated funds rather than the general fund.
- Add: Outstanding at the end of current year
- Add: Received in advance at beginning of year
- Less: Outstanding at beginning of year
- Less: Received in advance at end of year
- Specific fund expenses are deducted from the fund balance
Formula Sheet
Surplus/Deficit = Total Revenue Income - Total Revenue Expenditure
Capital Fund = Total Assets - Total Liabilities
Subscription for the year = Receipts from Subscription + Outstanding (End) - Outstanding (Beginning) + Advance (Beginning) - Advance (End)
Exam Tip
Always prepare the Subscription Account in a working note to avoid arithmetic errors in the Income and Expenditure Account.
Common Mistakes
- Treating capital receipts as revenue income in the Income and Expenditure Account
- Failing to adjust current year subscriptions for amounts related to previous or future years
- Ignoring the instruction to capitalize items like Legacies or Entrance Fees in the absence of clear policy
More Revision Notes
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