Questions
5 questions per paper
Difficulty
Medium
Importance
Key for Class 12 Boards and CUET entrance exams
Overview
Not-for-Profit Organisations (NPOs) focus on social welfare rather than profit-seeking, requiring a unique accounting framework focused on fund-based accounting. Mastering this topic is essential for conceptual clarity in accounting as it tests your ability to adjust cash-based entries into accrual-based financial statements, a frequent target for tricky MCQ variations.
Receipts and Payments Account
This is a summary of the cash book, representing the real account that records all cash and bank transactions regardless of the period they pertain to. It serves as the starting point for preparing final accounts and only considers actual cash inflows and outflows.
- Nature: Real Account
- Includes: Revenue and Capital receipts/payments
- Records: Current, past, and future period transactions
- Excludes: Non-cash items like depreciation or outstanding expenses
- Opening balance: Cash/Bank in hand; Closing balance: Surplus/Deficit
Income and Expenditure Account
Functioning similarly to a Profit and Loss Account, this is a nominal account prepared on the accrual basis to determine the surplus or deficit. It includes only revenue items related to the current accounting year.
- Nature: Nominal Account
- Basis: Accrual accounting
- Includes: Revenue income and revenue expenditure only
- Excludes: Capital items, purchase of assets, or sale of investments
- Adjustment: Add outstanding/accrued income; deduct prepaid expenses
Balance Sheet of NPOs
The Balance Sheet in an NPO reflects the financial position at the end of the year, showing assets and liabilities. Unlike profit-oriented firms, it uses a 'Capital Fund' or 'General Fund' instead of Capital, reflecting the accumulated surplus or specific restricted funds.
- Structure: Assets = Capital Fund + Liabilities
- Treatment of Life Membership Fees: Capitalised as a liability
- Treatment of Legacies: Usually treated as capital receipts
- Entrance Fees: Treated as revenue unless specified otherwise by bylaws
- Fund-based accounting: Restricted funds shown on the liability side
Formula Sheet
Subscription for the year = Subscription received + Closing Outstanding - Opening Outstanding - Closing Advanced + Opening Advanced
Capital Fund = Total Assets - Total Liabilities
Cost of Materials Consumed = Opening Stock + Purchases - Closing Stock
Exam Tip
Always prepare the Subscription Account first to calculate the exact figure for 'Subscription' to be credited to the Income and Expenditure account.
Common Mistakes
- Treating capital receipts (like sale of assets) as revenue income in the Income and Expenditure account.
- Failing to account for opening and closing balances of 'Subscription Outstanding' or 'Subscription Received in Advance'.
- Recording non-cash items like depreciation in the Receipts and Payments account.
More Revision Notes
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