Non Profit Organisations

Non-profit organizations or NPO are also called non-trading organizations that are individually controlled entities that do not offer financial profits for their members or stakeholders. In other words, NPO are privately owned groups initiated with the purpose of charity or for not profiting from the operations they carry out. 

Non-profits organizations are formed for carrying out many different activities such as cultural, economic, political, religious, educational, and activities of a similar kind. These organizations are granted the status of tax-exempt and all charities made to these organizations are tax-deductible, as long as they are properly registered under tax laws.

Meaning of NPO

A non-profit organization or NPO is an organization that is run by an intention to a social reason in the areas of religion, science, research, or education or encouraging for a specific common view. Unlike trade corporations, all incomes earned by a non-profit organization are used in promoting its target purposes instead of being circulated to shareholders, members, or employees of the organization.

The incomes generated by a non-profit organization are mainly from donations from individuals and corporate organizations. NPOs also generate revenues from fundraising activities like exhibitions, selling gift cards, etc. The donations contributed by the individuals or corporations are tax-deductible and the organization is not demanded to pay taxes on such contributions. NPOs are liable to the donors, volunteers, founders, and the community for their activities. The projects that the organization undertakes help in building confidence for the public in the organization.

Terminologies in NPO

The various terminologies are discussed for proper understanding of the topic:

Annual Report: It is a document prepared annually that is provided to stakeholders and donors that reports the income, expenditures, programs, and progress of the organization.

Charitable Corporation: It is a kind of nonprofit corporation that focuses on the objectives of the charity and whose income is usually exempt from taxation by Federal and State law.

Contributions: It is an unconditional allocation of cash, other assets, the forgiveness of the debt, or the delivery of goods in kind to an organization.

Grant: The funds that are given to non-profit organizations by foundations and institutions to be used for a particular purpose, such as education or cultural activity are called grants.

Nonprofit Corporation: It is an incorporated non-profit organization that works for social welfare and is usually restricted by law for making a profit.

Accounting System in NPO

As we have already discussed that not-for-profit organizations do not trade in goods or provide services with a motive of profit-making. They are required to keep correct records of incomes, expenses, assets, and liabilities. The major source of revenue for NPOs is donations, subscriptions, grants, etc. Thereby, the majority of their transactions are transacted in cash or through a bank account.

They are required to maintain proper books of accounts firstly because they are liable to the members and the contributors and secondly because they are required to maintain proper books by the law so that the government can keep proper authority over the grants provided to the organization. Proper accounting decreases the risk of deception and misappropriation. NPOs are also required to maintain a stock register in addition to the ledgers and cash book. In a Stock register, a complete record of all fixed assets and stocks are maintained.

In accounting for non-profit organizations, instead of preparing a Capital Account, these organizations prepare a Capital Fund Account or General Fund Account. The Capital Fund Account is credited with the surplus, life membership fees, donations, legacies, etc.

Financial Statement of NPO

The not-for-profit organizations are also required to present the final accounts or the financial statements at the end of the accounting year following the principles of accounting. The contents of the financial statements of NPO are:

Receipts and Payments Account: It is the brief of the transactions related to cash and bank. It benefits in the preparation of Income and Expenditure Account and Balance Sheet. It is also needed to be submitted to the Registrar of Societies along with the Income and Expenditure Account and Balance Sheet.

Income and Expenditure Account: It is identical to the Profit and Loss Account and finds out the surplus or deficit for the year.

Balance Sheet: The Balance Sheet of NPOs is prepared in the same manner as business concerns with a profit motive.

Objectives of NPO

• To evaluate the performance of organizations about accomplishing the objectives for which they are formed.
• To evaluate whether the organizations are using the funds economically, effectively, and efficiently.
• To observe the compliance of rules, regulations, bye-laws in the organizations.
• For receiving grants from government departments.
• To submit annual reports to the Registrar of Societies with whom they are registered.

Requirements for NPO Status

Service to the Society: One of the necessities for a non-profit organization is that it must provide service to the public. The IRS needs that the organization must be organized and function only for specific purposes such as science, religion, charity, literature, research, public safety testing, the safety of children, and animal cruelty prevention.

Examples of non-profit organizations that function around such objectives are universities, churches, national charities, and hospitals. The organizations must also share their financial and operating information with the public so that the founders, volunteers, and donors get to know about how their donations are being utilized.

Tax exemption: Non-profit organizations permit for the status of exemption of tax from the IRS, and this benefits in keeping more incomes within the organization to help in accomplishing their ultimate objectives. However, for an organization to be tax-exempt, it needs to get permission from the IRS for the status and fulfill the requirements mentioned in the Internal Revenue Code. The federal government is authorized for granting tax-exempt title through the IRS, whereas the non-profit status is given by the state in which the organization operates. Once the non-profit is granted the tax-exempt status, it is required to meet the compliance requirements with the applicable agency of the state.

Non-political Requirements: Non-profit organizations are restricted from participating in political activities or making expenditures for activities relating to politics. They are required to follow an unbiased approach, and they must not involve in political campaigns. Non-profits organizations are required to state exclusively that they will not involve in political activities or incur expenditures for political purposes while applying for the status of tax-exempt. If a non-profit organization involves in activities relating to politics, it is dangerous to lose the status of tax-exempt of the IRS. However, some non-profits organizations are initiated to perform political activities, therefore they are granted the status of NPO by the law.

Conclusion

A non-profit organization or NPO is an organization that is run by an intention to a social reason in the areas of religion, science, research, or education or encouraging for a specific common view. The incomes generated by a non-profit organization are mainly from donations from individuals and corporate organizations. NPOs also generate revenues from fundraising activities like exhibitions, selling gift cards, etc. Not-for-profit organizations do not trade in goods or provide services with the motive of profit-making. They are required to keep correct records of incomes, expenses, assets, and liabilities. The major source of revenue for NPOs is donations, subscriptions, grants, etc. The not-for-profit organizations are also required to present the final accounts or the financial statements at the end of the accounting year following the principles of accounting.