A not-for-profit, or non-profit, organisation is one whose main objective is not profit maximization. Rather, these organisations have social or environmental objectives that are meant to improve general welfare. For example, a sports club is a non-profit organisation as it mainly exists to provide recreational services to its members.
Hence, the financial statements of a non-profit organisation are quite different from that of a for-profit business. There are two main differences between the financial statements:
- A receipts and payments account is prepared instead of a cash book.
- An income and expenditure account is prepared instead of a profit and loss statement (or income statement).
Receipts and payments account
All cash-based transactions are recorded in the receipts and payments account. For example, if a club paid for new equipment from its bank account, the transaction will be credited to the receipts and payments account.
Income and expenditure account
All accrual-based transactions are recorded in an income and expenditure account. The account is organised in a way that is similar to the income statement. The first section is the income section, which may include items like subscriptions and ticket sales. The next section is the expenditure section, which may include items like repairs and administration expenses.
The total of the expenditure is subtracted from the total of the income to obtain a resultant figure. If this figure is positive, the organisation has a surplus. If it is negative, the organisation has a deficit.
Statement of financial position
The statement of financial position (or the balance sheet) for non-profit organisations has one important difference: instead of capital it has an accumulated fund.
Accumulated fund = Assets – Liabilities
This fund is the total amount of liquid and non-liquid cash that the organisation has at its disposal.