What Is Non-Profit Accounting (Clubs & Societies)?
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What Is a Non-Profit Organisation?
A non-profit organisation is a body set up not to chase profit, but to serve its members or the wider community. The examples students meet most often are sports clubs, school societies, recreation clubs, welfare cooperatives, and residents' associations. Money collected from members is not shared out as personal profit; instead it is ploughed back to fund the organisation's activities and facilities.
This is very different from a business such as a grocery shop or a service firm, which exists to maximise profit for its owner. A club exists to provide a service. Suppose a Badminton Club collects RM60 a year from each member. That money is not the owner's income; it is a shared fund used to rent courts, buy shuttlecocks, and run tournaments. This difference in motive is fundamental.
Because the motive differs, the way a non-profit keeps and reports its finances also differs slightly from an ordinary business. Members and committees do not ask 'how much profit did we make', but 'was the money coming in enough to cover the cost of our activities this year'. That single question shapes their financial statements.
Why Does the Vocabulary Change?
In ordinary business accounting we use terms such as Capital, Gross Profit, Net Profit, and the Profit and Loss Account. Every one of these carries the meaning of profit belonging to the owner. Since a non-profit does not pursue profit, it would be misleading to use the words 'profit' or 'capital' for it. So the vocabulary is changed to reflect the organisation's true purpose.
The word Capital is replaced with Accumulated Fund. The Profit and Loss Account is replaced with the Income and Expenditure Account. Net Profit becomes Surplus, while Net Loss becomes Deficit. These substitutions are more than a change of name: they reflect the idea that the body manages funds held in trust for its members rather than owning any profit.
Understanding the reason behind the change of terms helps students avoid confusion. If you grasp that a club cannot make a 'profit', you will not mistakenly write Net Profit in a club's statement. The concepts are the same as in business; only the language is adapted to the non-profit context.
The Receipts and Payments Account
The Receipts and Payments Account is a summary of the club's cash book for one accounting period. It records every amount received in cash or at the bank on the debit side, and every amount paid on the credit side. It opens with the opening cash balance and closes with the closing cash balance, exactly like an ordinary cash book.
Its key feature is that it is purely cash-based. It records all receipts and payments regardless of whether they belong to the current year, last year, or next year. It also records capital items such as proceeds from the sale of assets and the purchase of assets, not only revenue items. For example, if the club receives next year's subscriptions in advance, that amount is still recorded here because the money has been received.
The weakness of this account is that it does not reveal whether the club managed the year's activities well. It only shows the movement of cash. That is why a non-profit needs a second account to measure the true performance of the year, namely the Income and Expenditure Account.
The Income and Expenditure Account
The Income and Expenditure Account is the equivalent of the Profit and Loss Account in a business. It is prepared on the accruals basis, meaning it only takes into account income and expenditure relating to the current year, regardless of when the money is received or paid. Income is recorded on the credit side and expenditure on the debit side.
Because it follows the accruals basis, adjustments are needed. For instance, next year's subscriptions received in advance are removed from this year's income, while this year's subscriptions still unpaid by members (arrears) are added as this year's income. Expenses such as rent still owing at year-end are included even though they have not yet been paid.
Non-revenue items are excluded from this account. The purchase of an asset such as a computer or sports equipment does not enter here because it is a long-term asset, not an expense of the current year. However, the depreciation of that asset is included as an expense. The final balance of this account shows whether there is a surplus or a deficit for the year.
Accumulated Fund Replaces Capital
In a business, Capital is the owner's investment plus accumulated profit less drawings. In a non-profit, there is no owner investing for a return. Instead there is an Accumulated Fund, which is the net worth of the organisation built up from the surpluses of previous years.
To find the Accumulated Fund at the start of the year, you prepare a short statement: add up all the club's assets at the beginning of the year, then subtract all its liabilities. That net value is the opening Accumulated Fund. Suppose at the start of the year a club has RM3,000 in the bank, equipment worth RM5,000, and subscription arrears of RM500, plus rent owing of RM800. The opening Accumulated Fund is RM3,000 plus RM5,000 plus RM500 less RM800, which is RM7,700.
At the end of the year, the Accumulated Fund is updated by adding the year's surplus or subtracting the year's deficit. This is similar to how Capital is increased by net profit in a business. In this way the Accumulated Fund reflects the organisation's financial strength over its lifetime.
Subscriptions: Arrears and Advances
Subscriptions are the main source of income for most clubs, and this is the area that most often confuses students. The principle is simple: in the Income and Expenditure Account, we count only the subscriptions relating to the current year, whether they have been received or not.
Subscriptions in arrears means current-year subscriptions that members have not yet paid. Even though the money has not come in, it still counts as this year's income because the member already owes it. It is also recorded as a current asset (subscriptions receivable) in the statement of financial position. In contrast, subscriptions in advance means next year's subscriptions paid early by members. These are not counted as this year's income and are recorded as a current liability (subscriptions received in advance).
Suppose the cash book shows subscriptions received of RM6,000. Of that, RM400 is for next year (advance), and there are RM300 of current-year arrears still unpaid. The subscription income for the current year is RM6,000 less RM400 plus RM300, which is RM5,900. It is this RM5,900 that goes into the Income and Expenditure Account.
Surplus Versus Deficit
When the total income of the current year exceeds the total expenditure of the current year, the result is called a Surplus, not Net Profit. A surplus means the club received more than it spent on that year's activities. This surplus stays within the organisation and adds to the Accumulated Fund.
Conversely, when the current year's expenditure exceeds its income, the result is called a Deficit, not Net Loss. A deficit shows that the club spent more than it received, and this reduces the Accumulated Fund. A continuing deficit is a warning sign that the organisation may be heading into financial trouble.
A surplus is not a 'profit' that can be distributed to members. It is an unused balance of funds, kept to finance future activities, because the organisation exists to provide a service, not to build up personal profit.
A Short Worked Example
This simple example brings all the concepts together. Suppose the Kembara Club during the year receives subscriptions of RM6,000 (including RM400 in advance for next year), donations of RM1,000, and proceeds from selling event tickets of RM800. There are also subscription arrears of RM300 not yet received. Expenses are: hall rent RM2,500, stationery RM300, depreciation of equipment RM600, and event costs RM700.
Step one, adjust the subscriptions: RM6,000 less RM400 plus RM300 equals RM5,900. Total income for the current year is RM5,900 plus RM1,000 plus RM800 equals RM7,700. Total expenditure for the current year is RM2,500 plus RM300 plus RM600 plus RM700 equals RM4,100.
Step two, compare: income RM7,700 less expenditure RM4,100 gives a Surplus of RM3,600. This surplus is then added to the opening Accumulated Fund. If the opening Accumulated Fund is RM7,700 as in the earlier example, the closing Accumulated Fund becomes RM7,700 plus RM3,600, which is RM11,300. Notice that the purchase of assets and subscriptions in advance never affect this surplus calculation.
Summary and Next Steps
In short, a non-profit uses the same accounting concepts as a business, but adapts the vocabulary: Capital becomes Accumulated Fund, the Profit and Loss Account becomes the Income and Expenditure Account, and profit or loss becomes surplus or deficit. The Receipts and Payments Account follows the cash basis, while the Income and Expenditure Account follows the accruals basis.
To master this topic, practise subscription adjustments and the calculation of the opening Accumulated Fund repeatedly, until the steps become automatic. Try preparing both accounts yourself from a single set of information, then check each adjustment one by one.
If you would like personal guidance on topics like this, our experienced teachers can take you through each adjustment step by step in online 1-to-1 lessons. The paid one-hour trial class is at the teacher's rate, from RM50/hour; WhatsApp us with any questions.