Not for Profit Organization (NPO) – BMS Notes

Not-for-Profit Organizations are the businesses that are organised as charity groups with no intention of making a profit and that are used for the community’s benefit. Providing services to a certain class of people or the general public is their main goal. They typically don’t manufacture, purchase, or sell goods, and they may not even use credit. As a result, unlike trading businesses, they are not required to keep several books of accounts, including Trading and Profit & Loss Accounts. These institutions generate money, which is attributed to either the capital or general funds. Typically, the primary sources of their revenue include grants-in-aid, profits from investments, subscriptions from member contributions, etc.

In such institutions, the primary purpose of record keeping is to satisfy legal requirements and help them manage how their money is spent. In addition, they must establish their revenue, expenses, and financial status at the conclusion of each accounting period, which is typically a financial year, and compile the financial statements, which they must then submit to the Registrar of Societies, the regulatory body.

categories of nonprofit organisations

There are not-for-profit businesses in the public and private sectors. The majority of public sector organizations—though not all of them—were founded to deliver what economists refer to as public goods, not for financial gain. These mostly consist of services that either couldn’t be supplied via the market at all or couldn’t be offered to people in need of them at the appropriate cost (such as healthcare, museums, art galleries, and certain types of transportation) (such as defence and regulation of markets and businesses). Examples of the private sector include the majority of charitable and self-help groups, including housing associations that house low-income and minority populations, sports associations (many football supporters’ trusts are structured as industrial and provident societies), foundations for scientific research, and environmental organisations.

Form of corporation

Organizations that are not for profit may be formed as unincorporated or incorporated entities. Typical company forms consist of the following:

They might be government agencies or departments in the public sector.

Certain public sector organisations, such as the Financial Services Authority, were founded as private businesses limited by guarantee (the UK financial services regulator)

In the private sphere, they might be founded as trusts, limited businesses, clubs or groups, cooperatives, or industrial or provident societies (a particular kind of mutual organisation, owned by its members).

A cooperative is a business that is owned by its members and is often run according to the “one member, one vote” principle. A trust is an organisation that has been set up expressly to accomplish particular goals. The founders designate the trustees to oversee the money and guarantee adherence to the trust’s goals. A lot of private foundations are set up as trusts; these are charitable organisations that don’t ask for donations from the public.

Creation, Organization, and Goals

It is a given that not-for-profit organisations are founded with a purpose, or purposes, and that the organisation will continue to work toward these goals after its founders pass away. The founders will choose the kind of organisation to form and draught a constitution that outlines its objectives. The organization’s legal form will determine its constitutional foundation.

In the event that it is a company, it will have a Memorandum and Articles of Association, the latter of which will contain provisions firmly ingrained to guarantee that the goals cannot be readily changed in the future. Non-profit organisations that are not corporations typically have a set of Rules, which are essentially the same as Articles of Association.

The founders and their management successors set the goals of not-for-profit organisations, just as they do for any other kind of organisation.

The overarching strategic goals of non-profit organisations, in contrast to profit maximisation, often do not alter over time.

The latter’s goals are often determined by the fundamental tenets of the former. But even within these broad goals, the activity’s emphasis might shift significantly. For instance, the British Know-How Fund, which the UK government founded to give development assistance, shifted its emphasis from developing central European states to African nations throughout the 1990s.

While profit maximisation is not the primary goal of not-for-profit organisations, it is crucial to understand that many of them must create profit in order to be viable and continue to develop. Regardless of the degree to which the organization’s operations depend on outside grants or subsidies, those who contribute this funding always anticipate that the group will strive for maximum financial independence.

It is often necessary to evaluate the success of non-profit organisations in relation to other metrics since traditional accounting ratios, such ROCE, ROI, etc., are inadequate for accurately assessing their performance. The majority of nonprofit organisations depend on metrics that assess how well they are doing in respect to:

• Effectiveness: The degree to which the company meets its goals
• Economy: The organization’s capacity to maximise the use of its economic resources (often assessed in relation to cost containment)

Efficiency is the organization’s “output” divided by the total amount of resources used.

“Value for money” metrics are often used by service-oriented businesses to evaluate performance in relation to goals. Performance metrics may also be made public when the company is accountable to the public, proving that money were spent as efficiently as possible. Exam questions often include hints about the organization’s values and guiding principles. It is crucial to understand these hints and use them to your evaluation of the organization’s performance.

Management

Not-for-profit organisations’ management structures are similar to profit-maximizing organisations’, notwithstanding certain differences in the terminology used to designate different committees and officials.

A Council or Board of Management oversees the adherence to the original goals of many not-for-profit organisations, while limited firms have a board of directors made up of executive and non-executive directors. The management styles of for-profit and corporate entities have been more similar in recent years. This includes hiring “career” executives to oversee daily operations and placing a greater emphasis on non-executive officers, particularly when it comes to supervision and inspection.

Features That Make Up Non-Profit Organizations

Service Motivation: The goal of these organisations is to help the public, members of certain groups, or both. Their goal is not to make a profit, hence they provide their services for free or at a very low cost. They don’t treat individuals differently based on their colour, caste, or religion. They provide a variety of services, including as education, food, housing, sports facilities, health care, and leisure.

• Members: These organisations were established as philanthropic societies or trusts. These organisations’ members are also their subscribers.
• Management: These organisations are run by the executive or managing committee. The committee is chosen by its members.
• Revenue Source: Not-for-profit organisations mostly get funding from subscriptions, gifts, grants from the government, bequests, investment income, etc.
• Surplus: Its members split up the excess that is produced over time.
• Reputation: The excellent work these organisations conduct for the general benefit of the public is the foundation of their goodwill and reputation.

Consumers of accounting information: The statutory bodies, as well as current and prospective donors, are the users of these organisations’ accounting information.

Accounting for Organizations That Are Not Profit

As far as we are aware, non-profit organisations neither trade in goods nor offer services with the intention of making a profit. However, they also mandate that accurate records of earnings, outlays, assets, and obligations be kept. The main sources of funding for them are grants, subscriptions, donations, etc. As a result, they use their bank account or cash for the majority of their transactions.

First and foremost, they are answerable to the members and contributors; second, the law mandates that they keep accurate records in order for the government to retain appropriate oversight over the grants. Additionally, accurate accounting lowers the possibility of embezzlement and fraud. Apart from the cash book and ledgers, they also need to keep a stock register. A comprehensive record of all fixed assets and consumables is also kept in a stock register.

Non-profit organisations maintain Capital Fund or General Fund Accounts in accounting, as opposed to Capital Accounts. They credit this account with donations, legacies, life membership fees, excess, etc.

In accordance with accounting principles, not-for-profit organisations must also prepare the final accounts, or financial statements, at the conclusion of the fiscal year. The following are included in these organisations’ final accounts:

Payments and Receipts A/c: It is an overview of all bank and cash transactions. It facilitates the creation of the balance sheet and the income and expenditure account. Together with the balance sheet and the income and expenditure account, we also need to submit it to the Registrar of Societies.

Income and Expenditure Accounting: This accounting determines any surplus or deficit and is comparable to Profit and Loss Accounting.

Balance Sheet: We prepare it in the same way as profit-driven companies’ balance sheets