Non-Profit Accounting: Funds, Statements & NFRS

TAKEAWAYS:

• Non-profit organizations (NPOs) use fund accounting to track restricted and unrestricted funds separately, unlike profit-oriented businesses.
• Receipts and Payments Accounting simplifies recording cash transactions but lacks detailed financial insights.
• Special-purpose financial statements (e.g., Statement of Activities, Statement of Financial Position) replace profit-and-loss accounts and balance sheets.
• NFRS 10 governs NPOs in Nepal, emphasizing transparency, accountability, and ethical financial reporting.
• Donations and grants are recorded differently based on restrictions (e.g., restricted vs. unrestricted funds).
• Exam focus: Trace transactions, prepare statements, and compare NPO accounting with for-profit accounting.

1. What Are Non-Profit Organizations (NPOs)?

Non-profit organizations (NPOs) operate to fulfill social, educational, religious, or charitable goals rather than generate profits. Examples in Nepal include:

• NGOs (e.g., Practical Action Nepal, Caritas Nepal)
• Educational institutions (e.g., Kathmandu University, Tribhuvan University)
• Religious organizations (e.g., Buddhist monasteries, Hindu temples)
• Government-funded bodies (e.g., National Planning Commission, Social Security Fund)

Key Features of NPOs

2. Accounting for NPOs: Fund Accounting vs. Receipts & Payments

NPOs use two main accounting methods:

1. Fund Accounting (Preferred under NFRS 10)
2. Receipts and Payments Accounting (Simpler but less detailed)

A. Fund Accounting: Tracking Restricted vs. Unrestricted Funds

Fund accounting segregates funds based on restrictions (e.g., donations for a specific project vs. general funds). This ensures compliance with donor conditions.

Types of Funds in NPOs

mindmap
  root((Fund Accounting in NPOs))
    General Fund
      - Unrestricted donations
      - Membership fees
    Restricted Funds
      - Project-specific grants
      - Endowment funds
    Agency Funds
      - Held on behalf of others (e.g., scholarship funds)

Example: Fund Accounting for a Nepalese NGO

Scenario: Green Earth Nepal receives:

• NPR 500,000 (unrestricted donation for general operations)
• NPR 300,000 (restricted grant for a reforestation project)

Journal Entries:

Statement of Financial Position (Simplified):

B. Receipts and Payments Accounting

This method records only cash transactions (no accrual accounting). It is simpler but does not show full financial health.

Example: Receipts & Payments for a Community Library

Transactions in 2024:

• Receipts:
  • Donations: NPR 200,000
  • Membership fees: NPR 50,000
• Payments:
  • Salaries: NPR 120,000
  • Book purchases: NPR 80,000
  • Rent: NPR 30,000

Receipts & Payments Summary:

Limitation: This does not show unearned revenue (e.g., prepaid memberships) or accrued expenses (e.g., unpaid salaries).

3. Special-Purpose Financial Statements for NPOs

NPOs prepare three key statements (instead of Income Statement + Balance Sheet):

A. Statement of Financial Position (Like a Balance Sheet)

Shows assets, liabilities, and funds (not equity).

Example for Hope Foundation Nepal (as of 2024-12-31):

B. Statement of Activities (Like an Income Statement)

Shows changes in net assets (instead of profit/loss).

Example for Hope Foundation Nepal (2024):

C. Statement of Cash Flows

Shows cash inflows and outflows (operating, investing, financing).

Example for Hope Foundation Nepal (2024):

4. Nepal Financial Reporting Standards (NFRS) for NPOs

NFRS 10 ("Financial Reporting by Not-for-Profit Entities") applies to NPOs in Nepal. Key requirements:

1. Accrual Basis: Must record revenues/expenses when earned/incurred (not just cash).
2. Fund Restrictions: Must disclose how restricted funds are used.
3. Donor Reporting: Must show how donor funds were spent (e.g., "80% of grant X was used for project Y").
4. Transparency: Must publish financial statements annually.

Example NFRS Compliance Check:

• If Green Earth Nepal receives a NPR 1,000,000 grant for a clean water project, it must:
  • Record it as a restricted fund.
  • Disclose in the Statement of Activities how much was spent on wells, training, etc.

5. Real-World Applications in Nepal

A. eSewa & Khalti (Digital Payments for NPOs)

• How it works: Many NPOs (e.g., Save the Children Nepal) use eSewa/Khalti donations for fund accounting.
• Example: If a donor transfers NPR 50,000 via Khalti for a scholarship fund, the NPO records:

  flowchart TD
    A["Donor: NPR 50,000 via Khalti"] --> B["Bank A/c"]
    B --> C["Restricted Fund: Scholarship A/c"]

B. NTC & Ncell (Corporate Social Responsibility - CSR)

• How it works: Telecom companies like NTC and Ncell allocate CSR funds (restricted for education/health).
• Example: Ncell’s Ncell Foundation spends NPR 200 million/year on digital literacy programs. Their Statement of Activities must show:
  • Restricted Revenue: NPR 200,000,000 (CSR budget)
  • Expenses: NPR 180,000,000 (training programs)

C. Daraz Nepal (Corporate Philanthropy)

• How it works: Daraz’s Daraz Charity platform allows users to donate to NPOs. Funds are tracked as restricted donations.
• Example: If a user donates NPR 10,000 for a women’s empowerment program, Daraz records:
  • Bank A/c Dr. 10,000
  • Restricted Fund (Women’s Empowerment) Cr. 10,000

6. Worked Example: Accounting for a Kathmandu-Based NGO

Scenario: Bright Future Nepal (a children’s education NGO) has the following transactions in 2024:

Step 1: Journal Entries

Step 2: Statement of Financial Position (as of 2024-12-31)

Step 3: Statement of Activities (2024)

7. Advantages and Disadvantages of NPO Accounting

8. Exam Tip: How to Score Full Marks

1. Understand Fund Accounting:

   • Always separate restricted vs. unrestricted funds.
   • Example: If a question gives a grant for a specific project, classify it as a restricted fund.

2. Prepare Correct Statements:

   • Statement of Financial Position = Assets = Liabilities + Funds (not equity).
   • Statement of Activities = Revenue – Expenses = Net Increase in Net Assets.

3. NFRS 10 Application:

   • If a question mentions donor restrictions, ensure you disclose compliance in the notes.

4. Real-World Linking:

   • Relate to eSewa donations, Ncell CSR, or Daraz Charity in explanations.

5. Common Mistakes to Avoid:

   • ❌ Treating NPOs like for-profit businesses (no "equity" in funds).
   • ❌ Ignoring restricted fund conditions in journal entries.
   • ❌ Forgetting to close inventory in the Statement of Financial Position.

Final Note: NPO accounting is mission-driven, not profit-driven. Always focus on transparency, donor trust, and NFRS compliance in your answers.