Non Profit Organizations (NPOs) are formed with the basic motive of rendering services and with the welfare-motive. A few examples of Non-Profit Organizations (NPOs) are charitable trusts, hospitals, schools, temples, social clubs, and sports clubs. These organizations are managed and governed by the person(s) who are known as trustees.
How do Non-Profit Organizations (NPOs) Sustain?
At this stage, you might think about how Non-Profit Organizations (NPOs) can survive, as they do not earn profit. Well, this should not be misunderstood as NPOs operate for the welfare motive, so they do not earn profit. In fact, such organizations do have earnings in form of subscriptions and donations that they get from their members and other public. For all NPOs, subscriptions and donations constitute the basic source of income. For instance, think of a temple or a gurudwara, which gets donations and subscriptions from its devotees. These amounts are then used by the temple to meet its various expenses.
Similarly, there are many other NPOs such as sports clubs, social clubs, schools, etc. providing various services. It should be noted that besides rendering services to society, sometimes, NPOs also carry out trading activities. For example, a cricket club may have a canteen being run on its premises. In this way, the club will be earning profit by selling confectioneries in the canteen. The profit so earned cannot be taken up by the trustees. In fact, this profit will only be utilized for achieving the goals and the betterment of the organization.
Features of Non Profit Organizations (NPOs)
The given below are the various features of Non-Profit Organizations (NPOs).
Welfare-Motive Objective: The prime motive to set up an NPO is to render services to its members and to society. In this way, an NPO aims at enhancing social welfare.
Separate Legal Entity: NPOs have a separate legal entity. This entity means that an NPO is different from its members or trustees. This implies that NPO remains unaffected by the death of existing members and/or the admission of new members. In different words, an NPO is treated as an artificial person.
Income Sources: The main sources of income of NPOs are subscriptions from their members, entrance, and admission fees, donations, and grants.
Books of Accounts: These organizations maintain their books of accounts in form of Receipts and Payments Account, Income, and Expenditure Account, and Balance sheets.
Form: These organizations are established in the form of trusts, charitable institutes, or clubs that aims at promoting the welfare of society.
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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.