Lesson 20: Financial Statements (Not for Profit Organisation)
Master accounting procedures for non-trading entities such as clubs, hospitals, libraries, and NGOs. Learn how to prepare the Income and Expenditure Account, handle subscription accruals, differentiate capital and revenue receipts, compute opening Capital General Fund, and draft the Balance Sheet.
Income & Expenditure Account: Meaning, Need & Features
What is Income & Expenditure Account?
An Income and Expenditure Account is a summary of all revenue incomes and revenue expenses of a Not for Profit Organisation (NPO) for a specific accounting year. It is prepared on an accrual basis and is identical in function to the Profit and Loss Account of a commercial enterprise.
- Surplus: When total Revenue Income > total Revenue Expenditure.
- Deficit: When total Revenue Expenditure > total Revenue Income.
- Excludes all capital items (sale/purchase of assets, loans, specific building funds).
Why do NPOs prepare this account?
Even though NPOs do not operate to make profit, they must track operational health to ensure sustainability and maintain statutory compliance:
- Ascertain whether current year income is sufficient to cover running expenses.
- Fulfil legal obligations required under trust and society registration laws.
- Exercise budgetary control over administrative and activity costs.
7 Key Distinctions (Receipts & Payments vs. Income & Expenditure)
| Basis of Distinction | Receipts and Payments A/c | Income and Expenditure A/c |
|---|---|---|
| 1. Nature | Summary of the Cash Book (Real Account). | Summary of Revenue Income/Expense (Nominal Account). |
| 2. Side Layout | Debit = Receipts | Credit = Payments. | Debit = Expenses & Losses | Credit = Incomes & Gains. |
| 3. Opening Balance | Starts with Opening Cash/Bank Balance. | No opening balance. |
| 4. Closing Balance | Shows Closing Cash in Hand / at Bank. | Shows Net Surplus or Deficit. |
| 5. Nature of Items | Includes both Capital and Revenue items. | Includes ONLY Revenue items pertaining to current year. |
| 6. Adjustments | No accrual adjustments considered (Cash Basis). | Mandatory adjustments for O/S, Prepaid, Depreciation, etc. |
| 7. Transfer of Balance | Carried forward to next period Cash Book. | Transferred to Capital / General Fund in Balance Sheet. |
Real-World Application: Charitable Hospital
A charitable hospital receives ₹50,000 as general patient fees (Revenue Income) and pays ₹30,000 for medicines consumed & doctors' honorarium (Revenue Expenses). The ₹20,000 excess is credited to Capital General Fund as Surplus.
Capital vs. Revenue Distinction
Purchasing a X-ray machine for ₹2,00,000 is a Capital Expenditure (shown on B/S Assets). Repairing the machine for ₹3,000 is a Revenue Expenditure (debited to Income & Expenditure A/c).
Classification of Receipts & Payments (Capital vs. Revenue)
Revenue Items (Income & Expenditure A/c)
Revenue Incomes (Credit Side):
- Annual Subscriptions from members
- General Donations (small/recurring)
- Entrance / Admission Fees
- Government Grant-in-Aid (for general running)
- Sale of old newspapers, grass, or used sports items
- Rent received for hall, interest on FD investments
Revenue Expenses (Debit Side):
- Salaries, wages, rent, electric & telephone charges
- Honorarium: Payment to non-employee managers
- Depreciation on fixed assets (building, furniture, books)
- Upkeep of sports ground, laundry, medicines consumed
Capital Items (Balance Sheet Only)
Capital Receipts (Liabilities Side):
- Life Membership Fees: Lump sum contribution from members
- Specific Donations: Building Fund, Tournament Fund
- Legacies received under a will for specific purpose
- Loans raised or government capital grants
Capital Expenditures (Assets Side):
- Purchase of Land, Building, Furniture, Computers
- Purchase of Books for library, Sports Equipment
- Fixed Deposits made with Banks / Investments
When an asset (e.g., old almirah with book value ₹1,800) is sold for ₹800:
- The ₹800 sale proceeds go to Cash/Bank in Receipts & Payments A/c.
- The ₹1,800 original book value is deducted from Furniture/Almirah Asset in Balance Sheet.
- The Loss on Sale of ₹1,000 (₹1,800 - ₹800) is debited to Income & Expenditure Account. (If sold at a profit, the gain is credited to Income & Expenditure A/c).
Subscriptions & Expense Adjustments (Accrual Engine)
Subscriptions received during the year in the Cash Book may include arrears of past years or advance for future years. To adhere to accrual principles, adjust subscriptions as follows:
Master Formula: Subscription to be Credited to Income & Expenditure A/c
Rent & Operating Expense Adjustment Rule
Formula for Expense Debited to Income & Expenditure A/c:
NIOS Standard Exam Numerical Example (Illustration 3)
Given: Subscription received during 2013 = ₹15,000 | O/S on 31.12.2013 = ₹1,500 | Received in 2012 for 2013 = ₹800 | Received in 2013 for 2012 arrears = ₹400 | Received in 2013 for 2014 advance = ₹600.
Calculation: ₹15,000 + ₹1,500 (O/S 2013) + ₹800 (Adv 2012) - ₹400 (O/S 2012) - ₹600 (Adv 2014)
Amount to Income & Expenditure A/c = ₹16,300
Opening Balance Sheet & Capital General Fund
Commercial entities have a Capital Account representing owner equity. NPOs instead maintain a Capital Fund or General Fund. If the opening balance of Capital Fund is not given in the question, draft an Opening Balance Sheet as on the first day of the accounting year.
Opening Capital General Fund Formula
- Opening Cash in Hand & Cash at Bank
- Building, Furniture, Computers, Books
- Sports Equipment opening value
- Subscription Outstanding at start of year
- Prepaid Expenses at start of year
- Outstanding Expenses at start of year
- Subscription Received in Advance at start
- Special Purpose Funds (Building/Publicity Fund)
- Bank Loans / Bank Overdraft
Interactive Process Flows & Live Calculators
Explore interactive visual models illustrating how Receipts & Payments are filtered into Income & Expenditure items, the subscription accrual pipeline, and a live NPO Subscription & Surplus/Deficit Calculator.
Receipts & Payments Filtering Engine
Select an item category to trace where it is routed in the final financial statements of an NPO.
Subscription Processing Pipeline
Sequential flow showing how cash receipts are converted into true current-year revenue.
Total Cash Recd
Cash received during year as per R&P A/c.
+ Accrued Income
+ O/S Current Year + Adv Prev Year.
- Non-Current
- O/S Prev Year - Adv Next Year.
I&E Credit & B/S
Credited to I&E; O/S to B/S Assets; Adv to B/S Liab.
Interactive Subscription & Surplus/Deficit Calculator
Input subscription figures and operational costs to calculate net subscription revenue and financial outcome in real-time.
5 Golden Rules for NIOS Board Exam NPO Accounting
Memorize these 5 core rules for solving Chapter 20 numerical problems and financial statement adjustments in NIOS exams.
Specific Purpose Funds vs. General Incomes
Special Fund AccountingDonations or receipts received for a specific purpose (e.g., Building Fund, Tournament Fund) are Capital Receipts and shown on the Liabilities side of the Balance Sheet. Related expenses (e.g. tournament expenses) are subtracted directly from that Special Fund on the Liabilities side, NOT debited to Income & Expenditure A/c.
Life Membership Fees & Capital Receipts
Non-Recurring ReceiptsLife membership fees represent a lump sum payment for lifelong services. Under NIOS standards, it is treated as a Capital Receipt and added directly to the Capital / General Fund on the Liabilities side of the Balance Sheet (never credited to Income & Expenditure A/c).
Four-Point Subscription Accrual Rule
Current Year Accrual PrecisionTo calculate subscription income: ADD current year outstanding and advance received last year for current year. SUBTRACT previous year outstanding received this year and advance received this year for next year. Outstanding current year subscription is an Asset in the current Balance Sheet.
Opening Capital Fund via Opening Balance Sheet
Missing Opening Capital ComputationIf the opening Capital Fund is missing, prepare an Opening Balance Sheet as on the first day of the year using opening cash/bank balances, opening fixed assets, opening subscription outstanding, and opening prepaid expenses. The balancing figure (Opening Assets minus Opening Liabilities) is the Opening Capital General Fund.
Depreciation, Consumables & Honorarium Treatments
Non-Cash & Specific Operating CostsDepreciation on fixed assets (e.g. 20% on motor van) is a non-cash expense debited to Income & Expenditure A/c and subtracted from assets in B/S. Honorarium (payment to non-employees) and Stationery/Medicines Consumed (Opening Stock + Purchases - Closing Stock) are debited as operational revenue expenses.
10 MCQ Practice Quiz
Test your knowledge of NPO financial statements, subscription formulas, and capital/revenue treatments.
10 Interactive 3D Flashcards
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