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Basic Accounting, Taxability and Audit of Non Profit Organsiations

Sumit Kumar Yadav 
on 02 November 2015

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NON PROFIT ORGANISATIONS

WHAT IS NON PROFIT ORGANISATIONS (NPO)

A Non Profit Organization is an entity that is operated for the benefit of the society as a whole, rather than the benefit of sole proprietor or a group of people or shareholders.

Examples of Non Profit Organsiations are:

  • Public Educational Institution
  • Public Hospitals
  • Societies
  • Clubs
  • And many more…

FINANCIAL STATEMENT OF NON PROFIT ORGANISATIONS

Every Non Profit Organization is required to prepare financial statement to show the financial position at the end of the financial year. The financial statement for an Non Profit Organizations include:

  1. Balance Sheet
  2. Income & Expenditure Account
  3. Receipts & Payment Account

RECEIPTS & PAYMENTS ACCOUNT

It is a combine form of Cash & Bank Book. It show the summary of Cash & Bank Receipts and payment made during the year. The receipts are shown at the left hand side and the payments are shown at the right hand side. It shows all the Cash and Bank Entries irrespective of the nature i.e. Capital Expenditure or Revenue Expenditure.

INCOME & EXPENDITURE ACCOUNT

In simple terms, we can say that Income & Expenditure Account is Profit and Loss Account. On left hand side all the revenue expenditure are shown and on the right hand side all incomes are shown.

All Capital Expenditure and incomes are excluded from it.

MAIN SOURCES OF INCOME

Generally the main sources of income for the Non Profit Organizations are Subscriptions, Donations or Grants, Interest, Entrance and Membership Fees.

BALANCE SHEET

Balance Sheet is the statement of Assets & Liabilities of an entity at a given date. It is prepared at the end of Accounting Period. It is prepared after the Income & Expenditure Account. It is the classified summary of ledger balances left over. All the assets are shown at the Right side and liabilities are shown at the Left side. And, the difference between Assets and liabilities are shown as Capital Fund. Capital fund represent the amount contributed by members. The surplus or deficit of Income & Expenditure Account will be added in this.

TAXABILITY OF NON PROFIT ORGANISATIONS

Section 501 of the Internal Revenue Service (IRS) tax code exempts qualified nonprofit organizations from federal taxes. A nonprofit organization is an organization that engages in activities for both public and private interest without pursuing the goal of commercial or monetary profit. To be exempted from federal taxes, nonprofit organizations have to meet certain rules. Some of these rules include:

  1. Being organized and operated exclusively for charitable, scientific, religious or public safety purposes.
  2. Collecting income and turning over entire amount less expenses to organizations or individuals who are lawfully recognized as legitimate charities.

Charitable purpose is defined in Section 2(5) of the IT Act and includes:

  • Relief to the poor
  • Education
  • Medical Relief
  • Preservation of Environment
  • Preservation of Monuments
  • Advancement of any object of general public utility

If any Non Profit Organization is carrying out any commercial activity then receipts from such activity should not exceed 20% of total receipts of trust or NPO otherwise it will be taxable.

NPO should also spent 85% of income derived during the year for charitable purpose before the end of Assessment year otherwise the amount not spend will be taxable.

AUDIT AND FILING OF RETURN REQUIRMENT

REQUIREMENT OF AUDIT REPORT

Section 12A states two conditions for availing the exemption available under the Act, the first condition is regarding application for registration and the second condition is regarding audit by an accountant as defined in the Explanation below sub-section (2) of section 288. All organizations are required to apply for registration within one year from the date of their creation. If there is delay in applying for registration then the organization should submit Audit Reports for the past three years or as may be available.

MONETARY LIMIT

As per the Taxation Laws Amendment Act, 2006, w.e.f. 1st April 2006, it is mandatory for every organization to get its account audited where its income exceeds the minimum exemption limit. (As per the Finance Act 2008, presently the minimum exemption limit is Rs.1,50,000)

The implication of section 13(3) is extensive and therefore it may not be possible on the part of the Auditor to make independent inquiries. Therefore the Auditor before certifying the annexure to Form 10B should ensure and also clearly state the scope of his work and the responsibilities owned. It is important that the Auditor should mention in its report that the details of the persons covered under section 13(3) were provided by the Trustees of the Trust or the functionaries of the organizations.

FILING OF RETURN

All Charitable Organizations having income exceeding the minimum exemption limit during the previous year are required to file their return of income. The ‘income’ for the purposes of filing the return should be computed without giving effect to the provisions of sections 11 and 12 of the Act. Such returns are to be filed with the Income-Tax Officer or the Assessing Officer under whose local jurisdiction they fall. The return is to be filed as per the provisions of section 139(4A) and (4C) in the manner provided in section 139 of the Act.

Thanks & best Regards:

Author
Name: Sky
Email:sumit.yadav544@gmail.com

Author deals in Accounting, Taxation & Audit related matters & can be contacted at above written email id. Email:sumit.yadav544@gmail.com


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