Principles of Accounting: Accounting for non profit organisations

////Principles of Accounting: Accounting for non profit organisations

Principles of Accounting: Accounting for non profit organisations

ZIMSEC O Level Principles of Accounting: Accounting for non profit organisations

  • While it is true that the majority of entities exist primarily to make a profit
  • There are still a large number of organisations which are not for profit
  • While profit is the overriding aim in for profit business
  • Non profit organisations are driven by other goals including:
    1. Promoting the interests of their members
    2. Advance a certain agenda
    3. Lobbying
    4. Equal distribution of of wealth
    5. Eradication of poverty
    6. Fighting a certain disease e.g. malaria, cancer etc
    7. Provide entertainment to members etc
  • Examples of non profit entities include:
    • Football clubs such as Dynamos
    • Chess clubs
    • Burial societies
    • Funding circles i.e. marounds/ amarounds
    • Charities e.g Oxfam, MSF

Differences between non-profit entities and profit entities

  • Because profit is not the main motive non profit entities do not prepare a profit and loss account (income statement)
  • Instead they prepare an income and expenditure account
  • An income and expenditure account is the equivalent of an Income Statement/Profit and Loss Account in non profit organisations
  • It matches income against expenditure incurred in the same period
  • If income exceeds expenditure in a given period the excess is known as surplus
  • Conversely if expenditure exceeds income the difference is known as deficit
Profit making entityNon-profit making entity
Income Statement/Trading and Profit and Loss AccountIncome and Expenditure Account.
Trading Accounts are sometime prepared
Net ProfitSurplus of Income over Expenditure
Net LossDeficit of Income Over Expenditure
  • Non profit entities also prepare  a receipts and payments
  • receipts and payment account are a summary of cash and bank accounts in a given period

Accumulated Fund

  • Accumulated fund is the equivalent of capital in profit making enterprises
  • Accumulated Fund = Assets – Liabilities
  • Consequently an Accumulated Fund account is used in non profit entities instead of a Capital Account
  • The name accumulated fund is used because this fund is likely made up of funds that accumulated overtime rather than a normal capital injection

Income Statement in non profit entities

  • Often non profit organisations have profit making concerns
  • An example is when a football club operates a bar
  • In such instances an Income statement/Trading and Profit and Loss Account is prepared for that particular concern
  • Only transactions pertaining to the concern are included in such an Income Statement
  • Any profit made from such a concern is used to fund the activities of the non profit organisation
  • The profits are added onto the income side of the income and expenditure account

Subscriptions

  • Most non profit making entities rely extensively on subscriptions
  • A subscription is a pledge to provide funds to a particular organization or charity
  • Subscriptions are often made by members on a regular basis e.g. monthly, quarterly or annually
  • A subscriptions account is prepared to ascertain the subscription amount attributable to the period
  • This should take account an subscriptions owing and prepaid both at the beginning and end of the period
  • This should be done in accordance with the prudence concept

Other forms of income and their accounting treatment

  • Lifetime membership fees-often members have to pay a membership fee to join a club
  • Such a membership fee lasts for the entire lifetime of an individual’s membership
  • The lifetime membership fee should be credited to a lifetime membership account
  • An “appropriate” share of such lifetime membership fee should be credited to the Income and Expenditure Account every accounting period
  • The exact amount to be transferred is solely at the discretion of the non profit making entity.
  • Be sure to follow instructions in the examniation
  • The remaining balance in the lifetime membership account is to be treated as a liability (non current liability)
  • Donations-are usually shown as profit in the year in which they are made
  • Entrance fees-for example collected from people who came to see the team play are treated as income

To access more topics go to the Principles of Accounts Notes.

By |2018-02-05T10:20:06+00:00February 2nd, 2018|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Accounting for non profit organisations

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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