What is prepared by the non profit organisations to know that the income during the year was sufficient to meet the expenses or not?

Financial statements

The correct answer is option 1- Financial statements.

The Not-for-Profit Organisations are required to prepare financial statements at the end of the each accounting period. These organisations are non-profit making entities and they are not required to make Trading and Profit & Loss Account but it is necessary to know that the income during the year was sufficient to meet the expenses or not. They have to provide the necessary financial information to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation as stated earlier, the final accounts of a ‘not-for-profit organisation’ consist of the following:
(i) Receipt and Payment Account
(ii) Income and Expenditure Account, and
(iii) Balance Sheet.

The Receipt and Payment Account is the summary of cash and bank transactions which helps in the preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the Income and Expenditure Account, and the Balance Sheet. Income and Expenditure Account is akin to Profit and Loss Account.

The Not-for-Profit Organisations usually prepare the Income and Expenditure Account and a Balance Sheet with the help of Receipt and Payment Account. However, this does not imply that they do not make a trial balance. In order to check the accuracy of the ledger accounts, they also prepare a trial balance which facilitates the preparation of accurate Receipt and Payment Account as well as the Income and Expenditure Account and the Balance Sheet.

In fact, if an organisation has followed the double entry system they must prepare a trial balance for checking the accuracy of the ledger accounts and it will also facilitate the preparation of Receipt and Payment account. Income and Expenditure Account and the Balance Sheet.