Non-Profit Organization Definition
Non Profit making organizations are formed for social welfare or charity. They usually promote science, art, charity, commerce or religion for social development and not for personal profit. Such establishments can be registered under Section 8 of the Indian Companies Act, 2003.
It is a type of organization which does not gain profits for its owners, instead all the amount of money they earn as donation is utilized in pursuing objectives of it and in keeping it running. Typically these non-profit seeking organizations are under the non-profit sector and are tax-exempt charities or other types of public service organizations.
The sole objective of such companies is to extend necessary aid to a specific group of people or public at large. Usually, they do not perform credit transactions which are generally done in a profit making organization. Hence, they need not to keep a list of credit records, accounts for loss or profits as such.
However, they do keep a book of records which is then used to keep track of consumption of their funds and to assess the financial standing of the company during a fiscal year. This record is kept to maintain the transparency between the expenditure and income of that particular company and then submitted to statutory authority, also known as Registrar of Society.
Characteristics of Not for Profit Organizations
There are a few distinct features which make them different from regular organizations.
The Motive for Service – Non-profit organisation meaning they are set up mainly to provide service to a specific group of people or public, without discriminating for their caste, creed and gender. They extend help free of cost or at a nominal price as profit making is not their motive. For example, they provide services like health care, education, food, recreation, shelter, clothing, sports facilities, etc.
Management – Usually, a managing committee or executive committee looks after these organizations, and its members elect them.
Members – Since these organizations are formed as charitable societies or trusts, the people who give subscriptions to these are its members.
Income Sources – The primary source of these trusts are donations, subscriptions, government grants, incomes from investments, legacies and several others.
Surplus – If a financial year surplus is generated, that will be credited to the capital fund.
Reputation – These organizations generally earn a reputation for the contribution it makes through the services and not for any of its member’s personal goodwill.
Accounting Information – Generally, any present or potential contributors and its members can have access to its accounting information.
For instance, Amnesty International is an example of a non-profit organization. Now, try searching and noting down the names of other 5 such renowned international non-profit organizations.
Accounting Process of Non - Profit Organizations
Although non-profit seeking organizations do not trade with the motive to earn a profit, like any other organization, they need to keep records of expenses, assets, income, liabilities, etc. Most of their sources of income are donations, subscriptions, etc. which are mainly made through cash or bank transactions.
Keeping proper credit documentation is required as these trusts are accountable to its members and contributors and most importantly, to the Government as well. For a matter of fact, the government monitors these trusts whether they are using their funds for right causes or not.
Along with ledgers and cash books, they also hold a Stock Register. This stock registers records of all consumables and fixed assets, and are maintained carefully. Moreover, the not for profit organizations maintain a general fund account or capital funds instead of a capital account and this is one of the primary differences between a profit organization and non-profit organization.
These organizations must prepare a financial statement or final accounts at the end of a financial year. This financial statement includes the following components.
Receipts and Payment Account – Here, all the cash and bank transactions are recorded. It is used to prepare income, expenditure accounts and balance sheets, and finally, three of these have to be submitted to the Registrar of Societies.
Expenditure and Payment Account – It is somewhat similar to profit and loss accounts and keeps track of deficit or surplus, if any.
Balance Sheet – A balance sheet has to be made following the guidelines like any other organization’s balance sheet is prepared.
Types of Non - Profit in India
The term non-profit meaning is an entity which serves society without any motive to earn a profit. There are majorly two types of such organizations in India.
Companies Under Section 8 – It is one of the most popular forms of non-profit organization in India and comes under Companies Act, 2003. These types of companies are set up to promote social wellbeing and developments.
Any profit generated from them can only be used for promotion of the objectives of that particular body and cannot be divided among its members. The registration process of them is quite similar to that of other companies, but a special certificate is given in this case.
NGOs – These are non-government organizations which come under the Section 8 of Companies Act. These companies are established in India but are allowed to accept foreign funds. However, the funds are monitored by the National Intelligence Agency.
A few eminent examples of non-profit organizations of India are CRY (Child Rights and You), GOONJ, Help Age India, Give Foundation and various others.
Task for You: Find out the difference between a non-profit organization and a non-governmental organization.
For further details about not-for-profit organizations and NGOs of India and how they operate, check our website today. You can also install Vedantu’s app to take your learning with you.
MCQs about Non-Profit Organization :
1. What is the payment account and receipt of the non-Profit Organization?
Real account
Income proof
check
account of the nominee
Answer (a) Real account
2. What is the main objective of a non-profit organization?
To work with government
To maintain peace
To investigate crime
To provide a better life to citizens.
Answer (d)
FAQs on Not-for-Profit Organizations: Objectives and Accounting
1. What is a Not-for-Profit Organization (NPO) as per the Class 12 syllabus?
A Not-for-Profit Organization (NPO) is an entity established for purposes other than earning profit. Its primary aim is to provide services to the public or its members to promote social welfare, charity, education, art, culture, or sports. Any surplus generated from its activities is not distributed among its members but is used to further the organization's objectives. Examples include schools, hospitals, literary societies, and sports clubs.
2. What are the main objectives of a Not-for-Profit Organization?
The core objectives of an NPO revolve around a service motive rather than a profit motive. The main objectives include:
- Providing services and promoting useful activities for the benefit of society or a specific group.
- Promoting art, culture, science, education, religion, or sports without the intention of making a profit.
- Meeting the collective needs of its members, such as in the case of a sports club or a residents' welfare association.
- Ensuring that the funds received through donations, subscriptions, and grants are utilised for the stated objectives of the organization.
3. What are the key financial statements prepared by an NPO for accounting purposes?
Unlike for-profit businesses, NPOs prepare a specific set of final accounts to show their financial performance and position. For the academic year 2025-26, these are:
- Receipt and Payment Account: A summary of the cash book, recording all cash receipts and payments of both capital and revenue nature during the year.
- Income and Expenditure Account: Prepared on an accrual basis, it is the equivalent of a Profit and Loss Account and is used to determine the surplus or deficit for the period.
- Balance Sheet: A statement showing the financial position of the NPO by listing its assets and liabilities at the end of the accounting period.
4. How does the accounting for an NPO fundamentally differ from that of a for-profit business?
The primary difference lies in their core objectives, which directly impacts their accounting approach. Here are the key distinctions:
- Motive: NPOs operate with a service motive, whereas for-profit entities operate with a profit motive.
- Financial Outcome: NPOs determine a 'Surplus' (excess of income over expenditure) or 'Deficit'. For-profit businesses calculate 'Net Profit' or 'Net Loss'.
- Key Accounts: NPOs prepare an Income and Expenditure Account. Businesses prepare a Trading and Profit & Loss Account.
- Ownership Funds: In NPOs, the equivalent of owner's capital is the Capital Fund or General Fund, which represents the accumulated surplus over the years.
5. Why do NPOs prepare an Income and Expenditure Account instead of a Profit and Loss Account?
NPOs prepare an Income and Expenditure Account because their primary objective is not to earn profit. The term 'Profit' or 'Loss' is associated with commercial enterprises. Using the terms 'Surplus' or 'Deficit' more accurately reflects an NPO's financial outcome in relation to its service-oriented goals. The account serves the same purpose—matching current year's revenues with current year's expenses on an accrual basis—but its name aligns with the non-commercial nature of the organization.
6. What is the crucial difference between a Receipt and Payment Account and an Income and Expenditure Account?
The main difference lies in their basis and nature. The Receipt and Payment Account is a summary of cash transactions (cash basis) and includes both capital and revenue items from any period. In contrast, the Income and Expenditure Account is prepared on an accrual basis, includes only revenue items, and pertains strictly to the current accounting period, similar to a Profit and Loss Account.
7. If NPOs don't aim for profit, why is maintaining proper accounts so important for them?
Maintaining proper accounts is crucial for NPOs for several reasons, despite their non-profit nature:
- Accountability: They are accountable to their members, donors, and contributors. Proper accounts ensure that funds are used for their intended purpose.
- Legal Compliance: NPOs are required by law (e.g., The Societies Registration Act, The Companies Act) to maintain and submit financial statements.
- Financial Control: It helps prevent the misuse or misappropriation of valuable funds and assets.
- Performance Assessment: It allows the management to ascertain the surplus or deficit and assess the financial health and operational efficiency of the organization.
8. How are special items like 'Subscriptions' and 'Donations' treated in the final accounts of an NPO?
The treatment of these items is a key aspect of NPO accounting:
- Subscriptions: This is a major source of revenue income for NPOs. The amount related to the current year (after adjustments for outstanding and advance amounts) is credited to the Income and Expenditure Account.
- Donations: Their treatment depends on their nature. General donations are treated as revenue income and credited to the I&E Account. However, specific donations (e.g., a donation for building construction) are treated as a liability and shown in the Balance Sheet until used for the specified purpose.
