Basic Accounting Concepts of NGO

28/08/2022 0 By indiafreenotes

There are certain areas where the accounting of NGOs differs from that of other organisations that aim at earning profit. The components that are different in the case of NGO accounting are as follows:

  • The NGO receives donations from different individuals and business entities. The donations can be general or specific donations, where general donations are used for any purpose in the organisation, whereas the specific or individual donations are used only for the purpose for which the donor has donated.
  • The main motive of NGOs is to provide services for the welfare of society, and there are specific programmes that NGOs conduct for the same. The accounting for such programmes is done separately to separate surplus or deficit from such programmes.
  • In standard profit-making entities, a different head reports shareholder’s equity, but shareholders and investors are not there in NGOs. Thus, there is no equity stake in NGOs, and in the case of these NGOs, net assets take the place of equity in the statement of financial position.
  • In the case of NGOs, the statement of activities is prepared. It calculates surplus or deficit instead of profit and loss account and profit or loss in the profit-making organisation. The equity statement is not prepared in the case of NGOs as equity shareholders are not there.
  • In the case of NGOs, the statement of functional expenses is prepared, which records the fund accounting of the company. This report shows the total expenses incurred by the NGO along with the details of the expenses spent by it by diving into funds and category wise.

Basis of NGO Accounting

An important section of NGO account management is the basis of accounting. It defines the basis on which the accounting starts and methods applied for managing accounts with day-to-day transactions. Points to be considered for this process are as follows:

  • The NGO prepares its accounts on the basis of the historical basis of accounting, but assets are re-valued from their historical cost to reflect current values.
  • The NGO applies an accrual-based accounting method. Revenues, grants, or donations are recorded in the accounting period it is received, and expenses are recognised when incurred. Loans and other grants are also recognised when received. Further, other revenues are recognised as per the accrual concept.
  • Grants and donations are recorded separately and are shown with the non-operating income and expenses. They are not included in the retained earnings from operations but in the contributed capital or donated equity.  
  • Contributions made in kind are recognised through journal adjustments which are supported by appropriate documents such as agreements, formal letters, memos, MOU, etc.

The account books are maintained in a set pattern, so all transactions are traced back and forth. The pattern is as follows:

  1. Expenses
  2. Cash memo
  3. Voucher
  4. Cash book
  5. Ledger
  6. Trail balance
  7. Income and expenditure statement, balance sheet

Fund Accounting

Fund accounting enables NGOs to allocate money in different groups or “funds” to keep them organised and spend as per need. The groups under which money is separated are:

  • Restricted Funds: 

The funds are for certain NGO projects and activities and are to be spent accordingly.

  • Temporarily restricted funds:

The funds are spent on certain projects and activities at NGOs for a certain period of time. After that time period, the fund becomes unrestricted funds.

  • Unrestricted funds:

This is also called the Annual Fund. These funds can be spent on anything that NGOs require. 

Advantages of NGO Accounting

The advantages related to NGO Accounting are as follows:

  • In NGOs, the statement of functional expenses is prepared to record funds accounting of the company.
  • Programs are conducted by NGOs, for which accounting is done separately.  
  • NGO Accounting enables to analyse of every program properly.

Although NGO Accounting is beneficiary in the ways mentioned above, it also has disadvantages. The various disadvantages related to NGOs are as follows:

  • NGO Accounting is more prone to fraud when compared with the accounting of other organisations.
  • There are chances where the person authorised for accounting does not account properly and leaves some of the grants received by the organisations.

Books and Documents maintained for NGO Accounting

Following is the list of books and documents that NGOs maintain for proper and systematic account management:

  • Cash payment or receipt vouchers and book
  • Bank payment or receipt vouchers and book
  • Summary of daily petty cash book
  • Journal vouchers and journal
  • General Ledger
  • Fixed Assets Register
  • Contract or Registration Documents
  • Attendance Register
  • Budget copies of various grants
  • Utilisation Certificates
  • Any other relevant Registration papers
  • Copies of consultancy agreements
  • Capital assets approvals
  • A file of original bills of assets purchased
  • Copies of contracts and agreements
  • Stationary Register
  • A file containing bank mandates and authorised signatories
  • Quotation file for all purchases
  • Advance payment register
  • Check issue register
  • Cancelled check register
  • Donation receipt issue register