In Accounting, Donations are the second most important source of income for an NPO. These are basically received in form of charity. These are the gifts, which are normally received in cash and in some cases in form of assets. Usually, donations are received from the members of an NPO, however, there are times, when donations are also received from external sources such as from top-ranked organizations like WHO, UNICEF and from elite people as well.
Types of Donations in Accounting
For purpose of accounting treatment, donations can be classified into two broad categories.
General Donations: Such donations are received without any specific conditions of use. Thus, as these types of donations do not carry any specific conditions, so these amounts can be utilized for meeting any purposes (i.e. general purposes).
Specific Donations: Unlike general donations, specific donations are received with some specific conditions attached to their use. These donations can only be used for the purpose for which these are received by the organization. For example, if an NPO receives a donation for the extension of the pavilion, then this amount can only be used for this specific purpose only (i.e. for the extension of the pavilion). Some other examples of Specific Donations are donations for the construction of the canteen, donations for buildings, etc.
Accounting Treatment of Donations
The given below are the accounting treatment of General Donations and Specific Donations.
General Donations: As these donations are general in nature, so these are treated as revenue receipts of an NPO. Accordingly, these donations are shown on the credit side (i.e. Income side) of the Income and Expenditure Account.
Specific Donations: These donations are capital in nature as they are specific in nature. These donations are added to the respective funds and are shown on the Liabilities side of the Balance Sheet. In case, there is no existing fund maintained for the specific donation, then the same will be directly shown on the Liabilities side of the Balance Sheet.
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.