Home » Accounting Explanation » Accounts of Non-Profit Organizations

Non-profit organization

Also known as NPO, not-for-profit organization, non-commercial organization, nonprofit etc.

Non-profit organizations are those organizations that are not meant for making profit or their main purpose is not to make profit, but they exist for the welfare of their members and/or general public

It is inappropriate to prepare income statement for a non-profit organization since non-profit organizations don’t exist to make profit. Therefore, non-profit organizations prepare income and expenditure account as a substitute of income statement

The amount of total Revenues greater than the amount the total expenses of a non-profit organization is referred to as surplus (not net profit). Surplus is not distributed among the members of non-profit organization rather than it is kept for growth and expansion of the organization, for example non-profit organizations use surplus to buy fixed assets such as building for the club, land, equipments etc.

Examples of non-profit organizations

Charitable organizations such as Human rights groups, animal right organizations, Hospitals, health care clinics, Emergency relief services such as Red Cross, charitable schools / colleges etc.

Professional Associations and Trade Associations such as chamber of commerce, Association on American Indian Affairs, American Lung Association, Association for Firefighters and Paramedics, Teacher's Retirement fund Associations etc.

Religious organizations for example churches, mosques, Islamic International Foundation of Cooperation (IslamIFC)

Welfare organizations and clubs such as Calgary women's emergency shelter, Institute of Field Research Expeditions, sports club, social clubs etc.

Scientific groups such as general research groups, cancer research groups, chemistry research groups etc.

Difference between non-profit organizations and profit oriented organizations

Profit-Oriented OrganizationsNon-Profit Organizations

Main purpose is to make profit

Main purpose is Not to make profit

Sole proprietorship:
Owned by a single owner

Owned by partners

Owned by the shareholders

No one owns a non-profit organization

Profit is distributed to shareholders or owner(s)

Not distributed but kept for growth and expansion of the organization

Main revenue source = Rendering services or selling goods

Main revenue source = Membership subscription

Tax is generally charged on net income

Tax Exemption in many countries

Profit-Oriented OrganizationsNon-Profit Organizations

Income Statement

Profit and Loss Account

Income and Expenditure Account

Net profit or Net income


Net Loss


Capital, Owner's Equity or Shareholders' Equity

Accumulated Fund

Capital + Liabilities = Assets

Accumulated Fund + Liabilities = Assets

Financial statements
Balance sheet                        Income statement

Explanatory Notes          Cash  Flow Statement
Inc. and Exp. A/C                        Balance Sheet

Cash flow statement            Explanatory Notes

The main purpose of business entities is to make profit as much as possible for the owner(s), whereas the non- profit organizations are established not to make profit but for the well-being of their members, society or general public
In case of profit oriented organization, there are people that possess the legal ownership of the entity, while there are no owner or owners of non-profit organizations
Since “for profit organizations or profit oriented organizations” are established to make profit for the owner(s), their profits or gains are distributed to their owners, while non-profit organizations keep their profits or gains in order to grow or expand their activities, for example non-profit organizations can buy a new building from their accumulated profit or surplus
The major source of revenue for a profit oriented organization is to sell goods or render services, whereas a non-profit organization generally gets income or revenue in shape of membership subscription and in return the non-profit organization provides various benefits to its members, for example a golf club requires you to pay $500 annually as the membership subscription in order to be its member
In case of profit oriented organizations, tax is charged and calculated on net income as per income statement or profit and loss account, whereas tax is not legally required to be paid by non-profit organizations
Business organizations prepare income statement in which all expenses incurred and incomes earned duration an accounting period are reported, whereas non-profit organizations use the income and expenditure account rather than income statement to report their incurred expenses and earned incomes for an accounting period
The amount of total incomes greater than the amout total expenses is considered as net profit in case of profit oriented organizations, while the same is regarded as surplus in non-profit accounting
The amount of total expenses greater than the amount of total incomes is considered as net loss in case of profit oriented organizations, while the same is regarded as deficit in non-profit accounting
The term Capital, owner’s equity or shareholders’ equity is commonly used by profit oriented organizations, while it would be inappropriate to use owner’s equity or capital in non-profit accounting since they are owned by no one. Therefore, the term accumulated fund is usually used to refer to the capital of a non-profit organization.
Capital + Liabilities = Assets is an accounting equation of profit oriented organizations, while Accumulated fund + Liabilities = Assets is an accounting equation of non-profit organizations because non-profit organizations use the term accumulated fund instead of capital or owner’s equity
Income statement or profit and loss account

A statement that shows revenues and expenses. In short, it reflects the operations of a business in an accounting period

Income statement is specific to profit oriented or business organizations. Non-profit organizations prepare income and expenditure account NOT income statement
Balance sheet or statement of financial position

A statement which presents assets, liabilities and capital of an entity. All in all, it represents the financial position of an entity
Cash flow statement or statement of cash flow

A statement that presents the cash and cash equivalents receipts and cash payments during a specific accounting period
Accounting policies and explanatory notes

Accounting policies adopted while preparing financial statements and explanatory notes as to how the financial statements were prepared, what methods/procedures were utilized in the preparation of financial statements
Income and expenditure account

It is an income statement of a non-profit organization. All revenues (or incomes) and expenditure (or expenses) of a non-profit organization are shown in income and expenditure account.