Not-for-profit organizations, are those organizations, that are established to work for the benefit of the society, or for promoting art and culture. Their main objective is to serve the society and earn profit in the due course. Thus, unlike other organizations they are not guided by the profit motive but earning profit is ancillary to their main objective such that the profit can be utilised for social welfare..
They provide service either to a specific group or community of people or public at large. Not-for-profit organizations exist as charitable trusts or charitable societies.
Since, their primary motive is welfare of the general public they normally do not deal in trading or manufacturing activities. Hence, there is no requirement of maintaining a Trading and Profit and Loss Account.
Characteristics of Not-for-Profit organizations –
The features of non profit organizations are described below –
- Primary Motive – These organizations are incorporated for sole purpose of providing service to general public either at a nominal charge or completely free of cost. They are not directed to work for earning profit.
- Management – Non-profit organizations are managed by members who subscribe to the organization by paying a specified fees. Out of these members, a managing committee is elected to run the daily operations.
- Sources of Income – Unlike other organizations who generate income by undertaking commercial activity, non profit organizations depend on other sources for generating income. The major sources of income are – donations, government grant, subscriptions from members and interest income from investments.
- Surplus not distributed – Although these organizations do not function to earn profits, there may be excess of income over expenditure. Instead of distributing such surplus among the members, it is adjusted in the capital fund.
- Area of work – The not-for-profit organizations work for serving the society in matters related to education, health, religious, recreation and other social areas.
- Goodwill/ Reputation –These organization gains their reputation in the society based on their contributions towards the welfare of the people and not on the basis of satisfaction of customer’s.
- Accountability – The members who manage the activities of the organizations are answerable to the society as a whole for fulfilling the objectives for which the organization was established.
- Proper Books of Accounts – To ensure that the funds and efforts of the organization are directed towards the objectives for which it was established, the members are required to furnish proper accounts and financial statements to the Registrar of Societies at the end of each accounting year. This includes Receipt and Payment account, Income and Expenditure account and Balance Sheet.
Not-for-Profit organizations are set up for serving the members and the society. They do not engage in manufacturing or selling goods rather they work for promoting a specific cause. Thus as the name suggests, not-for-profit organizations function without any profit motive in mind.