Not-for-Profit Organisations (NPOs) play an essential role in society. From charitable trusts and clubs to NGOs and educational societies, these entities work for welfare instead of profit. Their accounting system is unique because the objective is not to measure profit but to ensure transparency, proper fund management, and accountability.

This blog post gives you a clear, simple, exam-oriented explanation of all important concepts:

• Meaning & features

• Receipts and Payments Account

• Income and Expenditure Account

• Balance Sheet

• Subscription adjustments

• Outstanding & prepaid expenses

• Depreciation treatment

• Key differences between R&P, I&E, and P&L Accounts

This is an ideal guide for Class 12 Commerce students (GSEB/CBSE/ISC) and anyone starting to learn NPO accounting.

Meaning of Not-for-Profit Organisations

A Not-for-Profit Organisation (NPO) is an entity created for social, charitable, cultural, religious, or educational purposes. Unlike businesses, it does not aim to earn profits. Instead, any surplus is used for the organization’s objectives.

Examples of NPOs

• Schools and colleges

• Hospitals and clinics

• Charitable trusts

• Sports clubs

• Religious institutions

• NGOs

Characteristics of NPOs

Not-for-Profit Organisations have certain features that make their accounting different:

1. Service-Oriented Purpose

They are formed to provide service, not to make profits.

2. No Capital Contribution

There are no shareholders or owners. The organisation is run by trustees or management committees.

3. Sources of Funds

NPOs receive money through:

• Donations

• Subscriptions

• Grants

• Entrance fees

• Membership fees

4. Surplus is Not Distributed

Any surplus is used to improve services, not shared like profits.

5. Special Accounting Statements

They prepare:

• Receipts & Payments Account

• Income & Expenditure Account

• Balance Sheet

6. Transparency and Trust

Proper accounting ensures public trust and credibility.

Receipts and Payments Account (R&P)

A Receipts and Payments Account is a summary of cash transactions during a financial year.
It follows a cash basis of accounting.

Features

• Shows all cash receipts and all cash payments.

• Includes both capital and revenue transactions.

• Does not show outstanding or prepaid items.

• Opening and closing balances are cash and bank balances.

Structure

Debit Side: All receipts (cash inflow)
Credit Side: All payments (cash outflow)

Examples of items in R&P

Receipts: Donations, subscriptions received, grants, entrance fees, interest on investments.
Payments: Salaries, rent, electricity, sports equipment, furniture purchases.

This account helps prepare the Income & Expenditure Account.

Income and Expenditure Account (I&E)

An Income and Expenditure Account is like a Profit & Loss Account for NPOs.
It follows the accrual basis.

Features

• Records incomes earned and expenses incurred actually during the year.

• Includes only revenue items.

• Non-cash items like depreciation are recorded.

• Capital items are not included.

Formula

Surplus = Total Income – Total Expenditure
(If expenses exceed income, the result is a Deficit)

Purpose

This account shows how efficiently the organisation managed its funds during the year.

Preparation of Balance Sheet for NPO

A Balance Sheet shows the financial position of the NPO at the end of the year.

Assets Include

• Cash and bank balance

• Furniture, building

• Investments

• Outstanding income

• Prepaid expenses

Liabilities Include

• General fund (capital fund)

• Outstanding expenses

• Subscriptions received in advance

• Loans

Steps to prepare the balance sheet

1. Take closing balances from R&P Account.

2. Adjust all outstanding items from I&E.

3. Add surplus to the Capital Fund.

4. List assets and liabilities in proper format.

This gives a clear picture of financial health.

Differences Between Receipts & Payments, Income & Expenditure, and Profit & Loss Accounts

This table is frequently asked in exams.

Subscription Adjustments

Subscriptions are regular payments made by members to NPOs.
They may be:

• Outstanding

• Prepaid

• Received in Advance

Formula for Subscription in I&E

Subscription Received  
+ Outstanding at end  
- Outstanding at beginning  
- Received in advance at end  
+ Received in advance at beginning  
= Subscription Income for the year

Common Adjustments

• Subscriptions outstanding → added to income

• Subscription received in advance → reduced from income

• Subscriptions for previous year → not included in income

Outstanding Expenses, Prepaid Expenses, Depreciation & Other Adjustments

NPOs record various adjustments to prepare accurate accounts.

1. Outstanding Expenses

• Treat as liability in the Balance Sheet

• Add to the related expense in I&E

2. Prepaid Expenses

• Treat as asset

• Deduct from expense in I&E

3. Depreciation

• Non-cash expense

• Shown in I&E

• Reduce asset value in Balance Sheet

4. Accrued Income

• Add to income

• Show as an asset

5. Income Received in Advance

• Deduct from income

• Show as liability

These adjustments help convert cash-based R&P data into accrual-based I&E.

✅ 1. Multiple Choice Questions (MCQs) with Answers

MCQ 1:
Receipts & Payments Account is prepared on which basis?
a) Accrual basis
b) Cash basis
c) Hybrid basis
d) Cost basis
Answer: b) Cash basis

MCQ 2:
Subscription received in advance is shown in the balance sheet under:
a) Asset
b) Liability
c) Income
d) Expense
Answer: b) Liability

MCQ 3:
Income & Expenditure Account records:
a) Capital items only
b) Revenue items only
c) All receipts
d) All payments
Answer: b) Revenue items only

MCQ 4:
Depreciation is recorded in an NPO as:
a) Asset
b) Liability
c) Expense
d) Income
Answer: c) Expense

MCQ 5:
The Capital Fund increases when:
a) Expenses exceed income
b) Surplus arises
c) Subscription decreases
d) Assets decrease
Answer: b) Surplus arises

✅ 2. Short Notes (Exam-Ready)

Short Note: Receipts & Payments Account

A Receipts and Payments Account is a summary of all cash and bank transactions made during the year. It includes both capital and revenue items and is prepared on a cash basis. It begins with opening cash and bank balances and ends with closing balances. It does not include outstanding or prepaid items.

Short Note: Income & Expenditure Account

This account is similar to the Profit & Loss Account but is prepared by NPOs. It follows the accrual system and records only revenue items. Capital items are excluded. It shows surplus or deficit for the year and includes adjustments like depreciation, outstanding expenses, and accrued income.

Short Note: Subscription Adjustments

Subscriptions represent regular payments by members. The amount shown in the Income & Expenditure Account is adjusted for outstanding subscriptions, prepaid subscriptions, and those received in advance.

Short Note: Capital Fund

Capital Fund represents the accumulated balance of the organisation. It is like the “owner’s equity” for NPOs. It is adjusted by adding surplus or deducting deficit each year.

✅ 3. Journal Entries for NPO Adjustments

1. Outstanding Expenses

Income & Expenditure A/c     Dr
       To Outstanding Expenses A/c

2. Prepaid Expenses

Prepaid Expenses A/c         Dr
       To Income & Expenditure A/c

3. Accrued (Outstanding) Income

Outstanding Income A/c       Dr
       To Income & Expenditure A/c

4. Income Received in Advance

Income & Expenditure A/c     Dr
       To Income Received in Advance A/c

5. Depreciation

Depreciation A/c             Dr
       To Asset A/c

✅ 4. Numerical Problems with Solutions

Example 1: Subscription Adjustment Question

Information:
Subscription received during the year = ₹50,000
Subscription outstanding (beginning) = ₹4,000
Subscription outstanding (end) = ₹6,000
Subscription received in advance (beginning) = ₹3,000
Subscription received in advance (end) = ₹2,000

Find: Subscription income for the year (I&E A/c).

Solution:

Subscription received                       = 50,000
Add: Outstanding at end                     + 6,000
Less: Outstanding at beginning              – 4,000
Less: Received in advance (end)             – 2,000
Add: Received in advance (beginning)        + 3,000
-------------------------------------------------------
Subscription income                         = 53,000

✔ Answer: ₹53,000

Example 2: Prepare Income & Expenditure Adjustments

Given:
Salaries paid during the year = ₹40,000
Outstanding salary at beginning = ₹5,000
Outstanding salary at end = ₹8,000

Salary to be shown in I&E A/c:

Salary paid                              = 40,000
Add: Outstanding at end                  + 8,000
Less: Outstanding at beginning           – 5,000
---------------------------------------------------
Salary expense = ₹43,000

✔ Answer: ₹43,000

Example 3: Depreciation

Furniture value at beginning: ₹60,000
Depreciation rate: 10%

Depreciation = 10% of 60,000 = ₹6,000

✔ Show in I&E as expense
✔ Show furniture at ₹54,000 in Balance Sheet

✅ 5. Practice Questions (Short Answer)

Short Question 1:

Define Not-for-Profit Organisation with examples.

Short Question 2:

Write any four features of Income & Expenditure Account.

Short Question 3:

What is subscription? How is it treated in NPO accounts?

Short Question 4:

Differentiate between Receipts & Payments Account and Income & Expenditure Account.

Short Question 5:

What is Capital Fund? How is it calculated?

✅ 6. Long Answer / Exam Questions

Long Question 1:

From the following information, prepare a Receipts & Payments Account of a Sports Club:

• Opening cash balance: ₹10,000

• Subscriptions received: ₹40,000

• Entrance fees: ₹5,000

• Salaries paid: ₹25,000

• Rent paid: ₹10,000

• Purchase of sports equipment: ₹12,000

• Closing balance?

Long Question 2:

Prepare an Income & Expenditure Account from the given Receipts & Payments Account and adjustments:

• Subscription received: ₹60,000

• Outstanding subscription at year-end: ₹3,000

• Rent paid: ₹15,000

• Prepaid rent: ₹2,000

• Depreciation on building: ₹5,000

• Donation for building fund: ₹20,000

Long Question 3:

Prepare a Balance Sheet using:

• Capital Fund at beginning: ₹1,20,000

• Surplus for the year: ₹15,000

• Furniture: ₹50,000

• Outstanding salary: ₹6,000

• Cash in hand: ₹20,000

• Subscription outstanding: ₹4,000

Conclusion

Accounting for Not-for-Profit Organisations focuses on accountability, transparency, and correct reporting of funds. Understanding Receipts & Payments, Income & Expenditure, Balance Sheet preparation, and adjustments like subscriptions, outstanding expenses, prepaid expenses, and depreciation is essential for Class 12 Commerce students.
These topics form the base for more advanced accounting studies and are heavily tested in exams.