Government Grants and Government Aids

Government Grants and Aids are basically the help that is rendered by the government to the NPOs in form of cash or non-cash items (such as the government granting a piece of land to an NPO to extend the cricket ground). There are numerous NPOs for example, schools, colleges, hospitals, etc. which are dependent on such aids and grants from the government.

Types and Accounting Treatment of Government Aids and Grants

The government grants can be bifurcated into two types- General Grants and Specific Grants. Depending on the type of grants, the accounting treatment also differs.

General Grants: These grants are non-specific in nature. That is, such grants can be utilized for fulfilling general purposes. In this way, similar to general donations and general legacies, the general grants are considered as revenue incomes for the NPOs and are shown on the credit side (i.e. Income side) of the Income and Expenditure Account.

Special Grants: These grants are very specific in nature and can only be utilized for fulfilling the particular purposes for which the grants have been received. These grants are considered as capital receipts, thereby, can either be shown as additions to the Capital Fund or it can be shown separately in the Balance Sheet.

Note: Any subsidy received from the government in cash is treated as a revenue income for the year in which it is received and shown on the Credit Side (i.e. Income Side) of the Income and Expenditure Account.

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Interest on Capital

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.

Interest on Drawings

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.

What is Operating Profit?

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.

Balance Sheet

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

Profit and Loss Account

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.

What are Adjusting Entries?

In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.