NPO Basic Concepts | NPO Theory class 12 accounts for CBSE Board

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NPO (Not for profit Organization) is the first chapter of accountancy paper class 12 CBSE Board. This chapter is of 10 marks and very very important with examination point of view.

Here, Out discussion would be limited to some Basic NPO theory of class 12 as prescribed in CBSE Board Syllabus.

In this lecture, I will discuss few basic concepts of NPO such as definition, features (characteristics), and a number of financial statements prepared by not-for-profit-organization.

The best part is, its marks weightage is much more as compared to its syllabus. The chapter is not lengthy and with a little effort and concept gripping, students can secure full 10 marks of this chapter in the board exam.

NPO Theory class 12 accounts for CBSE Board

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What is NPO (Not-for-profit-organisation)

Not for profit organisation also know as NPO in short, are the organisation whose main objective is not to earn profit but to serve the society and its members without any motive of earning profit out of it.

Definition of NPO as given in TS Grewal Book

Not-for-Profit Organizations, also knows as Non-profit Organizations are set up with the objective to further cultural, educational, health, religious public services to public and/or members, etc. not with the purpose of earning profit.

Book, TS Grewal

Examples of NPO (Not for profit organisation)

  1. Schools
  2. colleges
  3. Public & Charitable Hospitals
  4. literary Societies
  5. Social Welfare Organizations
  6. NGO (Non-Government-Organizations)
  7. Societies for promotion of sports, arts and culture etc.

How NPO organizations raise fund

As NPO organization does not do any trading activities. Mostly all the activities are for welfare of its own members or societies.

So, the fund for these activities come from its own members, trustees and general public in the form of subscriptions, membership fees and donations.

Following are the form of fund raised by NPO

  1. Donation
  2. Subscription
  3. Membership Fee or Entrance Fee
  4. Loans, and Grants (from Government and Institutions)

Characteristics (Features) of Not for Profit Organization

Entity:-

with legal point of view, NPO is a separate entity from its promoters. If any fraud is done by NPO organization, legal action would be taken against organization. No individual legal action is legitimate on any member of it.

Purpose:-

The main purpose of NPO organization is to promote religious, educational, cultural and professional objectives through providing services to its own members and general public at large.

Ownership:-

It is setup as charitable society or trust. Hence it does not belong it its trustee and members rather belongs to the society it serve.

Profit is not the objective:-

NPO organization never function keeping in mind the profit objective. However, it can carry out few trading activities to fund its requirement. But this profit is termed as surplus in book of accounts. this surplus is used further to fulfill its main objectives and never distributed among members.

Management:-

NPO organization is managed by group of people called trustee or Managing Committee.

Funds:-

The main source of funds of NPO are subscriptions, donation, entrance and admission fees from its members. further donation from general public and other institutions are also received.

Financial Statements:-

The following financial statements are prepared each year.

  1. Receipts and Payments Accounts
  2. Income and Expenditure Account
  3. Balance Sheet

Difference between Not for Profit Organization and Profit Earning Organization

Here are basic difference between NPO and Business firm

BasisNPOBusiness Firm
PurposeIt is set up to further promote cultural, religious etc. services with no motive to earn profit.Main purpose is to earn profit
Source of FundsThe main source of funds are subscriptions, donations, admissions and entrance fees.funds are raised as capital in proprietor and partnership firm and as share capital in public and Pvt Ltd company.
Financial StatementsReceipts and Payments a/c, Income and expenditure a/c, Balance SheetTrading A/c, Profit & Loss A/c and Balance Sheet
Surplus/ProfitBalance of Income and Expenditure Account is written as surplus or Deficit.Balance of the Profit and Loss account is written as profit or loss.
Distribution of ProfitProfit is not distributed among its membersIts profit is distributed among its members.

Name of Financial Statements Prepared by NPO

NPO organization prepare annual (final) accounts that include:

  1. Receipts and Payments Account
  2. Income and Expenditure Account
  3. Balance Sheet

Further Reading:-

Receipts and Payments account format, features, limitations

Income & Expenditure Account, definition, features, format

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Anurag Pathak
Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.
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