Nonprofit Entities

Nonprofit Entities

Definition of Nonprofit Entities

A nonprofit entity is an organisation that operates without the primary goal of making a profit. Instead, its aim is to serve the community or a specific group. Revenue generated is used to further its goals rather than being distributed to members or shareholders. Examples include charities, clubs, and schools.

Key Financial Statements

Nonprofit organisations typically prepare several key financial statements:

• Receipts and Payments Statement: This statement summarises cash transactions and provides insight into the cash flow of the entity.
• Income and Expenditure Statement: This statement shows the income earned and expenses incurred over a specific period, determining whether the entity has a surplus (excess income) or a deficit (excess expenses).
• Statement of Financial Position: This statement reflects the entity's assets, liabilities, and equity at a specific date.

Receipts and Payments Statement

The receipts and payments statement is a simple summary of cash transactions. It shows all cash received and paid out during the period. This statement does not apply the accrual principle, meaning it only records cash transactions when they occur.

The statement can be structured in a T-format:

Receipts   | Payments
-----------|-----------
Cash In    | Cash Out

For example, consider the following receipts and payments statement for Stear Tennis Club:

STEAR TENNIS CLUB
RECEIPTS AND PAYMENTS STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
Receipts R | Payments R
Balance 30/6/20.1 b/d 4 700 | Refreshments purchased 1 342
Entrance fees 500 | Wages 4 220
Membership fees 12 000 | Tennis balls purchased 360
20.1 750 | Tennis courts painted 750
20.2 10 000 | Tennis courts built 7 000
20.3 1 250 | Stationery and sundry expenditure 1 590
Interest income 2 332 | Investment made at ABC Bank 5 000
Net proceeds from dance 620 | Balance c/d 3 410
23 672 | 23 672
Balance b/d 3 410

Income and Expenditure Statement

The income and expenditure statement is similar to the statement of profit or loss. It applies the accrual principle, which means it accounts for income and expenses when they are incurred, not when cash changes hands.

This statement is crucial for determining the financial performance of the nonprofit entity. The surplus or deficit is calculated by subtracting total expenses from total income.

For example:

STEAR TENNIS CLUB
INCOME AND EXPENDITURE STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
Income R | Expenditure R
Membership fees 12 000 | Wages 4 220
Interest income 2 332 | Refreshments purchased 1 342
Total Income 14 332 | Total Expenditure 5 562
Surplus 8 770

Trading Statement

Some nonprofit entities may engage in trading activities to generate revenue. A trading statement details the income and expenses related to these activities, showing gross profit. This gross profit is then transferred to the income and expenditure statement.

For instance, if a club sells refreshments, the trading statement would include:

STEAR TENNIS CLUB
TRADING STATEMENT FOR THE YEAR ENDED 30 JUNE 20.2
Revenue R | Cost of Sales R
Sales of Refreshments 6 200 | Opening Inventory 200
Purchases 3 600 | Closing Inventory (Balancing figure) 300
Gross Profit 2 700

Accumulated Fund

The accumulated fund represents the total net assets of a nonprofit entity. It includes initial donations, entrance fees, and any surpluses or deficits from previous periods. This fund is crucial for assessing the financial health of the entity.

For example, if a nonprofit has an accumulated fund of R100 000 and it generates a surplus of R20 000, the new accumulated fund will be R120 000.

Special Funds

Nonprofit entities may establish special funds for specific purposes. These funds are usually accounted for separately from the accumulated fund. There are two types of special funds:

• Nonexpendable Special Funds: These funds are set aside for a specific purpose, and the principal amount must remain intact. Only the income generated from these funds can be spent.
• Expendable Special Funds: These funds can be used for specific expenses, and both the capital and the income can be spent.

Entrance Fees

Entrance fees are typically paid by new members when they join a nonprofit organisation. These fees are considered capital and are credited directly to the accumulated fund account. They are not shown as revenue in the income and expenditure statement.

Example of Fund Accounting

Consider the following example for the Stear Tennis Club:

Dr Star Fund Cr
Expendable (income) | Non-expendable (capital)
20.1 R R
Jun 30 Balance c/d 800 8 000 | Jul 1 Bank: Capital donation — 8 000
20.1
Jun 30 Bank: Interest on investment 800 | 800 8 000 800 8 000
20.2
Jun 30 Tennis courts painted 750 — | Jul 1 Balance b/d 800 8 000
Balance c/d 930 8 000 | 20.2
Jun 30 Bank: Interest on investment (a) 880 —
1 680 8 000 1 680 8 000
20.2
Jul 1 Balance b/d 930 8 000

In this example, the Star Fund tracks both income earned from investments and expenses incurred for specific projects. The income and expenses are not included in the general income and expenditure statement.

Summary

Nonprofit entities play a vital role in the community. Understanding their financial statements is essential for assessing their performance and financial health. The key statements include:

• Receipts and Payments Statement
• Income and Expenditure Statement
• Trading Statement
• Statement of Financial Position

Check your understanding

1. What is the primary purpose of a nonprofit entity?
2. How does a receipts and payments statement differ from an income and expenditure statement?
3. What are the two types of special funds?
4. Why are entrance fees credited directly to the accumulated fund account?