Any kind of company will be established with a sole purpose of making profit. In other words, they work towards their self-interest. And then there are companies which are formed only for the purpose of social welfare or charity which are termed as the Non Profit organisations. These organisations usually promote science, art, charity, commerce or religion for social development and not for any other personal profit. Such establishments can be registered under Section 8 of the Indian Companies Act, 2003.
What is a Not-for-profit Organisation?
Not-for-profit organisations are the type of organisations which do not generate profits for its owners, instead all the amount of profits generated and the money they earn as donation is utilised in pursuing objectives of the company and in keeping it running for the betterment of the organisation. Typically the non-profit seeking organisations comes under the non-profit sector and are always referred to as the tax-exempted charities or other types of public service organisations.
Like we discussed earlier, the only and main objective of such companies is to extend, deliver and help the necessary aid to a specific group of people or public at a larger scale. Usually, these types of organisations do not perform any kind of credit transactions which are generally done in organisations looking to make profits.
However, they do maintain a book of records which is further used to keep track of how the funds are used and to analyse and access the financial standing of the company during a financial year. Here in these type of business, having transparency is important and hence a record is kept to show the differences between the expenditure and income of that particular company.
Characteristics of Not-for-profit Organisations:
There are a few distinct features which make them different from regular organisations.
The main motive of service – These organisations are set up mainly to provide service to a specific group of people or public, without actually discriminating with their caste, creed and gender. Not-for-profit organisations further extend its hand to help the needy for free of cost or if at all charged, it would be at a very very nominal rate as profit making is not their motive.
Management – Usually, these organisation will have a managing committee or an executive committee who looks after the organisations, and they are being elected by their members.
Members of these organisation – Usually these organisations are formed as a charitable societies or as a trusts, the people who donates to these organisations are its members.
Source of Income – The primary source for these kind of organisations, trusts or charities are collected by means of donations from people, subscritpion, other and available government grants, incomes through investments, legacies and many more.
Surplus if any – Organisations if at all has generated a surplus in a financial year then it will be credited to the capital fund.
Reputation of the company/organisation – Generally the reputation that the organisation earn is based on the contribution it makes through the services for the public welfare and not for any of its member’s personal welfare.
Transparency: The not-for-profit organisations will maintain the utmost transparency with regards to the accounting of the contributions received from its contributors. The contributors will have the data available to see how the funds are used.
Types of Non - Profit in India
Like we already discussed, the term non-profit means an entity which serves the society without any motive to earn profit. There are majorly two types of such organisations in India.
Companies Registered Under Section 8 – These are the type of companies which are the most popular of all the non-profit organisations in India and as the name itself tells that these companies comes under Companies Act, 2003. These types of companies are set up only to promote social wellbeing and developments. Any profit that are generated from these companies can only be used for promotion and the betterment of the objectives of the company and cannot be divided among its members. The registration process of the company is quite similar to that of other companies, however there is a special certificate issued to these companies.
NGOs – NGOs or also known to be non-government organisations also comes under the Section 8 of Companies Act. These companies are however established in India but are also allowed to collect funds from other countries. The funds raised would be monitored by the related authorised agency.
Now let’s look at how the accounting process works for such organisations.
Accounting Process of a Non - Profit Organisations
It is a known fact that the non-profit organisations do not provide services with the motive to earn profit, however it is necessary like any other organisation, that they do need to keep their records of expenses, assets, income, liabilities, etc. The major source of their income would be from that of donations, subscriptions, etc.
Maintaining a proper credit documentation is necessary for such organisations as they are accountable and should maintain transparency towards its members and contributors and most importantly, to the Government as well. It is to bear in mind as a matter of fact, the organisations are being monitored by the government as to how are they are using the funds.
Along with the ledger books and the cash books, they also hold a Stock Register which is equally important. This register is used to record all consumables and fixed assets, and are used and maintained carefully. Moreover, theses not for profit organisations would maintain a general fund account or capital funds instead of capital account and this stands as on of the primary differences between a profit organisation and non-profit organisation.
It is recommended for these organisations to prepare a financial statement or final accounts at the end of a financial year. This financial statement should have the detailing of the following components.
Receipts and Payment Account
Expenditure and Payment Account
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