Lesson 26: Nonprofit Accounting

Lesson 26 of 33 · 78%

How nonprofit accounting differs

For-profit accounting tracks how much wealth the owners are accumulating. Nonprofits don’t have owners — they have a mission and donors. So the bookkeeping shifts: there’s no equity in the traditional sense, there’s no “profit” to maximise, and the financial statements emphasise accountability for restricted funds rather than return on investment.

If you’ve only worked in for-profit accounting, the move can be disorienting at first. Same double-entry mechanics, but a different vocabulary and different statements.

NONPROFIT — Net Assets by Restriction WITHOUT RESTRICTION General fund Unrestricted gifts ₹40,00,000 TEMPORARILY RESTRICTED Project-specific grants Time-bound pledges ₹15,00,000 PERMANENTLY RESTRICTED Endowment corpus Donor-stipulated ₹25,00,000
Net assets are categorised by donor restriction. Each pot has different rules about how the money can be spent.

Different vocabulary, same mechanics

For-profit termNonprofit term
Equity / Stockholders’ equityNet assets
RevenueContributions / Revenue / Support
Net incomeChange in net assets
Income statementStatement of activities
Balance sheetStatement of financial position
OwnersDonors / Beneficiaries

Three types of net assets

Under the current US framework (ASC 958), and broadly under Ind AS / IFRS for not-for-profits, net assets fall into three categories based on donor restrictions:

  • Without donor restriction (unrestricted). Free to spend on any mission-aligned purpose. General fund balance.
  • Temporarily restricted (with donor restriction — purpose or time). A donor specifies “₹15 lakh for the Mumbai school project” or “spend over the next 5 years”. Once the restriction is met, the funds move to unrestricted.
  • Permanently restricted (endowments). Donor stipulates principal must be preserved in perpetuity. Only the investment income can be used. The classic university endowment.

The three core nonprofit statements

  1. Statement of Financial Position — analogous to the balance sheet. Assets and liabilities, with net assets broken down by restriction.
  2. Statement of Activities — analogous to the income statement. Shows changes in each restriction category. Importantly, donations RECEIVED for restricted purposes go directly into the restricted category, NOT through “unrestricted revenue”.
  3. Statement of Cash Flows — three-section structure familiar from for-profits (operating, investing, financing).

Plus a Statement of Functional Expenses — uniquely nonprofit — that splits all expenses by both nature (salaries, rent) and function (program services, management, fundraising). Donors use it to compute the “program ratio” — what % of donations actually reach the cause.

Fund accounting

Many nonprofits use “fund accounting” — each donor restriction or project gets its own self-balancing set of books. A relief organisation responding to a disaster might create a Disaster Fund, a General Fund, and an Endowment Fund — each tracked separately. This makes restriction compliance visible by construction.

When to recognise a pledge

A donor promises ₹10 lakh over 5 years. When does the nonprofit book it?

  • Unconditional pledge. Recognise the full present value immediately, in the appropriate restriction category. Dr. Pledges Receivable · Cr. Contribution Revenue (Restricted)
  • Conditional pledge. Wait until the condition is met (e.g., “I’ll match donations up to ₹50 lakh” depends on others giving).

India-specific points

  • Section 8 companies and registered societies/trusts are the main nonprofit forms.
  • 12A registration — exempts the nonprofit from income tax on its surplus.
  • 80G certificate — donors can claim deduction on their donations.
  • FCRA — foreign contributions need separate accounts and special reporting.
  • CSR — companies meeting thresholds must spend 2% of average net profit on CSR; recipient nonprofits must follow strict utilisation rules.

Lesson recap

  • No equity, no owners; “net assets” replaces equity.
  • Net assets categorised by donor restriction: unrestricted, temporarily restricted, permanently restricted.
  • Statement of Activities replaces income statement.
  • Functional expense disclosure shows program vs. overhead split.
  • India: 12A, 80G, FCRA, CSR — the four-letter alphabet of nonprofit finance.
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Practical Indian Application

Nonprofit compliance resources: MCA’s CSR-1 portal for NGO registration; FCRA Online Services portal (fcraonline.nic.in); Income-tax e-filing for Form 10/10A/10B; ICAI’s Technical Guide on Audit of Charitable Trusts; specific software like Tally NGO module and Mango (for nonprofit finance management).

Worked Example — Akshaya Foundation Application Test

Suppose Akshaya Foundation, a Section 8 company, receives donations of ₹2 crore in FY26: ₹50 lakh restricted to education projects, ₹30 lakh restricted to health, ₹1 crore unrestricted, ₹20 lakh FCRA-foreign donation. Expenditure: ₹40 lakh on education programmes (within restriction), ₹25 lakh on health, ₹70 lakh on admin and outreach, ₹15 lakh on the foreign-grant project. The Income & Expenditure shows total income ₹2 cr, total application ₹1.5 cr = surplus ₹50 lakh. To meet Section 11(1)(a) of the Income-tax Act, the trust must apply ≥85% of income (₹1.7 cr) in the year, or file Form 10 to accumulate the balance for up to 5 years. Fund balances on the balance sheet: Education Fund ₹10 lakh (restricted), Health Fund ₹5 lakh, FCRA Fund ₹5 lakh, General Fund ₹1.05 cr (corpus + general surplus).

Common Nonprofit Compliance Mistakes

  • Not maintaining FCRA-designated SBI account for foreign donations
  • Failing to file Form 10 when income application below 85%
  • Missing CSR-1 registration before accepting CSR funds
  • Mixing restricted and unrestricted funds in books

Frequently Asked Questions

Are nonprofits required to use Ind AS?
Section 8 companies follow either Ind AS or AS based on the same MCA thresholds applicable to commercial companies. Trusts and societies follow accounting standards based on their constitutive law.

What is FCRA registration?
Foreign Contribution Regulation Act 2010 registration is mandatory for any Indian nonprofit accepting foreign contributions. Books and bank accounts must be FCRA-compliant and separately maintained.

Can CSR funds be transferred to NGOs?
Yes, but only to entities registered with the MCA under Form CSR-1 since FY 2021-22. The implementing NGO must also have a 12A and 80G certificate.

CSR Framework and FCRA Compliance

Section 135 of the Companies Act 2013 mandates qualifying companies (net worth ≥ ₹500 cr OR turnover ≥ ₹1,000 cr OR net profit ≥ ₹5 cr) to spend 2% of average net profit on CSR. The CSR-1 registration for implementing NGOs is mandatory since FY 2021-22. The CSR-2 form must be filed annually disclosing CSR spending, projects and impact. Unspent CSR amount must be transferred to a Schedule VII Fund within 6 months of FY-end. FCRA 2010 regulates foreign contributions to Indian nonprofits. Mandatory: SBI New Delhi Main Branch FCRA Account (consolidated), 5-year renewable registration, annual return (Form FC-4) by 31 December, prior permission for one-time grants. Penalties include cancellation of registration and prosecution under FCRA.

Sector Note

The Indian nonprofit sector employs ~3 million people across 3.3 million registered NGOs. Major Indian nonprofits — CRY (Child Rights and You), Goonj, SOS Children’s Villages India, Pratham, Akshaya Patra Foundation — operate with combined budgets exceeding ₹10,000 crore annually. Strong compliance, transparent reporting (their annual reports are public), and CSR partnerships have professionalised the sector dramatically in the last decade.

Recent Regulatory Changes Affecting Indian Nonprofits

The 2020-2024 period brought significant compliance tightening: (a) FCRA Amendment Act 2020 added New Delhi SBI Branch designated bank account mandate, prohibited sub-granting, capped admin expenses at 20%; (b) Income-tax Section 12A re-registration introduced 5-year sunset; (c) CSR Amendment Rules 2021 introduced CSR-1 and CSR-2 forms with mandatory NGO registration; (d) GST applicability on certain charitable services clarified through several Advance Rulings. The compliance overhead for FCRA-registered NGOs has doubled in this period. Several large NGOs (Oxfam India, Greenpeace India) had FCRA registration cancelled or not renewed during this period. As a finance professional working with nonprofits, staying current on these changes is non-negotiable — annual training/refresher recommended through ICAI’s Branches or specialised consulting firms.