The various funds of an NPO can be classified broadly into two major types as Unrestricted Fund and Restricted Fund.
Types of Funds
There exist no restrictions on the utilization of these funds. The management can use these funds in any manner as it wants. These funds are used by NPOs for carrying out their day-to-day business operations. In short, these funds are utilized to achieve the general set of objectives of the NPO. These funds are also known as Capital Fund or General Fund. Any Surplus or deficit as per the Income and Expenditure Account is adjusted to this capital fund in the Balance Sheet.
Unlike unrestricted funds, restricted funds can only be used for the purposes they are meant for. Such restrictions are either imposed by the members or by the donors of the funds. Some of the examples of restricted funds are Prize Fund, Sports Fund, Building Fund, Tournament Fund, Annuity Fund, Loan Fund, etc. For instance, sports funds can be only be utilized to carry out sports activities. Similarly, the other funds are also maintained for specific purposes.
Types of Restricted Funds
The given below is the further classification of the restricted funds.
Endowment Funds: These funds are basically the funds via gifts and bequests. These funds are maintained with the condition that only the income from the investments of such funds can be utilized for a specific purpose. That is, in different words, the principal amount of such funds remains unchanged as it is only the income amount that is used.
Loan Funds: These funds are maintained to provide loans for specific purposes. The purpose of granting loans from such funds is not to earn profits but to assist the person who is in need. One of the examples of loan funds is an education loan, which is granted to a poor and needy student.
Annuity Funds: These funds are created to pay a fixed amount at a regular time interval (generally annually) to the specified beneficiaries. The amount is paid during the lifetime of the beneficiaries or till the date as specified by the donor. After the death of the beneficiary or termination of the date, these funds become the property of the NPO.
Prize Funds: These funds are created for the distribution of prizes.
Fixed Assets Funds: These funds are maintained to make investments in the fixed assets such as Building Fund, Pavilion Fund, Auditorium Fund, etc.
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.