Accounts of Not-for-Profit Making Organizations

Organizations like churches, mosques, charities, and sports clubs exist to serve people, not to make money for owners. These are called not-for-profit making organizations. They provide services for the common good and any money earned goes back into improving those services. Think of the Red Cross Society in Nigeria—it collects donations and uses them entirely for humanitarian work, not for profit.

The key terminologies you'll encounter include "surplus" (when income exceeds expenses, unlike "profit"), "deficit" (when expenses exceed income), and "members' funds" (instead of owner's capital). Another important term is "receipts and payments account," which records all cash coming in and going out during a period.

Understanding these organizations differs from regular businesses because they don't have shareholders expecting dividends. Instead, they have a governing council or board managing funds responsibly.

A receipts and payments account is simply a cash book that records all money coming in and going out of an organization like a school, church, or sports club. Unlike businesses that track profits, not-for-profit organizations need this account to show where their money came from and where it went during a period.

Think of the PTA in your school collecting levies from parents. The receipts and payments account would record all money received from levies, donations, and fundraising events as receipts. Then it records payments for school projects, staff allowances, and materials as payments. The difference between total receipts and total payments shows whether cash increased or decreased.

This account is straightforward because it only deals with actual cash movements, not credit transactions. Unlike the income and expenditure account used for profit calculations, receipts and payments accounts ignore non-cash items like depreciation.

A subscriptions account records membership fees that members pay to clubs, associations, and societies. Think of your school's sports club—when members pay their monthly or yearly dues to participate, that payment is a subscription. The organization uses this account to track all money received from members.

In Nigeria, consider the Nigerian Red Cross Society. Members pay annual subscriptions to support the organization's humanitarian work. These payments are recorded in the subscriptions account and become the main source of revenue for running activities like disaster relief and blood donation drives.

When preparing financial statements, accountants must separate subscriptions received in advance from those actually earned during the year. Money received but not yet earned is shown as a liability, while earned subscriptions appear as income in the statement of comprehensive income.

An Income and Expenditure Account is like a profit and loss statement, but for organizations that don't aim to make money. Think of clubs, churches, schools, and charities—they exist to serve people, not shareholders. This account shows all money coming in (like membership fees or donations) and all money going out (like rent, salaries, and supplies). The difference tells you whether the organization broke even, had a surplus (extra money), or a deficit (shortfall). For example, a secondary school Parent-Teachers Association collects school fees contributions and uses that money for projects. At the end of the year, their Income and Expenditure Account would show every kobo received and spent.

The accumulated fund is simply the total money and assets that a not-for-profit organization has saved up over time. Think of it like the savings account of a club or charity. Instead of profit, which businesses aim for, these organizations build up an accumulated fund from their surplus income (when money coming in exceeds money going out).

For example, a secondary school's Parent-Teachers Association collects levies and organizes fundraisers. The money left over after paying for school projects becomes part of their accumulated fund. This fund grows year after year and appears on the balance sheet as capital, similar to how a business shows its owner's equity.

The accumulated fund shows the financial strength of the organization. A healthy fund means the organization can handle unexpected expenses and continue its activities smoothly.

The balance sheet of a not-for-profit organization like a school or charity shows what they own and how they financed those assets on a specific date. Unlike businesses that chase profits, these organizations exist to serve the public. Their balance sheet still follows the accounting equation: Assets equal Liabilities plus Fund Balance.

Consider the Nigerian Red Cross Society. Their balance sheet would show assets like office buildings and vehicles on one side. The other side displays liabilities such as loans owed and the organization's accumulated funds from donations and grants. The fund balance represents the difference—essentially what members have invested over time.

The key difference from business balance sheets is that instead of showing profit retained, not-for-profit organizations display their fund balance or accumulated surplus. This tells stakeholders whether the organization is financially healthy and can sustain its charitable work.

Organizations like schools, churches, and charities exist to serve people, not to make profits. However, they often need money to survive. To get this money, they run income-generating activities—businesses that bring in cash. Think of a secondary school running a bakery or a church organizing a medical outreach program that charges fees. These activities produce revenue that helps fund the organization's main mission.

When calculating profit or loss from these activities, you treat them like any normal business. You subtract all expenses from the total income earned. If a charity's poultry farm generates ₦500,000 in sales but costs ₦300,000 to run, they've made ₦200,000 profit. This profit gets added to the organization's general fund to support their charitable work.