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Accounting for Ngo in Bangladesh

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Reserve Fund Mesopotamia

Luca Pacioli

Provident Fund Depreciati

Income & Expenditure Credit
TM

AccountAble Handbook
Budget & Balance Report

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Corpus
Voucher

NGO Fixed Assets Register Grants
Accounting
Standards
Narration Receipts and Revenue Stamps Benedetto Cotrugli Ledgers
Regulation
Cash Box
Revolving Funds

Accounting

Multiple Cash Books Trial Balance Auditors Computerized Accounts

Deficit Endowments Investments

Journal Honorarium

Form IIIA Bank Reconciliation
Account Payee, Not Negotiable

ction 10(23C)(iv)

Blank Cheque

Tax Exemption

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ACCOUNTABILITY Contribution in Kind

INCOME

Transparency
Public Disclosure Auditors’ Certificate Debit

Stock Register Receipts & Payments

Societies Registration Act, 1860 Public Trust
TM
AccountAid India
Section 25 Non-profit Company Section 80G

New Delhi
Donation Ear-marked Funds Salary Register izfrxzkgdSÜpk;a Gratuity

Conflict of Interest

About this book
(front inside cover)
The AccountAble Handbook is a compilation of the individual issues of ‘AccountAble’, released by AccountAid India since 1994. These issues have been designed and circulated on a monthly basis primarily for the partners of our client Agencies.
‘AccountAble’ is circulated to about 1,200 persons, including Chartered Accountants. It is also available through e-mail, on a complimentary basis. The present compilation brings all issues of AccountAble related to accounting and regulation of non-profit organisations together at one place. Issues related to FCRA have been compiled in a separate handbook.
The topics covered in this handbook include:

• Book-keeping
• Financial statements
• Banking
• Form of organisation
• Income tax
• Financial reporting
• Other topics such as revolving funds, corpus, contribution in kind, gratuity, etc.
An electronic copy of this book is available on our web-site, www.AccountAid.net.
While we have taken utmost care to make sure there are no mistakes, the handbook is designed to provide a general understanding only. We, therefore, suggest that you seek independent and responsible advice before taking any important decisions based on this material.
We trust the handbook will be of use to implementing NGOs in India, grant-making Agencies, consultants and auditors dealing with non-profit organisations. The law presented in this book is valid as of 30th
June 2002. It applies to organisations working or registered in India.

(i)

AccountAble™ Handbook

NGO Accounting and Regulation

AccountAid™ India
New Delhi

© AccountAid India 2002
All rights reserved.
No part of the publication may be reproduced or transmitted in any form or by any means, without prior permission of AccountAid India, in writing.
However, AccountAid India encourages reproduction or re-distribution of this material in workshops or through non-profit / academic institution newsletters for non-commercial use, provided the source is acknowledged. Your use must not affect our rights to the material adversely.
The source should be acknowledged as ‘Copyright material of AccountAid™ India. Used for noncommercial purposes under general permission’.

Price: Rs.200/-

Published by:
AccountAid India,
55-B, Pocket C, Siddharth Extension,
New Delhi – 110 014
Ph.: 011-2634 3128, 2634 6111
Fax: 011-2634 3852 e-mail: accountaid@vsnl.com

Typesetting, layout and printing by:
Chanakya Mudrak Pvt. Ltd.,
C-16, DSIDC Packaging Complex,
Kirti Nagar, New Delhi-110 015
Telefax.: 2592 3947, 2592 3951

Preface
Non-profit accounting is a surprisingly complicated affair. There are several reasons for this: (i) organised charity is a relatively recent phenomenon; (ii) it is subject to pressures from various institutions, especially the donor agencies; (iii) professional accountants have paid relatively little attention to non-profit accounting; and, finally, (iv) its financial management is focussed on spending money, rather than making it!
What kind of accounting is appropriate for non-profits? This may vary from one region to another. Accounting practices developed in one country, therefore, may not suit another. Yet, there must be a common meeting ground, as organised charity is largely an international effort. A key issue is, therefore, to find solutions which are valid for a region, yet can be interfaced with requirements of international charities. We believe that such solutions can be built only from the ground upwards.
It is commonly acknowledged today that accountability is one of the most significant issues in non-profit work. Accountability is inextricably linked with public and Government perceptions of the non-profit sector, and in turn affects the credibility and capacity of the sector to make a difference. Accountability is, therefore, the silver thread running through the fabric of this book. As a matter of fact, this book is largely a compilation of our monthly journal with the self-explanatory title ‘AccountAble’.
This handbook deals with several areas related to accounting: book-keeping, financial reporting and banking. It also deals with regulation of non-profit organisations in India: issues relating to registration, taxation, and staff benefits have been covered. FCRA has been covered extensively in a separate volume.
While we have tried to make sure that the book is free from errors, still the possibility remains. We, therefore, welcome your comments and suggestions so that we can correct these in future editions. A copy of this book is also being put up on our website (www.AccountAid.net), where the information will be updated regularly.
For a compilation like this, acknowledging support can be a bewildering task. So many people have contributed to this, that it is difficult to decide who can be left out, given the constraints of space and reader’s attention span. In keeping with our own tradition, we can mention no individual names.
However, the most important contribution has come from NGO functionaries and accountants across India, who have shared their problems with us in confidence.
Many people working in grant-making Agencies, have helped us add depth and insight to AccountAble, by attending our annual workshops and discussing their concerns.
Then there are people who have encouraged us by visiting our web-site and sending us their feedback and questions.
We would also like to thank our client Agencies, CRY and Ford Foundation, who have supported research and publication of AccountAble through these years. The publication

(i)

of this handbook has been made possible under an agreement with Ford Foundation in India, whose people deserve a special word of thanks for their support, encouragement and the confidence they have shown in us.
We would also like to thank people at Chanakya Mudrak, who worked on this patiently, despite short notice and a difficult manuscript.
And finally, a special note of thanks to the individual members of our own team and to their families, who sacrificed many evenings and weekends to this book.
30th June 2002

AccountAid Team

( ii )

Topics at a Glance
Preface
........................................................................................................... i
Detailed Contents ..................................................................................... vii-xxxvi

Section I: Book-keeping ............................................................... 1
Double Entry Concepts ....................................................................................... 3
Understanding Debit and Credit......................................................................... 8
Multi-purpose Voucher .....................................................................................12
Cash Books ........................................................................................................15
Better Book-keeping .........................................................................................17
Trial Balance .....................................................................................................36
Computerised Accounts ..................................................................................44
Receipts

........................................................................................................49

Revenue Stamps ...............................................................................................54
Salary Records .................................................................................................57
Fixed Assets Register ......................................................................................61

Section II: Financial Statements ............................................... 65
Receipts and Payments Account ....................................................................67
Income and Expenditure ...................................................................................72
Balance Sheet ...................................................................................................77
NGO Auditors ....................................................................................................82

Section III: A Bit of Theory ......................................................... 87
History of Accounting .........................................................................................89
Commonly Confused Terms .............................................................................94
Accounting Standards ......................................................................................99
Accounting Policies ........................................................................................105

( iii )

Section IV: Non-profit Issues .................................................. 107
Grant Budgets .................................................................................................109
Contribution in Kind ........................................................................................116
Micro-Credit Revolving Funds ......................................................................121
Corpus & Endowments ..................................................................................126

Section V: Banking ..................................................................... 135
About Cheques ................................................................................................137
Filling Cheques Safely ...................................................................................143
Blank Cheques ...............................................................................................146
Safer Banking .................................................................................................148
Bank Reconciliation .......................................................................................150

Section VI: Form of Organisation ............................................ 153
Society, Trust or Company ..............................................................................155
Registered Societies .......................................................................................158
Regulation of Societies ..................................................................................163
Non-profit Company ........................................................................................197

Section VII: Income Tax ............................................................. 203
Income Tax Registration .................................................................................205
Income Tax Return...........................................................................................207
Key Person Transactions and Income Tax ...................................................210
Tax Relief on Donations .................................................................................214
Raising Funds from Public .............................................................................219

Section VIII: Others ..................................................................... 223
Conflict of Interest ............................................................................................225
Provident Fund ................................................................................................229
Gratuity

......................................................................................................233

( iv )

Section IX: Financial Reporting ............................................... 237
Reporting to Donor Agencies ........................................................................239
Public Disclosure ............................................................................................246

Section IX: Income Tax Forms ................................................. 251
Form 3CF: Approval u/s 35(1)(iii) ..................................................................253
Form 10A: Income Tax Registration u/s 12A ...............................................257
Application: Condoning delay in ... Income Tax Registration u/s 12A ....258
Form 10G: Approval u/s 80G .........................................................................259
Form 56: Approval u/s 10(23)(c) ....................................................................262
Application: Approval u/s 35AC ....................................................................265
Form 58A: Donation Certificate 205 u/s 35AC ............................................268
Form : Budget and Balance Report ..............................................................269
Form: Audited Utilisation Certificate .............................................................271

(v)

( vi )

Detailed Contents
Preface
........................................................................................................... i
Topics at a Glance ............................................................................................ iii-v

Section I: Book-keeping ............................................................... 1
Double Entry Concepts .................................................................................. 3
An introduction to double entry concepts ....................................................... 3
Shankar’s Accounting Troubles ...................................................................... 3
The Opening Balances .................................................................................. 3
A Cheque is Received ................................................................................... 4
The Purchase of Petrol ................................................................................. 4
Another Balance is Needed ........................................................................... 5
Raju’s Salary is now Paid ............................................................................. 5
Some Cash is Withdrawn .............................................................................. 6
The Heavier Columns .................................................................................... 6
A Trial Balance is Made ................................................................................ 7

An Accountant’s View ..................................................................................... 7

Understanding Debit and Credit ................................................................... 8
Debit & Credit: Left or Right ............................................................................ 8 debt ........................................................................................................... 8 left .......................................................................................................... 8

Yes, but what does all this lead to? ............................................................... 9

The three rules of Debit & Credit .................................................................... 9
A simpler Alternative ..................................................................................... 10
a. The Good and the Bad ........................................................................... 10
b. The Humanisation Process ..................................................................... 10
c. Only one rule for everyone ...................................................................... 10
d. Back to square one ................................................................................ 11
e. Checking back… ................................................................................... 11

Multi-purpose Voucher .................................................................................12
What is a voucher ......................................................................................... 12
The Present Voucher .................................................................................... 12
What are adjustments .................................................................................. 13
Advance for Expenses ............................................................................... 13

( vii )

Expenses Payable .................................................................................... 13

The Multi purpose Voucher ........................................................................... 13

Cash Books ......................................................................................................15
Problem of Multiple Cash Books .................................................................. 15
Dual Cash Books .......................................................................................... 15
Funding Agencies ......................................................................................... 15
Cuttings / alterations ..................................................................................... 16
Writing cash book regularly .......................................................................... 16

Better Book-keeping .....................................................................................17
Wonderful Vouchers ..................................................................................... 17
Use covering vouchers ............................................................................... 17
Coloured vouchers ..................................................................................... 17
Agency stamp ........................................................................................... 17
Cash paid stamp ........................................................................................ 17
Staple – Twice ........................................................................................... 17
Punch – Carefully ....................................................................................... 18
File – Properly ........................................................................................... 18
Using old file covers .................................................................................... 18
Labelling .................................................................................................... 18
Numbering the vouchers .............................................................................. 19
Paper for the vouchers ................................................................................ 19
Bind the old vouchers ................................................................................. 19

Natty Narrations ............................................................................................ 19
Give good narration on vouchers .................................................................. 19
Provide narration below the cash book entry ................................................. 19
Give brief narration in ledger also ................................................................. 19
Narrations in computerised accounts ........................................................... 20

Reduce Receipt Books ................................................................................. 20
One Receipt Book at a time ........................................................................ 20
Use pre-numbered Receipts ........................................................................ 20
Carbon type receipts are better .................................................................... 20

Captivating Cash Books ............................................................................... 20
The Daily Cash Book .................................................................................. 20
Reduce number of cash books .................................................................... 21
Ink up the totals and balances ..................................................................... 21

( viii )

No blank lines or pages in cash book ........................................................... 22
Maintain a rough cash book ........................................................................ 22

Care for your Cash ....................................................................................... 22
Keep it in a cash box .................................................................................. 22
The mobile cash box .................................................................................. 23
Reduce cash payments .............................................................................. 23
Plan your cash flow .................................................................................... 23
Insure your cash ........................................................................................ 23
Tally the cash periodically ........................................................................... 23

Legendary Ledgers ....................................................................................... 24
Separate Ledgers ....................................................................................... 24
Ink up the totals and balances ..................................................................... 24
No blank lines in ledger ............................................................................... 24

Other Records .............................................................................................. 25
Salary Register .......................................................................................... 25
Fixed Assets Register ................................................................................ 25
Log Book ................................................................................................... 25
Stock Register ........................................................................................... 26
Minutes Book ............................................................................................ 26

Once in a While ............................................................................................ 27
Bring forward opening balances ................................................................... 27
Prepare Subject Index in Ledger .................................................................. 27
Reconcile your Bank Account ..................................................................... 27
Make a Trial Balance .................................................................................. 28
Draft your final accounts ............................................................................. 28
Get your accounts audited .......................................................................... 28
Close your books ....................................................................................... 28
Physical Verification of Assets .................................................................... 28
Take care of the old records ........................................................................ 29
And finally… moksha .................................................................................. 29

Cuts and Bruises .......................................................................................... 29
Avoid alterations ......................................................................................... 29
Throw out the Eraz-ex ................................................................................. 29
Use counter-balancing entries ..................................................................... 29
The right place and time .............................................................................. 30
One slash is enough ................................................................................. 30

( ix )

Counter-balancing entries: the path of Ahinsa ............................................. 30
Voucher made for wrong amount .................................................................. 30
Forgot to enter a voucher ............................................................................ 31
Entered a smaller amount ........................................................................... 31
Entered a smaller amount ........................................................................... 31
Entered a larger amount .............................................................................. 32
Made an entry on the wrong side ................................................................. 32
Made a totalling or carry forward mistake...................................................... 33
Entry not posted ........................................................................................ 33
Posted on the wrong side ............................................................................ 34
Posted a larger amount ............................................................................... 34
Posted a smaller amount ............................................................................ 34

Duty Chart for Accounts ............................................................................... 35
How to use the Duty Chart .......................................................................... 35

Trial Balance ....................................................................................................36
What is a Trial Balance................................................................................. 36
Why does it tally? ...................................................................................... 36

Computers and Trial Balances ..................................................................... 37
Periodic Trial Balance ................................................................................... 37
Cumulative Trial Balance .............................................................................. 37
How to make a Trial Balance ........................................................................ 38
Does it tally? ................................................................................................. 39
Tracking the difference ................................................................................. 39
Common Errors ............................................................................................ 40
Cash book balance not taken ...................................................................... 40
Transposition errors .................................................................................... 40
Compensating Errors .................................................................................. 40
Entries not posted ...................................................................................... 40
Cash Book ................................................................................................ 40
Double your money errors ........................................................................... 41

The Long Trail ............................................................................................... 41
1. Check the totaling .................................................................................. 41
2. Have you included all the ledger balances ................................................. 41
3. Check the ledger totals & balancing ......................................................... 41
4. Check the cash book totaling .................................................................. 42

(x)

5. Make an opening Trial Balance ................................................................ 42
6. Check the opening balances ................................................................... 42
7. Check the posting .................................................................................. 42
8. Does it tally now? ................................................................................... 43
Do it again ................................................................................................. 43

Computerised Accounts ..............................................................................44
Software – Selecting a Package .................................................................. 44
E.X. 3.0 ..................................................................................................... 44
FACT 6.57 ................................................................................................. 44
Quicken .................................................................................................... 44
Tally 5 ....................................................................................................... 45
Total ......................................................................................................... 45
WinCA ...................................................................................................... 45
Wings-6 .................................................................................................... 45

Setting Up an Accounting Structure ............................................................. 45
Problem with Separate Files ........................................................................ 45
Using One File ........................................................................................... 45
Account Heads .......................................................................................... 46
Punching Transactions ............................................................................... 46

Please fasten your safety belts... ................................................................. 46
Delays ...................................................................................................... 46
Manual Accounts ....................................................................................... 47
Fall-back ................................................................................................... 47
Cash Log ................................................................................................... 47
Virus Protection ......................................................................................... 47

Three Myths and a Half-Truth ....................................................................... 47
Buying a Computer & Printer ........................................................................ 48
Gilb’s Law of Unreliability ............................................................................ 48

Receipts

........................................................................................................49

What is a Receipt ......................................................................................... 49
When do you need a Receipt ...................................................................... 49
‘Un-Receiptable’ situations .......................................................................... 49

Format for a Receipt ..................................................................................... 49
1. Stub Type .............................................................................................. 49
2. Carbon Copy .......................................................................................... 50

( xi )

3. Clay Tablet Receipts ............................................................................... 51

A suitable Receipt ........................................................................................ 51
For Credit Programs and Loans ................................................................... 51
Plain Paper Receipts .................................................................................. 51
Bi-lingual design ......................................................................................... 52

Save Your Receipt from Deceit .................................................................... 52
Use one Receipt book at a time ................................................................... 52
Resolution for printing ................................................................................. 52
Who can issue a Receipt? .......................................................................... 52
Power flows from the barrel of a Receipt … .............................................................. 52

Receipt Books Control ................................................................................ 53
11th Commandment: Thou shalt use pre-numbered Receipts…........................ 53
Cancelling a Receipt ................................................................................... 53

Other Issues ................................................................................................. 53
Voucher for a Receipt ................................................................................. 53
Revenue Stamps ........................................................................................ 53
How can I keep old Receipts safely? ............................................................ 53
A last bit of advice… ................................................................................... 53

Revenue Stamps ............................................................................................54
History ........................................................................................................ 54
Stamps on Receipts ..................................................................................... 54
More than 500 rupees ................................................................................. 54
Taking a receipt .......................................................................................... 55
Receiver pays for the stamp ........................................................................ 55
Cheque or cash.......................................................................................... 55
Cancelling the stamp .................................................................................. 55
No stamp on donation receipts .................................................................... 55
Grants from funding Agencies ...................................................................... 55
Staff Payments .......................................................................................... 55
Advance for expenses .................................................................................................... 55
Loan/ Personal Advance ................................................................................................ 55
Salary Payments ............................................................................................................. 55

IOU ......................................................................................................... 55
Cash Memos ............................................................................................. 55
Fixing it later .............................................................................................. 56

( xii )

Copy of a receipt ........................................................................................ 56
Splitting payments ..................................................................................... 56
Penalties ................................................................................................... 56
Can not be used as evidence ....................................................................................... 56
Confiscation ..................................................................................................................... 56
Extra duty........................................................................................................................... 56
Fine .................................................................................................................................... 56
Who can Confiscate ....................................................................................................... 56

Salary Records ...............................................................................................57
What is salary?.......................................................................................... 57
But who is an employee? .............................................................................................. 57
Is honorarium also salary? ........................................................................................... 57

Is a salary register required under law? ......................................................... 57
And apart from the law? .............................................................................. 57
How many registers? .................................................................................. 57
What about FCRA requirements? ................................................................ 57
Integrated Salary Register ........................................................................... 58
1. Plain register ............................................................................................................... 58
2. Analytical Register ...................................................................................................... 58

Attendance Register ................................................................................... 59
Leave Records ........................................................................................... 59
Joining Report / Appointment Letter ............................................................. 59
Paying salaries by cheque / bank transfer .................................................... 60
Salary to office bearers ............................................................................... 60

Fixed Assets Register ...................................................................................61
What is a Fixed Assets Register? ............................................................... 61
Is it different from a Stock Register? ............................................................. 61
Why do you need such a Register? ............................................................. 61
Where can you get this register? ................................................................. 61
How do you maintain this register? .............................................................. 62
Two Things to Remember... ......................................................................... 62
We have not started it… ............................................................................. 62
Old Vouchers available .................................................................................................. 62
Old Vouchers not available ............................................................................................ 62
Approval ............................................................................................................................ 63

( xiii )

Physical Verification ................................................................................... 63
Format of Fixed Assets Register ................................................................. 64

Section II: Financial Statements ............................................... 65
Receipts and Payments Account................................................................67
What is a Receipts and Payments Account? ................................................ 67
The Peace Maker ............................................................................................................ 67

Utility ........................................................................................................ 67
Receipts vs. Income ................................................................................... 67
Payments vs. Expenditure .......................................................................... 67

Common issues ........................................................................................... 68
Loan transactions ....................................................................................... 68
Advances for expenses ............................................................................... 68
Accrued Expenses / Income ....................................................................... 69
Cash or Bank? ........................................................................................... 69
Level of Detail ............................................................................................ 69
Using Trial balance figures .......................................................................... 69
Depreciation .............................................................................................. 69
Computerised Accounts .............................................................................. 69
Local Contribution and FCRA ...................................................................... 70

How to make a Receipts and Payments Account ........................................ 70
Opening Balance....................................................................................... 71
Receipts .................................................................................................... 71
Payments .................................................................................................. 71

Closing Balance ..................................................................................... 71
Tallying the two sides ............................................................................. 71

Income and Expenditure ..............................................................................72
How can I spend more than I earned? ........................................................... 72
What can the Income and Expenditure Account tell us? ................................ 72
Is it different from the Receipts and Payments Account?................................ 73
Why is that important? ............................................................................... 73
What happens to the surplus? ..................................................................... 73
Is ‘Profit’ different from ‘Surplus’? ................................................................. 73
Can we transfer surplus to General Fund? .................................................... 73
What about transfers to Corpus? ................................................................. 73

( xiv )

Are grants ‘Income’? ................................................................................... 73
What is a Consolidated Income and Expenditure Account? ............................ 74
What is Depreciation? ................................................................................ 74
Who pays for depreciation – the NGO or the funding agency? .............................. 74
Should NGOs charge depreciation? ........................................................................... 74
Depreciation rates .......................................................................................................... 74
WDV or SLM? ................................................................................................................... 75

Format: Gujarat and Maharashtra ................................................................ 75

Horizontal or Vertical? ................................................................................... 75
Horizontal Format ....................................................................................... 75
Using Schedules ............................................................................................................ 75
Classifying account-heads ........................................................................................... 75

Vertical Format .......................................................................................... 75
Notes to Accounts ..................................................................................... 76

Balance Sheet .................................................................................................77
How to read a Balance Sheet ....................................................................... 77
Final Accounts ........................................................................................... 77
Audit Report .............................................................................................. 77
Income and Expenditure Account ................................................................ 77
Receipts and Payments Account ................................................................. 77
Balance Sheet ........................................................................................... 77
Dynamic or Stable ........................................................................................................... 77
How much cash .............................................................................................................. 78
Bank Balance ................................................................................................................... 78
Ratio Analysis .................................................................................................................. 78
Window dressing ............................................................................................................ 78
Notes to Accounts ........................................................................................................... 78

More tips on reading a Balance Sheet .......................................................... 78
The Horizontal Balance Sheet ...................................................................... 79
Assets ...................................................................................................... 79
Fictitious Assets .............................................................................................................. 79

Liabilities ................................................................................................... 80

The Vertical Balance Sheet .......................................................................... 80
Application ................................................................................................ 80
Sources .................................................................................................... 81

( xv )

NGO Auditors ..................................................................................................82
Audit Report .................................................................................................. 82
Does an auditor’s stamp mean that everything is all right? ............................. 82
You mean a report like: ‘checked and found correct’... ................................... 82
What does a proper audit report look like? .................................................... 82
Auditors’ Report ............................................................................................................... 82

All audit reports are same – should we really read each one? ......................... 83
What is a qualification? ............................................................................... 83
How does a qualification affect the accounts? ............................................... 83
Our auditors refuse to type the Balance Sheet on their letterhead... ................ 83
Can audited accounts be checked again by another auditor? .......................... 83

The Things That Auditors Do… .................................................................... 83
What is statutory audit?.............................................................................. 83
What is internal audit? ................................................................................ 83
What do CAs do, apart from audit? .............................................................. 83
Our auditors don’t know anything about FCRA... ........................................... 83
What is 10-B report? .................................................................................. 84
Is it all right if my auditors write my accounts also? ....................................... 84
Should we re-appoint auditors each year? ..................................................... 84

Professional Ethics ....................................................................................... 84
Who can audit our accounts? ...................................................................... 84
What is ICAI? ............................................................................................ 84
What is negligence? ................................................................................... 84
Can any one complain against the auditors? ................................................. 84
Can the auditors be sued by the funding agency?.......................................... 85
How many CAs are there in India? ............................................................... 85
Has ICAI fixed some minimum audit fees? .................................................... 85
Can we pay our auditors fees @ 1% of total grants received? ......................... 85
Then how much fees should we pay the auditors? ......................................... 85
Can the auditors leak our secrets?............................................................... 85

Sorting out differences .................................................................................. 85
Our auditors are too strict... ........................................................................ 85
How can we remove our auditors? ................................................................ 86
What were the auditors doing...? ................................................................. 86
Unkindly yours, ..... .......................................................................................................... 86

( xvi )

Section III: A Bit of Theory ......................................................... 87
History of Accounting ....................................................................................89
A bit of History ............................................................................................... 89
1494 CE: Luca Pacioli ................................................................................ 89
1458 CE: Benedetto Cotrugli ....................................................................... 89

Modern Numerals and Accounting ............................................................... 89
Some more history ....................................................................................... 90
The Bahi-Khata System .............................................................................. 90
Accounting and Arthashastra ...................................................................... 91
Form of Accounts per Arthashastra ............................................................................. 92

Accounting concepts in Mahabharat ............................................................ 93
Cuneiform Tablets from Mesopotamia ........................................................... 93
Token accounting in Middle-East ................................................................. 93

Commonly Confused Terms .......................................................................94
Donations ...................................................................................................... 94
Grants

........................................................................................................ 94

Honorarium ................................................................................................ 94

Single Entry System ..................................................................................... 94
Double Entry System .................................................................................... 95
Basis of Accounting ...................................................................................... 95
Cash basis ................................................................................................ 95
Accrual basis (Mercantile) ........................................................................... 95
Mixed basis ............................................................................................... 95

Corpus ........................................................................................................ 96
Endowment ................................................................................................... 96
Surplus or Deficit .......................................................................................... 96
General Fund ................................................................................................ 97
Voucher ........................................................................................................ 97
Supports ....................................................................................................... 97
Cash memo .................................................................................................. 97
Bill

........................................................................................................ 97

Stock Register .............................................................................................. 98
Fixed Assets Register .................................................................................. 98

( xvii )

Final Accounts .............................................................................................. 98
Audit Report .................................................................................................. 98
Contingency .................................................................................................. 98

Accounting Standards ..................................................................................99
Accounting Standards .................................................................................. 99
Accounting policies ....................................................................................... 99
International Standards for Non-profits ......................................................... 99
Standards in India ......................................................................................... 99
Applicability to NGOs .................................................................................... 99
Compulsory for some .................................................................................. 99
Commercial or business activities .............................................................................. 99
Donation or sale? .........................................................................................................100

Voluntary for others .................................................................................. 100
Penalty for non-compliance ....................................................................... 100

Indian Accounting Standards ...................................................................... 100
AS-1: Disclosure of Accounting Policies ..................................................... 101
AS-2: Valuation of Inventories .................................................................... 101
AS-3: Cash Flow Statements .................................................................... 101
AS-4: Contingencies and events occurring after the Balance Sheet Date ...... 101
AS-5: Net Profit or Loss for the period, Prior Period Items and changes in Accounting Policies ................................................ 101
AS-6: Depreciation Accounting .................................................................. 101
AS-7: Accounting for Construction Contracts .............................................. 101
AS-8: Accounting for Research and Development ........................................ 101
AS-9: Revenue Recognition ....................................................................... 101
AS-10: Accounting for Fixed Assets .......................................................... 101
AS-11: Accounting for effects of changes in Foreign Exchange Rates ........... 101
AS-12: Accounting for Government Grants .................................................. 102
AS-13: Accounting for Investments ............................................................ 102
AS-14: Accounting for Amalgamations ....................................................... 102
AS-15: Accounting for retirement benefits in the Financial
Statements of Employers ................................................................ 102
AS-16: Borrowing Costs ............................................................................ 102
AS-17: Segment Reporting ........................................................................ 102
AS-18: Related Party Disclosures .............................................................. 102

( xviii )

AS-19: Leases ......................................................................................... 102
AS-20: Earnings Per Share ....................................................................... 102
AS-21: Consolidated Financial Statements ................................................. 102
AS-22: Accounting for Taxes on Income ..................................................... 102
AS-23: Accounting for Investments in Associates in
Consolidated Financial Statements ................................................. 102

ICAI Clarifications ........................................................................................ 103
Accounting Standards for NGOs ................................................................ 103
Responsibility of CAs ............................................................................... 103
Qualification/ disclosure in Audit Report ..................................................... 104

Accounting Policies .....................................................................................105
Accounting Standard – 1 ............................................................................ 105
Accounting Assumptions ............................................................................ 105
Going Concern ......................................................................................... 105
Consistency ............................................................................................ 105
Accrual ................................................................................................... 105

Accounting Policies .................................................................................... 105
Suggested Accounting Policies ................................................................. 106

Section IV: Non-profit Issues ................................................... 107
Grant Budgets ...............................................................................................109
What is a Budget ........................................................................................ 109
Different things to Different People ............................................................. 109
In the Funding Agency: .................................................................................................109
At the NGO: .....................................................................................................................109

Side Effects of a Budget ........................................................................... 110
Why does this happen? ............................................................................ 110

Towards clearer budgets .............................................................................110
The Logical Budget .................................................................................... 111
The Accountant’s Budget .......................................................................... 114

Forget me nots... .........................................................................................115

Contribution in Kind .....................................................................................116
In cash or in Kind .........................................................................................116
Estimating Values ........................................................................................117
Lower Wages ........................................................................................... 117

( xix )

Accounting Entries .......................................................................................118
Acknowledgment ...................................................................................... 118

Balance Sheet Disclosure ...........................................................................119
Accounting Policies .................................................................................. 119
Contribution in Kind .................................................................................. 120
Donated Materials & Services .................................................................... 120
Donated services ...................................................................................... 120

Micro-Credit Revolving Funds ..................................................................121
What is a Revolving Fund ........................................................................... 121
FCRA Treatment ......................................................................................... 121
1) When the loans are given out: .............................................................. 121
2) When the loans are recovered: ............................................................. 122
3) Interest received on micro-credit loans: ................................................. 122
4) Interest paid to funding agency ............................................................ 123
5) When the loans are given out again: ..................................................... 123

Village Level Organisations ........................................................................ 123
6) What is the law? ................................................................................ 123
7) Applying the law ................................................................................. 123

Accounting and Control .............................................................................. 124
8) Individual loans ................................................................................... 124
9) Pass Books ....................................................................................... 124
10) Loan Documentation ........................................................................... 124
11) Recoveries ......................................................................................... 125
12) Internal Reporting ................................................................................ 125
13) Donor Reporting .................................................................................. 125
A 400-year-old Debt ......................................................................................................125

Corpus & Endowments ..............................................................................126
What is a Corpus ........................................................................................ 126
Corpus Features ......................................................................................... 126
Building it up ............................................................................................ 126
Corpus or endowment? ............................................................................. 126
Breaking the Corpus ................................................................................. 126

Origins ...................................................................................................... 127
Real or Nominal? ...................................................................................... 127
Corpus in a Society .................................................................................. 127

( xx )

How did nominal Trusts emerge? ............................................................... 127
Utility of a Corpus ..................................................................................... 128

Corpus and the law ..................................................................................... 128
Income Tax Act, 1961 ............................................................................... 128
Foreign Contribution (Regulation) Act, 1976 ................................................ 128
Bombay Public Trusts Act, 1950 ............................................................... 129

Accounting .................................................................................................. 129
Disclosure ................................................................................................... 129
Some Indian figures .................................................................................... 130
Creating a Corpus Fund ............................................................................. 130
Endowments ............................................................................................... 131
Accounting for Endowments ...................................................................... 131
Endowment Income .................................................................................. 131

Seven Steps to a Corpus ........................................................................... 132
Control Mechanism ..................................................................................... 133
Income Tax Implications ............................................................................. 133
Permitted Investments .............................................................................. 133

Section V: Banking .................................................................... 135
About Cheques ..............................................................................................137
What is a cheque ........................................................................................ 137
Depositing a Cheque .................................................................................. 137
Clearing ...................................................................................................... 137
Clearing time ........................................................................................... 137
At the Clearing House............................................................................... 138
Manual clearing ........................................................................................ 138
Collection Charges ................................................................................... 138

Types of cheques ....................................................................................... 138
Self cheque ............................................................................................. 138
Bearer cheque ......................................................................................... 139
Crossed cheque ....................................................................................... 139

Endorsing a cheque .................................................................................... 139
The Payee ............................................................................................... 140
Pen or Pencil ........................................................................................... 140
Dating the cheque .................................................................................... 140
Amount in words ...................................................................................... 141

( xxi )

Living Dangerously ................................................................................... 141
Bounced Cheques ........................................................................................................141
Kiting ................................................................................................................................141
Float .................................................................................................................................141

Stop Payment .......................................................................................... 141

Filling Cheques Safely .................................................................................143
Some Tips ................................................................................................... 143
Cuttings & Changes ................................................................................. 143
Carbon for safety ...................................................................................... 143
Registered Post ....................................................................................... 143
Use Special Ink Pens ............................................................................... 143
Special Stickers ....................................................................................... 143
The Confused Bankers .............................................................................. 143

Some things are Not Negotiable… ............................................................. 144
Anatomy of a check .................................................................................... 145

Blank Cheques .............................................................................................146
Signing Blank Cheques .............................................................................. 146
A Safer Alternative ...................................................................................... 146
Shankar’s Self-Help Program ..................................................................... 146
Faithfully Yours... ..................................................................................... 146

What you need to do ................................................................................... 147
Sample Bank Resolution ........................................................................... 147
Amending Bylaws .................................................................................... 147

Safer Banking ................................................................................................148
Frauds ...................................................................................................... 148
The Changing Scene .................................................................................. 148
Alterations ................................................................................................... 148
The Benzene Miracle ................................................................................ 148

Forgeries ..................................................................................................... 149
What to do? ................................................................................................ 149
The Hardworking Postmen ........................................................................ 149

Bank Reconciliation ....................................................................................150
What is a Bank Reconciliation? .................................................................. 150
Why a difference? .................................................................................... 150

Making a Bank Reconciliation ..................................................................... 150

( xxii )

1. Ticking Off common items ..................................................................... 151
2. Correcting Our Ledger Balance .............................................................. 151
3. Reconciling the Pass Book balance ....................................................... 151
Follow-up Steps ....................................................................................... 152

Section VI: Form of Organisation ........................................... 153
Society, Trust or Company .........................................................................155
1. Non-Profit Company ............................................................................... 155
Characteristics of a company: .................................................................. 155

2. Society .................................................................................................... 155
Characteristics of a society: ..................................................................... 156

3. Trust ...................................................................................................... 156
Characteristics of a trust: ......................................................................... 156

Comparison ................................................................................................ 157

Registered Societies ....................................................................................158
What is a Society? ...................................................................................... 158
Registration ................................................................................................. 158
Registered Society .................................................................................. 158
Unregistered Society ............................................................................... 159

Limited Liability ............................................................................................ 159
Memorandum .............................................................................................. 159
Name ..................................................................................................... 160
Objects .................................................................................................. 160

Rules and Regulations (Bylaws) ................................................................ 160
General Body .............................................................................................. 161
Who can be a member? ........................................................................... 161
Admitting new members ........................................................................... 161
Takeovers ............................................................................................... 161
Types of members ................................................................................... 161
Voting Rights .......................................................................................... 162
Disqualification ........................................................................................ 162
Removing members ................................................................................. 162
Membership fees ..................................................................................... 162

Regulation of Societies ................................................................................163
Andhra Pradesh .......................................................................................... 163

( xxiii )

Telangana Area ........................................................................................ 163
Registration ............................................................................................ 163
Alteration ................................................................................................ 164
List of Governing Body Members ............................................................... 164
Accounts ................................................................................................ 164
Dissolution .............................................................................................. 164
Disposal of Property upon dissolution ........................................................ 164
Others .................................................................................................... 164

Andhra and Rayalaseema Region ........................................................... 164
Registration ............................................................................................ 164
Alteration ................................................................................................ 165
List of Governing Body Members ............................................................... 165
Accounts ................................................................................................ 165
Dissolution .............................................................................................. 165
Disposal of Property upon dissolution ........................................................ 165
Others .................................................................................................... 165

Arunachal Pradesh ..................................................................................... 165
Registration ............................................................................................ 165
Alteration ................................................................................................ 165
List of Governing Body Members ............................................................... 166
Accounts ................................................................................................ 166
Dissolution .............................................................................................. 166
Disposal of Property upon dissolution ........................................................ 166
Others .................................................................................................... 166

Assam

..................................................................................................... 166

Registration ............................................................................................ 166
Alteration ................................................................................................ 166
List of Governing Body Members ............................................................... 167
Accounts ................................................................................................ 167
Dissolution .............................................................................................. 167
Disposal of Property upon dissolution ........................................................ 167
Others .................................................................................................... 167

Bihar

..................................................................................................... 167

Registration ............................................................................................ 167
Alteration ................................................................................................ 168

( xxiv )

List of Governing Body Members ............................................................... 168
Accounts ................................................................................................ 168
Dissolution .............................................................................................. 168
Disposal of Property upon dissolution ........................................................ 168
Cancellation ............................................................................................ 168
Others .................................................................................................... 168

Delhi

..................................................................................................... 169

Registration ............................................................................................ 169
Alteration ................................................................................................ 169
List of Governing Body Members ............................................................... 169
Accounts ................................................................................................ 169
Dissolution .............................................................................................. 169
Disposal of Property upon dissolution ........................................................ 169
Others .................................................................................................... 169

Gujarat

..................................................................................................... 170

Registration ............................................................................................ 170
Alteration ................................................................................................ 170
List of Governing Body Members ............................................................... 170
Accounts ................................................................................................ 170
Dissolution .............................................................................................. 170
Disposal of property upon dissolution ........................................................ 171
Others .................................................................................................... 171

Goa, Daman and Diu .................................................................................. 171
Registration ............................................................................................ 171
Alteration ................................................................................................ 171
List of Governing Body Members ............................................................... 171
Accounts ................................................................................................ 171
Dissolution .............................................................................................. 171
Disposal of property upon dissolution ........................................................ 172
Others .................................................................................................... 172

Haryana ...................................................................................................... 172
Registration ............................................................................................. 172
Alteration ................................................................................................. 172
List of Governing Body Members ............................................................... 172
Accounts ................................................................................................. 172
Dissolution .............................................................................................. 172

( xxv )

Disposal of property upon dissolution ......................................................... 172
Others ..................................................................................................... 172

Himachal Pradesh ...................................................................................... 173
Registration ............................................................................................. 173
Alteration ................................................................................................. 173
List of Governing Body Members ............................................................... 173
Accounts ................................................................................................. 173
Dissolution .............................................................................................. 173
Disposal of property upon dissolution ......................................................... 173
Others ..................................................................................................... 173

Jammu & Kashmir ...................................................................................... 174
Registration ............................................................................................. 174
Alteration ................................................................................................. 174
List of Governing Body Members ............................................................... 174
Accounts ................................................................................................. 174
Dissolution .............................................................................................. 174
Disposal of property upon dissolution ......................................................... 174
Others ..................................................................................................... 174

Karnataka .................................................................................................... 174
Registration ............................................................................................. 174
Alteration ................................................................................................. 175
Annual General Meeting ............................................................................ 175
List of Governing Body Members ............................................................... 175
Accounts ................................................................................................. 175
Enquiry by the Registrar ........................................................................... 176
Dissolution .............................................................................................. 176
Disposal of property upon dissolution ......................................................... 176
Others ..................................................................................................... 176

Kerala

...................................................................................................... 176

Malabar Region ....................................................................................... 176
Registration ............................................................................................. 176
Alteration ................................................................................................. 177
List of Governing Body Members ............................................................... 177
Accounts ................................................................................................. 177
Dissolution .............................................................................................. 177
Disposal of property upon dissolution ......................................................... 177

( xxvi )

Others ..................................................................................................... 177

Rest of the State of Kerala ...................................................................... 177
Registration ............................................................................................. 177
Alteration ................................................................................................. 178
Annual General Meeting ............................................................................ 178
List of Governing Body Members ............................................................... 178
Accounts ................................................................................................. 178
Dissolution .............................................................................................. 178
Disposal of property upon dissolution ......................................................... 179
Others ..................................................................................................... 179

Madhya Pradesh ......................................................................................... 179
Registration ............................................................................................. 179
Alteration ................................................................................................. 179
List of Governing Body Members ............................................................... 179
Accounts ................................................................................................. 180
Dissolution .............................................................................................. 180
Disposal of property upon dissolution ......................................................... 180
Others ..................................................................................................... 180

Maharashtra ................................................................................................ 180
Registration ............................................................................................. 180
Alteration ................................................................................................. 180
List of Governing Body Members ............................................................... 181
Accounts ................................................................................................. 181
Dissolution .............................................................................................. 181
Disposal of property upon dissolution ......................................................... 181
Others ..................................................................................................... 181

Manipur ...................................................................................................... 182
Meghalaya ................................................................................................... 182
Registration ............................................................................................. 182
Alteration ................................................................................................. 182
List of Governing Body Members ............................................................... 182
Accounts ................................................................................................. 182
Dissolution by Members ........................................................................... 183
Dissolution by the Registrar ...................................................................... 183
Dissolution by Court ................................................................................. 183

( xxvii )

Disposal of property upon dissolution ......................................................... 183
Others ..................................................................................................... 183

Mizoram ...................................................................................................... 183
Registration ............................................................................................. 183
Alteration ................................................................................................. 184
List of Governing Body Members ............................................................... 184
Accounts ................................................................................................. 184
Dissolution .............................................................................................. 184
Disposal of property upon dissolution ......................................................... 184
Others ..................................................................................................... 184

Nagaland ..................................................................................................... 184
Registration ............................................................................................. 184
Alteration ................................................................................................. 184
List of Governing Body Members ............................................................... 184
Accounts ................................................................................................. 185
Dissolution .............................................................................................. 185
Disposal of property upon dissolution ......................................................... 185
Others ..................................................................................................... 185

Orissa

...................................................................................................... 185

Registration ............................................................................................. 185
Alteration ................................................................................................. 185
List of Governing Body Members ............................................................... 186
Accounts ................................................................................................. 186
Dissolution .............................................................................................. 186
Disposal of property upon dissolution ......................................................... 186
Others ..................................................................................................... 186

Pondicherry................................................................................................. 186
Registration ............................................................................................. 186
Alteration ................................................................................................. 186
List of Governing Body Members ............................................................... 187
Accounts ................................................................................................. 187
Dissolution .............................................................................................. 187
Disposal of property upon dissolution ......................................................... 187
Others ..................................................................................................... 187

Punjab ...................................................................................................... 187

( xxviii )

Registration ............................................................................................. 187
Alteration ................................................................................................. 187
List of Governing Body Members ............................................................... 188
Accounts ................................................................................................. 188
Dissolution .............................................................................................. 188
Disposal of property upon dissolution ......................................................... 188
Others ..................................................................................................... 188

Rajasthan .................................................................................................... 188
Registration ............................................................................................. 188
Alteration ................................................................................................. 188
List of Governing Body Members ............................................................... 189
Accounts ................................................................................................. 189
Dissolution .............................................................................................. 189
Disposal of property upon dissolution ......................................................... 189
Others ..................................................................................................... 189

Sikkim

...................................................................................................... 189

Registration ............................................................................................. 189
Alteration ................................................................................................. 189
List of Governing Body Members ............................................................... 189
Accounts ................................................................................................. 190
Dissolution .............................................................................................. 190
Disposal of property upon dissolution ......................................................... 190
Others ..................................................................................................... 190

Tamil Nadu .................................................................................................. 190
Registration ............................................................................................. 190
Alteration ................................................................................................. 190
List of Governing Body Members ............................................................... 191
Accounts ................................................................................................. 191
Dissolution .............................................................................................. 191
Disposal of property upon dissolution ......................................................... 191
Others ..................................................................................................... 192

Tripura ...................................................................................................... 192
Registration ............................................................................................. 192
Alteration ................................................................................................. 192
List of Governing Body Members ............................................................... 192
Accounts ................................................................................................. 192

( xxix )

Dissolution .............................................................................................. 192
Disposal of property upon dissolution ......................................................... 193
Others ..................................................................................................... 193

Uttar Pradesh.............................................................................................. 193
Registration ............................................................................................. 193
Renewal .................................................................................................. 193
Alteration ................................................................................................. 193
List of Governing Body Members ............................................................... 193
Accounts ................................................................................................. 194
Dissolution by Members ........................................................................... 194
Dissolution by the Registrar ...................................................................... 194
Dissolution by Court ................................................................................. 194
Disposal of property upon dissolution ......................................................... 194
Others ..................................................................................................... 194

West Bengal ............................................................................................... 195
Registration ............................................................................................. 195
Alteration ................................................................................................. 195
List of Governing Body Members ............................................................... 195
Accounts ................................................................................................. 195
Dissolution by Members ........................................................................... 195
Dissolution by the Registrar ...................................................................... 195
Dissolution by Court ................................................................................. 196
Disposal of property upon dissolution ......................................................... 196
Others ..................................................................................................... 196

Non-profit Company .....................................................................................197
What is a non-profit Company? .................................................................. 197
Is it relevant for voluntary work? ................................................................. 197
What are the advantages?......................................................................... 197
Going back to basics, what is a Company? ................................................ 197
So we will be called ‘Lok Jagran Manch Limited’? That sounds funny… ......... 197
Do we need to renew the registration after few years? .................................. 198
What about the Charity Commissioner? ..................................................... 198
Can a non-profit Company pay salary to its directors? ................................. 198
Can a non-profit Company get FCRA? ........................................................ 198

( xxx )

Is it very difficult to register a non-profit company? ....................................... 198
Are there many formalities later on? ........................................................... 198
Who should go for a non-profit Company?................................................... 198

Registration Realities .................................................................................. 199
Choosing a name ..................................................................................... 199
Memorandum and Articles ........................................................................ 199
License under section 25 .......................................................................... 199
Registration with ROC .............................................................................. 199
ROC Offices ............................................................................................ 200
Costs of registration ................................................................................. 200
Converting to Company ............................................................................. 200

Ambling along ............................................................................................. 200
Board Meetings ........................................................................................ 200
Annual General Meetings .......................................................................... 200
Auditors .................................................................................................. 201
Annual Returns ........................................................................................ 201
Annual Costs ........................................................................................... 201

Daring Disclosures ..................................................................................... 201
Conflict of Interest .................................................................................... 201
Disclosure of payments ............................................................................ 201
Public access .......................................................................................... 201

Facts and Figures ....................................................................................... 202
How many? ............................................................................................. 202
What is the minimum no. of members required for a non-profit company? ..... 202

Section VII: Income Tax ............................................................ 203
Income Tax Registration ..............................................................................205
What is Income Tax Registration? .................................................................... 205
How to Apply .................................................................................................. 205
Please forgive our Delay... ................................................................................ 205
Income Tax Return .......................................................................................... 205
Refusal of Registration ..................................................................................... 205
Conditions of Exemption .................................................................................. 206
Raising Donations ........................................................................................... 206
We are not sure... ........................................................................................... 206

( xxxi )

Income Tax Return ........................................................................................207
Filing the return ........................................................................................... 207
Due date for filing ..................................................................................... 207
Which Form to use................................................................................... 207
How to fill up the return ............................................................................. 207
What documents to attach ........................................................................ 208

Assessment Procedure .............................................................................. 208
Scrutiny .................................................................................................. 208
Assessment Order ................................................................................... 209
Did you know that... ................................................................................. 209

Key Person Transactions and Income Tax .............................................210
Transactions with key persons ................................................................... 210
1. Who is a key person? ........................................................................... 210
2. What type of payments are covered ....................................................... 211
3. Use of assets ....................................................................................... 211
Penalty ................................................................................................... 212
Audit Report ............................................................................................ 212
The unfortunate ones… ............................................................................. 213
Precautions… .......................................................................................... 213

Tax Relief on Donations ..............................................................................214
Donations in kind ........................................................................................ 214
Money Donations ........................................................................................ 214
Section 80-G ............................................................................................... 214
Who can be approved ............................................................................... 214
50% deduction for donor ........................................................................... 214
The 10% Limit .......................................................................................... 215
Receipt ................................................................................................... 215

Section 35AC .............................................................................................. 215
Who can be approved ............................................................................... 215
The 100% deduction ................................................................................. 216
35AC or 80GGA? ..................................................................................... 216
No 10% Limit ........................................................................................... 216
Form 58A ................................................................................................ 216

Section 35(1)(iii) .......................................................................................... 216

( xxxii )

Who can be approved ............................................................................... 216
The 125% deduction ................................................................................. 217
Section 35 or 80GGA?.............................................................................. 217
Proof of donation ...................................................................................... 217

Section 35CCB ........................................................................................... 217
Who can be approved ............................................................................... 217
The 100% deduction ................................................................................. 217
35CCB or 80GGA? ................................................................................... 217
Proof of donation ...................................................................................... 218
All good things come to an end… .............................................................. 218

Cash or cheque? ........................................................................................ 218
Misusing tax benefits .................................................................................. 218
Penalties ................................................................................................. 218

Raising Funds from Public .........................................................................219
Double Benefit ......................................................................................... 219
Eligible projects ....................................................................................... 219
Approval Process ..................................................................................... 219
Time Period ............................................................................................. 219
Some Organisations ................................................................................. 219
Getting Funds .......................................................................................... 220
National Committee .................................................................................. 220
Examples of Approved Projects ................................................................. 220
Filling the Application ............................................................................... 221
Sending the form ...................................................................................... 221
Form 58A ................................................................................................ 221
Eligible Projects ....................................................................................... 221
The National Committee Members ............................................................. 222
NGO grapevine ..............................................................................................................222

Section VIII: Others ..................................................................... 223
Conflict of Interest .........................................................................................225
What is conflict of Interest .......................................................................... 225
Examples .................................................................................................... 225
At Board Level ......................................................................................... 225
At Operating Level ................................................................................... 225

( xxxiii )

In Grant making ....................................................................................... 225

Implications ................................................................................................. 226
Managing Conflict of Interest ...................................................................... 226
1. Disclosure of Interest ............................................................................ 226
2. Role in decision-making and monitoring .................................................. 226

Registers and Records .............................................................................. 227
Designing a Conflict of Interest Policy........................................................ 227
1. Commitment to duties: .......................................................................... 227
2. Prohibitions: ......................................................................................... 227
3. Transparency: ....................................................................................... 227
4. Money Value: ....................................................................................... 227
5. Corrective Action: ................................................................................. 228

Moonlighting ................................................................................................ 228

Provident Fund ..............................................................................................229
What is Provident Fund? ............................................................................ 229
Does it apply to you? .................................................................................. 229
Who are employees .................................................................................. 229
Exemption for .......................................................................................... 229

Deductions and Deposits ........................................................................... 229
Monthly Deductions .................................................................................. 229
Depositing the amount .............................................................................. 230
Filing Returns .......................................................................................... 230
Penalties ................................................................................................. 230

Getting Your Money Back ........................................................................... 231
Advances ................................................................................................ 231

The Pension Scream... ............................................................................... 231
Your own PF Trust....................................................................................... 232
Registration ............................................................................................. 232
Running the Trust ..................................................................................... 232

Gratuity

......................................................................................................233

What is Gratuity? ........................................................................................ 233
Applicability ............................................................................................. 233
Nomination .............................................................................................. 233
Compulsory Insurance .............................................................................. 234

Payment of Gratuity .................................................................................... 234

( xxxiv )

Normal Retirement ................................................................................... 234
In case of death ....................................................................................... 234

Calculation of Gratuity Amount ................................................................... 234
Penalties ................................................................................................. 235
Notification .............................................................................................. 235

Section IX: Financial Reporting ............................................... 237
Reporting to Donor Agencies ....................................................................239
A. Specialised Reports ............................................................................... 239
1. Budget and Balance Report ............................................................. 239
Format ............................................................................................. 239
How to prepare the Budget and Balance Report ................................... 242
Variances ......................................................................................... 243
How often ........................................................................................ 243
Due dates ........................................................................................ 243
Delays ............................................................................................. 244

2. Audited Utilisation Certificate ........................................................... 244
B. General Purpose Reports ...................................................................... 244
1. Consolidated Accounts .................................................................... 244
2. Copy of FC-3 .................................................................................... 245

Pubilc Disclosure ..........................................................................................246
Introduction ................................................................................................. 246
Voluntary Publication .................................................................................. 247
Format for Publishing Accounts ................................................................. 247
a) Brief Format ......................................................................................... 247
b) Detailed Format .................................................................................... 248

How much it cost? ...................................................................................... 249

Section X: Income Tax and other Forms ................................ 251
IT Form 3CF: Approval u/s 35(1)(iii) .............................................................253
FORM No. 3CF ........................................................................................... 253
Notes ...................................................................................................... 255
ANNEXURE ............................................................................................ 255

IT Form 10A: Income Tax Registration u/s 12A ...........................................257
FORM NO. 10 A ......................................................................................... 257

( xxxv )

Application: Condoning delay in applying for Income Tax
Registration u/s 12A ...............................................................................258
Sample Application ..................................................................................... 258

IT Form 10G: Approval u/s 80G .....................................................................259
FORM No. 10G ........................................................................................... 259
Notes: ..................................................................................................... 261

IT Form 56: Approval u/s 10(23)(c) ...............................................................262
FORM NO. 56 ............................................................................................. 262
Notes: ..................................................................................................... 264

Application: Approval u/s 35AC ....................................................................265
Application under Section 35AC ................................................................. 265

IT Form 58A: Donation Certificate205 u/s 35AC ........................................268
Form No. 58A .............................................................................................. 268

Form: Budget and Balance Report ...............................................................269
Budget and Balance Report ....................................................................... 269

Form: Audited Utilisation Certificate .............................................................271
Audited Utilisation Certificate ..................................................................... 271

( xxxvi )

Section I: Book-keeping
Book-keeping is an accounting term, which simply means keeping books of account. These books form the backbone of accounting and accountability -- without these internal controls will break down, no financial reporting can occur, and financial decisions will be taken in a mist of gray vapour.
In this section, we discuss the basics of book-keeping, in the context of non-profit work. The solutions suggested here are mainly designed for NGOs working with grants from donor agencies, both Indian and foreign. The section covers double-entry concepts, vouchers, accountbooks, trial balance, etc. as also some specialised records such as salary register or fixed assets register.

Double Entry Concepts

3

Understanding Debit and Credit

8

Multi-purpose Voucher

12

Cash Books

15

Better Book-keeping

17

Trial Balance

36

Computerised Accounts

44

Receipts

49

Revenue Stamps

54

Salary Records

57

Fixed Assets Register

61

1

2

Balancing the Accounts
An introduction to double entry concepts

Balance is not an original phrase was ‘libra bilanx’ which
From this phrase, the word
‘balance’. From there, it was years ago.

English word. The original Latin means ‘a scale with two pans’.
‘bilanx’ passed into French as adapted into English almost 700

Today, ‘balance’ has two meanings. The general meaning is that of a ‘weighing instrument’. For accountants, it means ‘surplus’ or difference between debit and credit figures.
Accountants use this word in many ways. Trial Balance means trying to see whether the debit and credit amounts are balanced. A Balance Sheet shows the balances of accounts on a sheet of paper. When an accountant calculates the difference between debit and credit figures, it is called balancing the accounts.
Double entry accounting is based on the Balance (
) shown above. When you place an amount on one side, the balance tilts to that side. To make it even, you have to place the same amount on the other side also. You end up making two entries for each transaction. That is why this type of accounting is called Double Entry System of
Accounting.
If you understand this properly, you will have less difficulty in dealing with accountants.
The following story about Shankar tries to explain this idea. It uses a physical Balance (
) as a symbol.

Shankar’s Accounting Troubles
In the beginning of the year, accountants start with some previous balances. These are called opening balances. Shankar started with three opening balances(
): Cash,
Bank and Trust Fund. There was also a Total in the last column. Each had two sides: left and right.

The Opening Balances
1.
At the beginning of the
Cash
Bank
Trust Fund
Total
year, Cash and Bank were tilted to Left.
Trust Fund
1,000
5,000
6,000 6,000 6,000 was tilted to right.
All the figures on left sides were added up and shown on Left side of Total
.
Similarly, total of figures on right sides was shown on Right side of Total
.

A Cheque is Received

Cash

Bank

1,000

5,000

Trust Fund

Total

6,000

10,000

he put it on the left side of the Bank

6,000

6,000

10,000

2. Then Shankar received a cheque of 10,000 for a grant. He deposited the cheque at the
Bank. Then, in his account books,

.

This created a problem. He found that the Left Side of the Total heavier. What could he do?
3. A temporary
Cash
Grants
Bank
solution was needed. Shankar decided to bring in another
.
He called it the
1,000
5,000
Grants
. He
10,000
10,000 then put a balancing entry of Rs.10,000 on the Right Side of the Grants

had become

Trust Fund

6,000

Total

6,000

6,000

10,000 10,000

.

4. Shankar had now become bored with this paper work. He decided to go out and do some real work. He picked up his motorcycle and went into the field.

The Purchase of Petrol
5. On the way, the motorcycle started sputtering. Shankar found that the petrol had finished. He went to a petrol pump and purchased petrol for Rs.100. He put the cashmemo in his pocket.
6. Through the day Shankar visited several villages. He met many people and told them about the People’s Rally planned for 31st October. Shankar also visited the two NFE
Centers to see how the children were getting along.
7. Coming back to the office late at night, Shankar read the newspaper and letters.
Then Shankar locked up the office and went home.
8. When Shankar reached the office
Cash
Grants in the morning, he remembered that he had paid Rs.100 for the
1,000
petrol. He took
10,000
out Rs.100 from the cash box.
100
Then he put this amount on the Right Side of the Cash
:
9. Again Shankar found that the Total

Bank

5,000
10,000

Trust Fund

6,000

Total

6,000

6,000

10,000 10,000
100

had tilted to the right.

Another Balance is Needed
10. Shankar did some thinking. By paying money to the Petrol Pump, he had reduced the cash available. That much was clear because Shankar now had only Rs.900 in the
Cash Box. Where should he put the balancing entry? Could he put it on the Left side of the Grants
? After all, the Grant should also reduce by Rs.100. But Shankar was not sure.
11.
Shankar decided to bring in another for the time being.
Shankar
called this the Expenses
. He then put the 100 rupees on the left side of the Expenses
.

Cash

Grants

Expenses

Bank

1,000

Trust Fund

5,000
10,000
100

6,000

10,000

Total

6,000

6,000

10,000 10,000

100

100

100

12. Shankar was quite happy with the result. He decided to spend the rest of the day in the office. He had to reply to some letters and also write a report of the work done.

Raju’s Salary is now Paid
13. In the afternoon, Raju came to the office. His salary had not been paid last month because he had gone home to get married. They exchanged gossip and talked about the work. Then Shankar opened the cash box and paid him Rs.900.
Cash

Grants

1,000

Expenses

Bank

5,000

Trust Fund

Total

6,000

6,000

6,000

14. Following the same rule,
Shankar
made two entries. The result looked like this: 15.
Shankar
leaned back and
100
100
100
100 looked at his handiwork.
It
900
900
900
900
looked quite nice.
Shankar felt he was becoming quite good at accounts. But the Cash Box was empty and so was the lantern. Shankar filled up the lantern from the Kerosene tin. For the
Cash he would have to go to bank the next day.
10,000

10,000

10,000 10,000

Some Cash is Withdrawn
16. Next day Shankar reached the town early. Before going to the bank Shankar met one of his journalist friends and told her about the Rally. She was very interested and promised to attend. Then Shankar went to the bank and took out Rs.2,000 by cheque.

17. After spending some
Cash
Grants
Expenses
Bank
Trust Fund
Total
more time in the town, Shankar went to the field.
In the evening
1,000
5,000
6,000 6,000 6,000
Shankar came back to the office
10,000
10,000
10,000 10,000 and started his
100
100
100
100 balancing game
900
900
900
900 again. He put
Rs.2,000 on the
2,000
2,000
2,000 2,000
Left Side of the
Cash
. He also put the same amount on the Right Side of the Bank
. This time there was no confusion – the Total did not tilt to the Left or the Right:

The Heavier
Columns
18. Shankar now wanted to check out his work. He decided to total up all the columns and find out which were heavier. The result looked like this: Cash

Grants

Expenses

1,000

Bank

Trust Fund

5,000
10,000

6,000

10,000

Total

6,000

6,000

10,000 10,000

100

100

100

100

900

900

900

900

2,000

2,000

2,000

2,000

6,000 19,000 19,000

2,000
3,000

1,000

10,000

1,000

15,000

A Trial Balance is Made
19. Taking a piece of paper, Shankar calculated the differences in each noted these differences on another paper.

20. Since Shankar was Trying to Balance,
Shankar called the new paper ‘Trial Balance’.

Trial Balance
Name of

Left Right Side
Side

Cash

2,000

Grants

10,000

Expenses

21. Happily for him, both the sides showed the same Totals.
This meant that the Trial
Balance was tallied.

An Accountant’s View

1,000

Bank

13,000

Trust Fund

6,000
Total

16,000

. Shankar

16,000

a special book called ‘Cash Book’.

Shankar used Balances (
) in the story. Accountants call these
‘Accounts’. They also use special books to make their entries. All entries related to Cash are made in

Some people use one of the columns in the cash book to record bank transactions.
Others open a Bank Account in the ‘Ledger’.
For each of the entries in the Cash Book, double entry is completed by posting these into a Ledger. In the ledger, separate accounts are opened for each type of expense.
An account is also opened for Grant Received. The Ledger may also have accounts for
Fixed Assets.
At the end of each month or year, accountants prepare a Trial Balance. This helps them find mistakes. The Final Accounts (Balance Sheet, Income & Expenditure Account) are prepared from this. NGO’s also prepare another statement called Receipts & Payments
Account. This gives a summary of all cash and bank transactions during the year.

Understanding Debit and Credit
Most of accounting can be summed up in two words: Debit and Credit. What do these words mean? Debit and credit is supposed to very boring and tedious for human beings. For accountants, this is the very essence of life.

Debit & Credit: Left or Right
You might have heard the following story about an accounting wizard:
A wealthy Wall Street banker was famous for his numerical skills - he could take in the most complicated balance sheet at one glance. Trained as an accountant, he would come to his office every day, open a wall safe behind his desk, take out a small piece of tightly rolled paper, look at it, then place it back in the safe.
When the banker died, his junior was naturally very interested to know what was written on that slip of paper. He gained access to the safe, took out the paper, and unrolled it. Written in the banker’s own handwriting were these words: ‘Debit is on the left, credit is on the right.’
And thereby hangs another tale. Why is debit on the left and credit on the right? For finding an answer, we have to go back in time to the middle ages and look at the origins of word debit and credit. It turns out that debit is related to the word debt. Where did debt come from?

debt7
Debt originated as debita, the plural of Latin debitum ‘that which is owed’, a noun formed from the past participle of the verb debere8 ‘owe’. In the 15th century, English independently borrowed
Latin debitum as debit. People who owed money to others were called ‘debtors’.
Debtors in those times really had a tough time: prisons were full of them. And of course, we all know what Shylock would have done to Merchant of Venice, had Portia not been around. So owing money to someone was probably a bad thing.

left9
So was being left-handed. People who were left-handed were considered evil by the church.
From 1484 to 1782, thousands were burned alive at the stake as witches or sorcerers 9A. The left hand continues to be considered unclean even today in India, though for different reasons.
The Old English word for ‘left’, was winestra’. Tracing the origin of this word, we find that

originally it meant ‘friendlier10’. Its polite application to ‘left’ is a reminder that historically the lefthand side of the body has been superstitiously regarded as of ill omen. To call it ‘friendly11’ was an attempt to placate the evil forces of the left 12 .
Putting these two things together, it is logical that debit would have been put on the left. The logic of putting bad things on the left continued with the Balance Sheet also, where assets were put on the right and liabilities on the left.

7

Used since 13 th Century
Latin debere ‘owe’, source also of English debenture, due and duty, was originally a compound verb formed from the prefix de - ‘away’ and habere ‘have’, literally ‘have away’, that is ‘keep in one’s possession what belongs to someone else’.
9
In use since 13th Century
9A
The World Book Encyclopedia, 1997 edition, vol. 21; page 282
10
It is related to Swedish vän ‘friend’
11
A usage which survives in Swedish vänster and Danish venstre ‘left’
8

8

Once we have got this far, working out the credit side is much easier. The word credit comes from the Latin word credere ‘to believe, trust’. It has positive connotations (creditable, creditworthy, credible). The word ‘right’ similarly has positivism (doing the right thing). So credit entries were put on the right.

Yes, but what does all this lead to?
In the world, there are two forces at work, good and evil. A coin has two sides, heads and tails.
Numbers can be of two types, either positive or negative. A person has two hands, left and right.
Accountants recognised this simple truth long ago, and adapted it to their purposes. According to them, every transaction involves two parties, a giver and receiver. If you receive something, then someone, somewhere must have given it to you.
If you receive something, you become a debtor. Receiving is, therefore, considered to be a debit activity. On the other hand, if you give something to a person, you become his (or her) creditor.
Giving is, therefore, ‘credit’.
Debit and Credit are, therefore, two sides of a transaction. Each accompanies the other.
Accountants also say that debits and credits must always be equal to each other in any transaction. Or whenever there is a debit, there should be an equal and opposite credit. Sounds familiar? A gentleman named Sir Isaac Newton recognised13 this truth and applied it to Physics in 1687.
The Third Law of Motion (Every action has an equal and opposite reaction) was thus born.

The three rules of Debit & Credit
In order to make simple things complicated, accountants say that there are three types of accounts: Real, Personal and Nominal. If you know which type of account you are dealing with, you can apply the correct rule. Of course, identifying the type of account is not an easy thing.
Still let us give it a try.
1.

Real Accounts are tangible, physical, real things. For example, a building, cash, vehicle. For these accounts, the rule is ‘Debit what comes in, Credit what goes out’.

2.

Personal Accounts are, accounts of persons. The definition of person includes organisations also. Here the rule is very simple: ‘Debit the Receiver, Credit the Giver’.
This doesn’t need much explanation.

3.

Then comes the master-stroke of double entry accounting: Nominal Accounts. The word nominal comes ultimately from the Latin word nomen (name). Hence the meaning: existing in name only. Nominal Accounts are actually a figment of accounting imagination. You can never touch, see or smell them. Accounts of income (sale, fees, interest earned) and of expenses (traveling, printing, rent, etc.) are nominal accounts. The rule for nominal accounts is also rather simple: Debit all expenses and losses.
Why? Because expenses are bad things, they should be kept on left. On the other hand (i.e. The right hand), income is good. Therefore, credit all incomes and gains!
Simple, isn’t it?

12
13

No pun intended!
It is not clear whether Sir Isaac Newton had taken accounting classes during his college days…

9

A simpler Alternative
If these rules sound complicated then here’s a another14 way:

a. The Good and the Bad
Keep in mind only two things:
1. Receiving is bad (because ultimately you have to repay it). Keep the Receivers on the left. 2. Giving is good (doesn’t every faith say that?). Keep the Givers on the right.

b. The Humanisation Process
If you are comfortable with that, proceed as follows: q First give a personality to each account. Treat them like human beings. ‘Cash’ will become
‘Mr. Cashier’. Bank will become ‘Ms. Banker’.

q

Similarly, when you look at tangible things, go behind them to the persons. For example, if you have bought a Maruti Gypsi, think that Ms. Banker has paid money to Maruti
Udyog Ltd.

q

If you have incurred expenses, once again give them a personality. Your train fare has been paid to Indian Railways.

q

If you receive a donation from a donor, give the donor a personality. Say that Mrs. Donor has given you the money.

c. Only one rule for everyone
Now apply the basic rule:
Transaction

Receiver

Giver

Rough Entry

Withdrew cash from bank

Mr. Cashier

Ms. Banker

Dr. Mr. Cashier
Cr. Ms. Banker

Bought a Maruti Gypsy

Maruti Udyog Ltd.

Ms. Banker

Dr. Maruti Udyog Ltd.
Cr. Ms. Banker

Spent money on rail fare

Indian Railways

Mr. Cashier

Dr. Indian Railways
Cr. Mr. Cashier

Received a donation

Ms. Banker

Mrs. Donor

Dr. Ms. Banker
Cr. Mrs. Donor

14

This simple method has been known to cause serious confusion amongst trained accountants.
Accountants are requested not to read this.

10

d. Back to square one
Now wave your magic wand and depersonalize them with the first swing. In second swing, turn them into regular accounts.
Rough Entry

First Swing

Second Swing

Dr. Mr. Cashier

Dr. Mr. Cashier Cash

Dr. Cash Account

Cr. Ms. Banker

Cr. Ms. Banker Bank

Cr. Bank Account

Dr. Maruti Udyog Ltd.

Dr. Maruti Udyog Ltd. Gypsy

Dr. Gypsy Vehicles Account

Cr. Ms. Banker

Cr. Ms. Banker Bank

Cr. Bank Account

Dr. Indian Railways

Dr. Indian Railways Railway Ticket Dr. Railway Ticket Travel Account

Cr. Mr. Cashier

Cr. Mr. Cashier Cash

Cr. Cash Account

Dr. Ms. Banker

Dr. Ms. Banker Bank

Dr. Bank

Cr. Mrs. Donor

Cr. Mrs. Donor Donors

Cr. Donors Donations Account

Account

e. Checking back…
Let us now go back and see whether our results match with accounting rules.
Final Entry

Type of

Transaction Analysis

Rule Applicable

(Second Swing)

Account

Dr. Cash Account

Real

Cash came in.

Debit what comes in.

Cr. Bank Account

Personal

Bank gave the money.

Credit the giver.

Dr. Vehicles

Real

Vehicle came in.

Debit what comes in.

Cr. Bank Account

Personal

Bank gave the money.

Credit the giver.

Dr. Travel

Nominal

Travel is an expense.

Debit all expenses and losses.

Cr. Cash Account

Real

Cash went out.

Credit what goes out.

Dr. Bank Account

Personal

Bank received the money. Debit the receiver.

Cr. Donations

Nominal

Donation is an income.

11

Credit all income and gains.

Multi-purpose Voucher 15
Some of our accounting problems are due to the present design of the voucher. Can we have one voucher which will meet all our needs?

What is a voucher
When you make a payment to a shop, you get a cash memo or a bill. Details of items purchased and their value is written on this.
Before you enter this payment into your cash book, you attach a voucher on top of the cash memo. This voucher gives more details about the expense (who purchased the items, purpose etc.). The head of account
(such as Stationery,
Lok Jagran Manch
Equipment Purchase etc.)
Machhera, A.P. is also written on the
Voucher No...........
Date..............
voucher. The name of the
Funding Agency or
Name.....................……………………….……............…......
project is also noted. The
Address.........................................……………...........……..…
Secretary or Treasurer signs the voucher to show
Rupees............................……………………...Paise….........
that it has been approved.
The voucher is useful because it helps in proper approval procedures and accounting. If you are not using a voucher, think about introducing it.

Expense Head

Description

Amount (Rs.)

The
Present
Voucher
If you are using a voucher, it may be a simple expense voucher. This voucher is very popular with NGOs. There are many variations in its design. One such design is shown here.
This voucher has many variations in design and layout. But one thing is same in all such vouchers: these can be used only for payments.
Adjustments can not be made with these vouchers.

15

Total
Expense of Rs...…………………………............………..
Paise…………………….….………..... is approved.
Treasurer

Secretary
Receipt

Received Rupees.............……………….... Paise...………
Cashier

Receiver

Based on AccountAble 4: The New Voucher

12

What are adjustments
Advance for Expenses
Suppose you have given Rs.500 advance to Shri Sohan Singh. He is going to Ahmedabad to attend a meeting. When he comes back, he submits a Traveling Bill for Rs.870. Simple calculation shows that you have to pay him another Rs.370. So you pay him the money. How will you record this transaction? We have found that NGOs are recording this in different ways. When the advance of Rs.500 is given, some NGOs do not enter it into the cash book. They note it in a separate register. Later when Sri Sohan Singh submits traveling bill, they tear up the first voucher/ slip for Rs.500 and cross out the entry in register. Then they make the payment of Rs.370. The cash book shows a payment of Rs.870 instead of Rs.370.
Another way is to show a return of Rs.500. This is entered as receipt in the cash book. A full payment of Rs.870 is shown on the payments side. Once again, the actual cash paid on this day is Rs.370 only.

Expenses Payable
Sometimes you do not make payment for expenses immediately. For example, if you have organized a camp, you may have hired a tent. When the shop keeper gives you a bill, you may make the payment two or three days later. Similarly, salary for any month is paid four or five days after the month is over.
When you are closing the accounts at the end of the year, these expenses get left out. They will be booked only in the next month (say April), which falls in the next accounting year.
To get around this problem, you either try to make all such payments on say, 31st March. Alternatively, you may be back-dating the payment. This helps you show full utilization of the money during the
Budget Period.
Actually, all the above methods are wrong because they do not show true transactions. Either the amount is not being recorded correctly or the dates are getting changed. This results in problems such as shortage of cash or wrong structure of accounts.

The Multi purpose Voucher
These problems can be solved if voucher design is proper. Such a voucher should provide for adjustment entries. It should also provide for multiple entries. Multiple entries are required when one particular payment is booked under two or three accounts. To save on stationery, it would be useful if the same voucher could be used for cash payments, bank payments, and adjustment entries. Also, now that Accounting Standard - 1 has become compulsory for most NGOs, you will need a voucher which allows for adjustment entries.
The multi purpose voucher on the next page is meant to solve the above problems. It has been designed specially for NGOs which receive funding from several Agencies.
The main design of the voucher is enclosed in the red box. Various features of the voucher are explained by red arrows. For better understanding, the voucher has been filled up in magenta ink.
If you find the design useful, use it next time you get your vouchers printed.

13

AccountAid Kit # 4

The New Voucher
You can use the same voucher to account for different types of expenses. If more than one Account is to be debited, use the two

To complete the double entry, some accounts will be credited. Here,
Sri Sohan Singh had paid for some of the expenses from his imprest (meaning advance taken).
Balance Rs.370 has been paid in cash.

You may not find this entry on the vouchers you use at present. This is so because your present vouchers may be ‘Cash
Vouchers’.
In such vouchers, it is assumed that ‘Cash in Hand’ will b di d

Write Expense Head here. It should be similar to the Budget Heads. This helps in preparing
Utilization
St t t Write name of Funding
Agency for each item of expense. This name will be copied in the cash book also. This will help you post the expense in the right ledger.

The stamp means that this is a General voucher. It should be entered in General cash book only. For
FCRA vouchers, use a similar stamp saying ‘FCRA’.

Lok Jagran Manch, Machhera, A.P.

Write voucher number here.
Voucher numbers should be given after cash book has been written up for the day. ‘G-’ before the voucher number means ‘General’ voucher.
For FCRA vouchers, you can put
‘F-’ instead.

Voucher No . G-397
Date 28.5.94

Budget / Account Head

Project / Agency

Dr. Traveling

Amount (Rs.)

CRY Project

870

00

Dr.
Dr.
870

Cr. Sri Sohan Singh Imprest
Cr. Cash in Hand

Main Ledger
General

00

500

Total

00

370

Description

00

870

Total

00

4-1

Sri Sohan Singh will sign here when he receives cash. If the cash amount is more than Rs.500, use a revenue stamp of Re. 1.

Total Rupees (in words) Eight Hundred and Seventy only
Cash paid (in words) Rs. Three Hundred and Seventy only

Accountant

The accountant will check the voucher and supporting bills. He/ she should sign the voucher after that. Very often the voucher itself is made by the accountant.

Sohan S.

John Kuriakose

M L Sharma
Explain briefly what the voucher means.
Give name of person who was paid, why the expenses was incurred and any other special details.
Attach
supporting cash memos to the h Accounts are maintained in different ledgers. Imprest Accounts are kept in Main Ledger.
The name of the ledger should be written in this Traveling Bill of Sri Sohan Singh for visit to Ahmedabad to participate in meeting from 12 May to 15th May ‘94 (Details attached)

Punch here with double punch and file vouchers in
Index File or Tag

The date on which the voucher is made. It is simpler to put the date when payment is made.
Otherwise voucher may not be entered on the correct date.

Project Incharge

Treasurer/ Secretary

The total amount on the voucher should be given here in words. This means no one can change the amount by adding a digit to the t Receiver

The voucher should be signed by the project Incharge, if there is a project
Incharge.

Write the amount of cash paid. Note that this amount may be different from Total amount. In any case the Secretary or Treasurer should check the voucher and sign it.

© AccountAid India 1994, 1996

Cash Books16
Problem of Multiple Cash Books
Many of the weaknesses of the accounting system are due to the practice of multiple cashbooks. This increases workload on the accounting staff and means unnecessary duplication of effort. It becomes difficult for books to be updated regularly. This weakens internal controls and makes it impossible for Trustees to verify cash. Accounting books also become very complicated and mysterious. This allows transactions to remain undetected, allows manipulation of cashbalances, internal transfers to cover up diversion of funds and double-booking of expenses.

Dual Cash Books
This system needs to be discontinued at the earliest and replaced with the standard dual cash book system.
Dual Cash Book 17 system means your accounts people can prepare useful reports instead of wasting time on maintaining countless cash books. It also means lower stationery costs and audit fees.

Dual Cash Book System

Funding Agencies
It is wrongly assumed that Funding Agencies insist on separate cash books. If you read the conditions carefully, you will find that only separate accounts are specified. This means that separate ledger accounts are required. If the letter says ‘separate set of books’, then only a separate cash book is meant.

16

Based on AccountAble 3: Cash Books
A separate cash book will also be needed for Income Generation Activities (if you have any such projects) under Income Tax Law.
17

15

However, before implementing this system for the first time, you may need to consult with your present Funding Agencies.

Cuttings / alterations
No cuttings or alterations should be made in the cash book or ledger. Correction Fluid should also not be used.
Any mistakes should be corrected by passing a rectification entry. This is done by passing a counter-balancing entry also known as a reverse entry.

Writing cash book regularly
The cash books should be written regularly. Normally, the backlog should not be more than one or two days. In case some one falls ill, another person should be asked to write the cash books temporarily. All cash balances should be inked up by the 7th of next month. Also remember that the Rough Cash Log forms a part of the official record and should not be destroyed.

16

Better Book-keeping18
How can you make your account books healthier? You have three options:
1. Get them to join a Health Club, Gymnasium or local Akhada;
2. Give them a low-cholestrol, high fibre and protein diet;
3. Adapt some of the tips given in this chapter.
Assuming you have chosen the third option, read on:

Wonderful Vouchers
Vouchers are the proof of your hard work. Each voucher will stand up to the auditors and give witness for (or against!) you. Take good care of the vouchers.

Use covering vouchers
Cash memos feel cold in winters without a covering voucher. Therefore, prepare vouchers for all transactions – even those where you have a cash memo or a bill. It is not a good practice to use the cash memo or bill as a voucher.
The proper format of a voucher is given under topic ‘Multi-purpose Voucher’ in page 14. This is also called journal voucher and can be used for payments, receipts as well as journal entries.

Coloured vouchers
Some organisations print covering vouchers of different colours like red, yellow, blue, green, pink, etc. Each colour is used for a different project. This is meant to ensure that vouchers don’t get mixed up.
This also gives rise to a few problems: q You have to print and stock different types of vouchers. Sometimes, vouchers remain unused even when the project has ended. q You have to get the correct voucher signed at the time of payment. But in reality, the relevant project may not be known, if the expense is of a general nature.
Is there an alternative?

Agency stamp
Yes. You can get rubber stamps made with different project or agency names.
These are put on the voucher and the cash memo. The stamp helps identify the project. CRY
Funds

Cash paid stamp
Similarly, a ‘Paid’ stamp can also be used. When this is put on the cash memo or the voucher, you know that money has been paid to the concerned person.

Staple – Twice
Staple the cash memo or support to the voucher on the left-hand side. If you staple it twice, it will never get lost. Where supports are more, use bigger staples to hold the cash memos together. 18

Based on AccountAble 49, 69, 70, 71: Better Book-keeping 1 to 4

17

Punch – Carefully
Punch the vouchers on the left-hand side carefully. Let the punch bite deep inside the margin. Make sure the punch holes are evenly aligned.

File – Properly
File the vouchers in an arch file (or lever file).
It is easy to handle the vouchers in this file and they are better protected.

Overloaded File

Never overload the file with too many vouchers. Going through an overloaded voucher file is very difficult. Vouchers in overloaded files tear up faster.
Also the paper lock becomes loose after a while.
What is the paper lock? It looks like this.

Properly loaded file

Always apply the paper lock finished using the file. hold the vouchers tight and

after you have
Paper lock will

protect them from falling out of the file.

Using old file covers
You can also use old spring files to file your vouchers. Spring files can be cut down to voucher size and used for filing vouchers. These files are light in weight and easy to handle. Also they take
Old spring file cut and used for filing vouchers less storage space in comparison to the arch files. This recycling helps you save money also.

Labelling
Labeling helps in locating voucher files later on. Put a label on top of the file. Put another label on the side. Label on the side is useful when you keep files in a stack or a row.
What does the label show? q Your NGO’s name and address q Your financial year q Month / year / numbering of vouchers q Project or location name

18

Numbering the vouchers
Many people do not number the vouchers serially. This makes it easy to insert vouchers or remove them.
It is up to you whether or not you number the vouchers. But if you want to number them, use an annual serial. Also use a simple numbering system – avoid monthly (or daily!) numbering systems. Paper for the vouchers
Some people use very thin paper for the vouchers. This paper is a little better than kite paper.
It also lasts just as long.
Vouchers suffer a lot of manhandling. They should be made with good, tough paper. Use paper which is at least 70 gsm in weight and has good bonding strength.

Bind the old vouchers
Your old vouchers are full of sweet memories. Also you have to keep them for at least ten years for Income tax purpose.
Take good care of them. Have them bound in small bunches, with a cardboard cover, and cloth on the spine. Put a label on top and the side.

Natty Narrations
Narrations give important information about the transaction. They also help speed up the review of accounts.
Narrations should be crisp and cover all important facts. Don’t waste effort on routine phrases like ‘Being the cost of…’. Narrations are required at three places.

Give good narration on vouchers
This is the first place for narrations. It is important to have the names of the payee and the payer. Also what services or goods were purchased. If these are recurring payments (salaries, rent) , give the relevant month. If the payment is for an event or some particular work (camp, pond etc.), give date and place. Finally give the purpose of the payment.
Some examples: q ‘Salary paid to 10 teachers by Smt. Vinita Devi for March ’99 per salary register’ q ‘Paid to Singhi Store, Makrana by Shri Lal Singh for purchase of 3 bags (100 kgs each) of boiled rice for Women’s camp at Macchera (April ’99)’ q ‘Rent paid to Smt. Chelamma by Km. Laxmi for Rangpatnam field office for February-March
’99.’

Provide narration below the cash book entry
More or less the same narration should be copied from the voucher to the cash book.

Give brief narration in ledger also
Ledger offers less space for narration. Still, try to pick up most relevant information and put it there. 19

You can cut out superfluous words here. For example, in an account for ‘rent’, there is no need to write ‘Rent paid for…’. Just say ‘Rangapatnam office: Feb-Mar-99'.

Narrations in computerised accounts
Computerised accounts do not mean that narrations can be skipped. This is wrong. Full and proper narrations are even more valuable in computerised accounts.

Reduce Receipt Books
One Receipt Book at a time
Don’t use 2-3 receipt books at the same time. Start one receipt book and use it from beginning to end. Start the next one only after the first has finished.

Use pre-numbered Receipts
Ask the printer to put serial numbers on the receipts, before sending them to you. Do not number the receipts by hand.

Carbon type receipts are better
Avoid using counter-foil type receipts. Carbon type receipts are better because all the details get noted down and you do not need to fill the same information twice. Also there are less chances of alteration. For more information on receipts, please see ‘Receipts’ on page 49.

Captivating Cash Books
Before we go deeper into cash books, one simple question: Why do you need a cash book for the office?
Well, that’s because the office cash belongs to office. And we need to keep track of how much has been spent. Also the cash book starts the chain of book-keeping.

The Daily Cash Book
But why do you maintain the cash book on a daily19 basis? Why can’t you simply have an account in the ledger called ‘Cash in hand’?
Firstly cash can be very tempting to most people. Secondly, once cash is lost, it is difficult to identify or recover.
To help people overcome this temptation, special controls were designed. We needed to know how much cash we should have at any point of time. Then we could compare this with the actual balance. If the two tallied, then you could be sure that the cashier was not getting tempted.
Cash control is central to the entire control mechanism in any organisation. Controls over cash depend on how often you use cash. For example, banks handle a lot of cash. So they have double / triple layers of cash control.
What about NGOs? Most payments are made in cash. But do NGOs have good controls over cash? Some do and some don’t.
Let’s see how we can make our cash books and cash control stronger.

19

Based on Actually minute to minute basis

20

Reduce number of cash books
NGOs receiving foreign funds are required to keep a separate cash book for FC funds. As a result, many NGOs maintain separate cash books20, one for each agency or project.
Is this a good practice? No. Multiple cash books weaken the control systems.
Ideally, you should use just one cash book for FC funds and another for Indian funds 21 . You can keep separate ledgers for each agency / project.
The next question that arises is how do you make entries (which will be posted to several ledgers) in one cash book. For this, each entry should be marked with the ledger where it would be posted. We call this the dual cash book system. An example is given below:
However, if you are running an IGP directly22, then you should keep a separate cash book for that also23 .
Income
Generation
Programs are profit-making ventures, therefore, Income
Tax people ask separate cash book for this.
Many Agencies 24 now encourage the dual cash book system. For other agencies, discuss it with them before implementing dual cash book system. For more details on dual cash book system, please refer
‘Cash Books’ on page 15.

Ink up the totals and balances When you write a cash book, mistakes are always possible. Accountants, therefore, often total up the cash book in pencil. But how long should these totals remain in pencil?
If you are writing your cash book regularly and also tally your physical cash at least once a month, you should ink up the totals, including carry forward figures and brought forward figures. th These should be inked up by 7 of the following month both on the receipts side as also the payments side each month.

20

Number of cash books (for FCRA holding NGOs) ranges from 2 cash books up to 72 cash books. 7-8 cash books are quite common.
21
If an NGO has offices at several locations, then they will need a separate cash book for each location.
22
Products are sold / purchased by you
23
Required under Income Tax Act
24
Such as CRY, Diakonia, Oxfam America, Sida

21

No blank lines or pages in cash book
It is normal practise to leave one blank line between each entry in the cash book. This is done so that each entry is separated clearly. There is no objection to this. But should you leave more than one blank line between entries in the cash book? The answer is ‘no’. If more than one line is left blank in the cash book, entries can be inserted afterwards. Similarly if blank pages are left in the middle of the cash book, the cash book can be altered. A good cash book would, therefore, look like as shown in the right side:

Maintain a rough cash book
Most cashiers keep a diary or notebook where they note payments and receipts immediately.
Account head etc. is not given.
This helps them keep track of cash in hand. The formal cash book is normally written up later, after the vouchers have been prepared. This diary or note book is called a rough25 cash book. This should be preserved for future reference.
Some people make a note of payments on loose pages. These get lost or are torn up afterwards.
This is a bad practise and should be avoided.

Care for your Cash
Keep it in a cash box
Don’t let the office cash get mixed up with other cash. Keep it in a cash box (small one will do). If not, keep it in an almirah in the office. And do keep all the office cash together in one place. Auditors find it very annoying when bits and pieces of cash keep surfacing from this room and that room.
Can you keep FC cash and Non-FC cash together in the same box?
The answer is ‘yes’. Just ensure that the total cash in the box tallies with the total of balances in the FC cash book and General cash book.

25

‘Kutchi Cash Book’ in Hindi speaking areas

22

The mobile cash box
Smaller offices cannot afford full time cashiers. Mostly, the Chief
Functionary ends up keeping the office cash in his / her pocket. What to do in such a case?
Make a voucher debiting the chief functionary every time office cash is given to him or her. Later, you can pass a journal voucher when they report expenses. This will ensure that the cash book shows the actual cash in hand at any time.

Reduce cash payments
Reducing the number of cash payments helps reduce many problems. You don’t have to go to bank very often or carry large cash balances. Chances of mistakes and pilferage also come down. Payments to your auditors, consultants, travel agents etc. should mostly be made by an account payee cheque. Try and encourage other people around you to accept cheque payments.
This includes staff members and regular suppliers. In many cases, telephone and electricity bills can also be paid by cheque.

Plan your cash flow
Avoid withdrawing and keeping huge amounts of cash in your office. You should work out the cash flow required each week or each month and plan your cash withdrawals. The ideal amount of cash withdrawals also depends upon the volume of per day expenditure, availability of signatories and the distance between your office and bank.

Insure your cash
However, if you still need to keep a lot of cash at office, think about insurance. Such an insurance policy is called ‘Cash in Safe Insurance’.
Remember that you can also have another policy to cover the risk of carrying cash from bank to your office and from main office to field office. This policy is called ‘Cash in Transit Insurance’.
The annual premium of these policies is very nominal. The premium is calculated on the basis of distance of your bank from office and from office to field office as well as amount of withdrawals and amount kept in your office.
For more information on premiums and cover, you can contact any branch office of insurance companies 26 or agents.

Tally the cash periodically
Cash balance in your cash book and physical cash lying in your cash box are like two identical twins. They should always be the same. To ensure this, tally the cash periodically, say every week or every day.
And if you run out of fingers to count your cash, try the method followed by Min tribe…
Instead of counting by 10s as most people do, the people of the
Min tribe27, in Western Papua-New Guinea, count by 27s. Where do they get the number 27?
26

This insurance is provided by general insurance companies (New India, Oriental, United India, etc.) and not by LIC
27
Source: “The World of Ripley’s Believe it or not”, Balck Dog & Leventhal Publishers, New York

23

By counting not only on their fingers, but also on various other body parts. They begin counting on the little finger of their left hand, then when they run out of fingers, they count the left wrist, forearm, elbow, bicep, shoulder, side of the neck, ear and eye – that’s 13. The bridge of the nose makes 14. Then the right eye, ear, side of the neck, shoulder, bicep, elbow, forearm, wrist and five fingers make a total of 27 !

Legendary Ledgers
Ledgers give you a clear picture of the funds spent under each head every month and the overall picture in one year.

Separate Ledgers
While you can keep a common cash book as discussed earlier, a separate ledger would be needed for each agency. Each ledger will be labeled with the Agency / project name. You can post entries 28 into these ledgers directly from the General Cash Book or the FCRA cash book.
Such ledgers are called sub-ledgers. These help you keep separate accounts for each agency without loss of control over cash. In the sub-ledgers you can open ledger accounts according to the budget heads of the relevant agency. This will help you prepare financial reports for the agency. Ledger Accounts, which are not related to any specific agency, are kept in the General Ledger or the main FCRA ledger.

Ink up the totals and balances
Spend some time at least once in a month to properly ink up all the ledger balances. All ledger th balances should be inked up by the 7 of next month.

No blank lines in ledger
Avoid leaving blank line in between ledger entries. If you leave a line for totals, cross out the blank space with a wavy line, as shown here.

28

Related to a particular agency or project

24

Other Records
Most common of the other records are listed below:

Salary Register
Do you need a salary register or can you pay through vouchers / pay-slips? The answer depends on the number of employees you have.
If you have only 2-3 employees, you don’t need a register. But if you have 5-6 employees or more, then it would be good to keep a salary register. In some states, it might be necessary 29 under local regulations as well.
More information about salary registers is given under ‘Salary Records’ on page 57.

Fixed Assets Register
This register keeps track of the fixed assets that you own. What is a fixed asset? Any valuable30 thing that you own and can use for more than one year. Consumables such as stationery are not treated as fixed assets.
In some NGOs, fixed assets are charged off to project expenses. This is a wrong accounting treatment. Money paid for fixed assets should be reported to the donor as ‘utilised’, not as
‘spent’. Secondly, such assets can be capitalized as shown below:
Income and Expenditure Account
Expenditure
Project expenses
Less: Assets capitalized

Amount

Income

90,000

Grant Received

8,000

Less: grant for capital items t/f to
Fixed Assets Reserve

Amount
91,000
8,000

The fixed assets will appear as below in the Balance Sheet:
Balance Sheet
Liabilities
Fixed Assets Reserve

Amount

Assets

8,000

Fixed Assets

Amount
8,000

Organisations do not need a fixed assets register when they are formed. As they grow and start adding assets, they should start a register. It is better to start early, when you buy the first motorcycle or set of chairs. Recreating a register in the tenth year can be very frustrating.
The register is essential for all large organisations. It is also very useful if you have multiple offices or decentralized operations. For format and other helpful hints on this, please see
‘Format of Fixed Assets Register’ on page 64.

Log Book
Most people expect you to keep a log book for the office vehicles. The log book helps keep track of how the vehicle is being used. You can also monitor fuel consumption, servicing etc. through the log book. The log book can also be used as evidence if you are wrongly implicated in a hit-and-run case!
Most NGOs are not able to keep a log book because the tachometer cable keeps breaking down. In such a case, you can try and note down estimated distances, without giving the meterreading.
29

Sometimes called an acquittance roll
These are capitalized in Balance Sheet. Definition of ‘valuable’ often depends on the size of the organisation. 30

25

Pre-printed log books are available in the market. A separate log book should be used for each vehicle. Stock Register
A stock register shows goods received, issued and the balance in hand. It is mainly used for fast-moving items such as medicines, food grains etc. You should not enter fixed assets in the stock register. A simple example of stock register is shown here.

Stock registers are used by NGOs mainly for three types of activities:
1. For materials used in IGP31 – this could be raw material, finished items, etc.
2. For material distributed to people as relief or as part of some development program.
3. For stationery or other office consumables.
One should keep a stock register only for items that add up to a large value over the year. Some people also include small but valuable items in the register, to control wastage and pilferage.
A simple stock register should contain at-least the following information: date of purchase/ issue, reference/ bill number, quantity of items purchased, issued to (branch office/ person), issued quantity, signature of receiver, balance stock, and initials by stock-in-charge. Like fixed asset register, stock register should also have separate page for each item.

Minutes Book
Normally every society or trust is expected to maintain two minutes books. One should record minutes (discussion and decisions taken) of the governing body meetings and the other should record minutes of the general body meeting. Generally the Secretary is supposed to write the minutes. What should be recorded in the minutes books? This depends on your memorandum and articles / bylaws. Normally this includes decisions such as opening a bank account, purchasing immovable property, investments of endowment funds in approved Bonds, appointment of new president/ secretary/ treasurer/ members, change in objectives, etc.
For each of these decisions, people record the discussion in brief, followed by the decision. The decision is called the ‘resolution’.
The minutes book also contains the date, place and agenda of each meeting held by governing body. Names of the persons attended the meeting are also given, along with their signatures.
31

Income Generation Project

26

Minutes books are generally kept in bound registers or notebooks. You can also get pre-printed registers for this. Loose-leaf minutes books should be avoided, as these can be easily altered.

Once in a While
Apart from the daily routine of writing books, there are important tasks to be done periodically.
These are discussed below:

Bring forward opening balances
When you start the new accounting year, you should bring forward the closing balances of previous year. Closing balance of cash book on 31.3.01 is taken as the opening balance on
1.4.01 (only one side of cash book shown below):

Cash Book
Receipts

Payments

Date

Narration

1.4.01

Amount

Opening Balance

Date

Narration

Amount

2,645

Similarly, opening balances have to be brought to other ledger accounts. These balances would be taken from the Balance Sheet of 31-3-01. All the balances in this Balance Sheet should be taken to a ledger account for 2001-02:
Account of Building
Date

Narration

Dr.

1.4.01

Opening balance b/f from previous year

Cr.

Balance

195,000

195,000

Prepare Subject Index in Ledger
Most ledgers in the market have index pages also.
These are tabbed with alphabets. These are used for listing all the accounts and their page numbers.
Accounts starting with the same alphabet should be listed together.

Car maintenance

18

CD

Conveyance

22

EF

Contingency

39

GH

Depreciation

54

IJ

You should make the index when you start a ledger.
As you add new accounts, keep updating the index also. KL
MN
OP

Reconcile your Bank Account
If you issue cheques against bills, then your pass-book balance and the ledger bank balance will probably differ. Do a bank reconciliation each month to identify break-up of the difference.
Even if you use your bank account mainly to draw cash, you should compare the pass book balance with ledger balance every month. This is a safeguard against mistakes by the bank.
For more details on Bank Reconciliation, please refer to page 150.

27

Make a Trial Balance
Trial balance helps identify mistakes in book-keeping. It is a must if you maintain accounts manually. You should prepare a trial balance once in three months or six months. Also, do not send out a report to a donor Agency without first tallying your Trial Balance. For more details on trial balance, please refer page 36.

Draft your final accounts
You have to prepare these at least once a year. These consist of Income and Expenditure
Account and the Balance Sheet. NGOs should also prepare a Receipts and Payments Account.

Get your accounts audited
Your final accounts should be audited at least once a year by independent auditors. Normally this means a firm of chartered accountants, appointed as auditors by your Governing Body or
General Body.
The auditors will go through your accounts. After the audit is completed, they will issue a ‘True and Fair view’ report. They may also give other special purpose reports, such as in form FC3 (for FCRA) or form 10B (for income tax). Audit reports are discussed in more detail under
‘NGO Auditors’ on page 82.

Close your books
After the final accounts have been audited, you should pass closing entries.
Balances of revenue accounts are transferred to Income and Expenditure Account. Balances of other accounts are carried over to next year. An example is shown below:
Account of Conveyance
Date

Narration

30.3.02

Paid to Srimal

31.3.02

Dr.

Bal. T/f to Income & Exp. A/c

Cr.

500

Balance
1,800

1,800

0

The Income and Expenditure is also opened as an account in the books. The closing balance of the Income and Expenditure is shown in Balance Sheet. It is then carried forward to next year. Account of Building
Date

Narration

26.08.01

Addition

31.03.02

Dr.

Bal. C/f to next year

Cr.

80,000

Balance
275,000

275,000

0

Closing balances of all assets and liabilities will become opening balances in the next year.

Physical Verification of Assets
Preparing a fixed assets register is useful only when you verify the assets periodically. This improves control over the assets and is normally an important audit requirement.
How often should you do this? It actually depends on your situation. Assets which are small and can be easily lost should be verified each year. Similarly, If you have many field offices,

28

physical verification should be annual. You can also plan in such a way that all assets get verified at least once over a period of three years. Physical verification is discussed in more detail under ‘Fixed Assets Register’ on page 63.

Take care of the old records
You need to keep old accounting records for around 10 years. During this period, you may not need them even once. How do you ensure that these will not be destroyed by damp, fungus, mice, silverfish and other bookworms?
1.

Book-binders normally add a little Blue Vitriol (CuSO4) to their glue. This will discourage mice and other insects from attacking your voucher files.

2.

Tie up records for each year in separate bundles. Label these with name of organisation and year.

3.

Keep the bundles in a tin trunk. Add some mothballs all around.

4.

Take out all the records at least once a year32 . Put them out in fresh air and sun for a day.

And finally… moksha
What to do with the records after 10 years are over? Traditionally, old records are burned under supervision rather than sold as scrap.
If you are environmentally conscious, you may consider using them as fuel. Understandably, recycling is not advisable, particularly for old vouchers and cash memos!

Cuts and Bruises
So far, we have discussed vouchers, receipts, cash book, ledgers, and other records. We now take up another aspect: how to deal with mistakes. When people make a mistake, cutting and erasing is the first option they take. Is this all right?
There’s nothing wrong with crossing out a figure. However, we must keep several things in mind:

Avoid alterations
Alteration occurs when you change a figure. For example, ‘1’ can be changed to ‘4’ or ‘7’ without much effort. Some other numbers can also be changed without the change being obvious.
Sometimes the digits are also increased.
However, careful auditors can detect almost all alterations. Discovery of alterations can change their attitude and audit approach. This is because there is no distinction between a genuine alteration and a fake one.
Therefore, you should avoid altering figures in the vouchers or anywhere else. If a shopkeeper changes a figure, ask him or her to authenticate it by signing again. Throw out the Eraz-ex
Eraz-ex was not designed for the accounts department. It was meant for making corrections on typed documents. You should not use Eraz-ex or Liquid Paper at all anywhere in the account books or records.

Use counter-balancing entries
What should we do if a mistake is made? If the mistake is in the cash book or ledger, you can
32

31st March is easy to remember. But 30th September (after the monsoons) makes more sense.

29

use a counter-balancing entry. Similarly, you can pass a correction voucher also. This is discussed in the next section.

The right place and time
However, counter-balancing entries cannot be used for some records such as salary register.
In such a case, cutting may be the only option.
Even so, the correction33 must be made before the audit is done or during the audit. Any changes in books after the audit is completed can be done only with the approval of the auditors.

One slash is enough
Right

Wrong

2,220 2,320 A.B.Sinha

2,220 2,320

When you have to make a correction, just cross out the figure neatly once. Don’t mutilate the figure beyond recognition. The original number should continue to show. Write the new figure besides the old one and put your initials next to it.

Counter-balancing entries: the path of Ahinsa
Which mistakes can be corrected without bloodshed and mayhem? These are listed below:

Voucher made for wrong amount
Let’s say that the supporting cash memo was for Rs.455. By mistake, the covering voucher was made for Rs.55 only. What can be done?
Make a supplementary voucher for Rs.400 on the day you discover the mistake. Enter it in the cash book that day and post it normally. On this voucher, give reference to the original voucher.
Give reference to the supplementary voucher on the original voucher also.
Lok Jagran Manch

21-Apr-01

Lok Jagran Manch

10-Jun-01

Dr. Travel

55

Dr. Travel

400

Cr. Cash

55

Cr. Cash

400

Supplementary voucher for traveling expenses of Ms. Shashi to Trivandrum. See original voucher dated 21-.Apr-01 for Rs.55.

Traveling expenses of Ms. Shashi to
Trivandrum. Also see supplementary voucher dtd. 10-Jun-01 for Rs.400

Now let’s say that the original voucher was made for a higher amount of Rs.555. What can be done in this case? The procedure is similar – except that a reversing entry is to be passed:
Lok Jagran Manch

18-Apr-01

Lok Jagran Manch

12-Jun-01

Dr. Travel

555

Dr. Cash

100

Cr. Cash

555

Cr. Travel

100

Traveling expenses of Ms. Shashi to
Trivandrum. Also see supplementary voucher dtd. 12-Jun-01 for Rs.100

33

Supplementary voucher for traveling expenses of Ms. Shashi to Trivandrum. See original voucher dated 18-.Apr-01 for Rs.555.

The correction should also be authorized by your supervisor, if any.

30

Such mistakes can be discovered the same day if you tally your physical cash with cash book every day. Even so, this procedure is useful if the cash tally is not done regularly. Also, this procedure applies to non-cash transactions also.

Forgot to enter a voucher
If you forget to enter a voucher in the cash book, do not try to insert that entry in between any blank space. You can enter such a voucher later, on the day you discover it.
Suppose you forgot to enter a voucher of Rs.245/- dated 6-April-01. This is discovered on 8-June01. You can enter it in the cash book on 8-June-01, as shown below:
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

8.6.01

Conveyance exp. voucher of 6-Apr-01 entered now

Amount

245

The voucher should be filed in the April voucher file only. Just make a small note in the margin of the cash book on 6-Apr-01: ‘Missing voucher entered on 8-June-01’.

Entered a smaller amount
Suppose you entered a smaller amount in the cash book? This is similar to a missed voucher.
In the example below, a voucher of Rs.500 has been entered as Rs.300:
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

9.5.01

Repair exp.
Paid to Smt. Shailja

Amount

300

To correct this, we have to pass another entry for the difference, on the same side of the cash book: Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

2.6.01

Repair exp.
Short entry made for
Rs. 300 instead of Rs.500 on 9-5-01, now corrected

Amount
200

A small note should be given in the cash book margin on 9-May-01: “Entry corrected on 2-June01”. This shows that the correction has been made later.

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Entered a larger amount
Suppose you have entered a larger amount in the cash book? Pass an entry for the difference on the other side. In the example below, a voucher of Rs.260 has been entered as Rs.660:
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

3.6.01

Conveyance exp.

Paid to Sri Arvind

Amount
660

How much is the difference? Rs.400. So we pass a counterbalancing entry for Rs.400 on
Receipts side. This entry may be passed later, when you find the mistake:
Cash Book
Receipts
Date

Payments

Narration

7.7.01 Conveyance exp.
Corrected for entry dated
3-6-01 for Rs.660 instead of
Rs.260

Amount

Date

Narration

Amount

400

This entry will be posted to the credit side of ‘Conveyance A/c’. The net debit to ‘Conveyance
A/c’ will now be Rs.260 only.
You should also make a small note in the margin of the cash book on 3-Jun-01: “Entry corrected on 7-July-01”.

Made an entry on the wrong side
If you make an entry on the wrong side of the cash book, this can be corrected by passing an entry on the other side.
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

3.6.01

Donations

Received from Km. Radha

Amount
501

Is this right? No. A donation has been received but entered on the payments side. This can be corrected as below, on the date it is discovered:
Cash Book
Receipts
Date

Narration

8.8.01 Donations
Donations
Corrected for entry passed on payment side 3-6-01

Payments
Amount

Date

501
501

32

Narration

Amount

Why do we make the correction entry twice: once to nullify the effect of the wrong entry, second time to record the actual donation.
You may ask: why don’t we pass the entry as Rs.1,002 instead? We can do that also – but the first method shows the trail more clearly. Also it will remain possible to identify the donation easily from the ledger also.

Made a totalling or carry forward mistake
Suppose you make a totalling mistake in the cash book. The effect of this mistake will be continued in subsequent totals also. How can this be corrected?
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

3.6.01

Amount

Repair exp.

200

For switch repair
4.6.01

Conveyance exp.

78

Paid to Sri Venkat
5.6.01

Misc. exp.

55

Duster for office
Total payments*

513

Cash in hand c/f

467

Total

980

* mistake of Rs.200 corrected 30-6-01

The mistake can be corrected on the date it is discovered. This is shown below:
Cash Book
Receipts
Date

Payments
Narration

Amount

Date

Narration

28.6.01 Salary exp.

Amount
3,200

To Sri Venkat
30.6.01 Program exp.

4,335

Mahila mela
Total payment

Less: Totaling mistake 5-June-01

7,535

Cash in hand c/f

–200
7,335
1,625

Total

8,960

A note regarding this should also be made in the cashbook for 5-Jun-01, as shown above.

Entry not posted
If you forget to post an entry from the cash book into the ledger, the solution is simple. Post the entry when you discover it. However, also show the original date when you post the entry:

33

Account of Conveyance
Date

Narration

Dr.

3.6.01

Paid to Ramesh

48

4.6.01

To Kumar for May

220

8.6.01

To Venkat for May

355

5.5.01/
8.6.01

To Venkat for April / not posted earlier

Cr.

Balance

330

Cr.

Balance

Posted on the wrong side
This can be corrected by making a double posting on the opposite side:
Account of Misc. Expenses
Date

Narration

Dr.

4.6.01

Paid to Zakir

48

5.6.01

For dusters

8.6.01

Signboard for office

5.6.01

Wrong Posting on credit side reversed

35

5.6.01

For dusters: entry now posted correctly on Dr. side

35

35
200

Posted a larger amount
This can be corrected by posting the difference on the opposite side:
Account of Misc. Expenses
Date

Narration

Dr.

6.7.01

Paid to Ramesh

48

8.7.01

For doormat

9.7.01

For moth balls

9.7.01

Excess posting 8-7-01 of Rs.450 instead of Rs.250 corrected Cr.

Balance

450
20
200

Posted a smaller amount
This can be corrected by posting the difference again:
Account of Misc. Expenses
Date

Narration

Dr.

5.8.01

For bulb

12

6.8.01

Bouquet for function

16

7.8.01

For cleaning supplies

45

7.8.01

Short posting 6.8.01 of Rs.16 instead of Rs.160 corrected 34

144

Cr.

Balance

Duty Chart for Accounts
This chart discusses the routine jobs that Accountants should do regularly. What are the routine jobs which Accountants should do regularly?
The following chart can work as a check-list for you.

Responsibilities of Cashier

Responsibilities of Accountant

q Make small payments for expenses.

q Check vouchers made by Cashier or agency staff.
Mark with Project stamp.

q Make vouchers for all expenses/ bank transactions.

q Check Petty Cash Log (rough cash book).

q Mark paid vouchers with ‘PAID’ stamp. q Write up Cash Book and sub-ledgers on the basis of vouchers (on double entry system).

q Enter all cash receipts and payments in rough (Kutcha) cash book on a daily basis.

q Make Bank Reconciliation every month.

q Keep control over Petty Cash Box.

q Make a Trial Balance every month.

q Assist Senior Accountant according to his / her directions.

q Prepare Budget Accounting Report etc. as required.

q File all vouchers date-wise in continuous serial. q Make Final Accounts (Balance Sheet, Receipts and
Payments Account, Income and Expenditure
Account) annually.

q Make cheques (for signatures of signatories) and fill pay-in-slips for bank.

q Assist in audit of accounts.

q Check cash Memos/ bills for correct expenditure. q Guide and train cashier in Accounts.

q Count the cash every day.

How to use the Duty Chart
This Chart may be used where: l Experienced accountant is not available on a full time basis;

l

Larger payments are handled by the trustees or Senior Staff;

l

The agency does not have a large budget (less than 10 lakhs) or much staff (four to ten full time persons).

Discuss the chart with the Accounts staff. Make changes where necessary. After this, the chart can be put on the wall near the cashier’s seat. Refer to the chart frequently to see that routine duties are being carried out.
This is a general guide only: suitable modifications may have to be made. Discuss the allocation of duties with your auditors if possible.

35

Trial Balance34
All book-keeping in NGOs is done using double-entry.
This means that for each debit transaction, there is an equal and opposite credit transaction. Somewhat like the
Newton’s Third Law of Motion35 .
Let us play a small game with numbers. We put a number on the left side. Then we put an equal number on the right side. We do this several times. The result looks like this: Now we add up both the sides and write the totals at the bottom. Are the totals equal? If yes then, why?
The reason is that you were doing something very similar to double entry accounting. And what you have made just now is similar to a trial balance.

What is a Trial Balance
Trial Balances help the accountants find mistakes in books. If the book-keeping has been done properly, both sides of the trial balance will tally.
Account of Mr. K. R. Singh (advance)

L.F. 32

Debit

Credit

Date

Particulars

5.4.99

Amount

Date

Particulars

To Cash

7.4.99

By Boarding Expenses

(Adv. for Madras

9.4.99

By Conveyance

300

Travel)

17.4.99

By personal Allowance

250

18.4.99

By Train Fares for Travel

7,000

Total

7,000

Amount

Total

2,500

3,600

6,650

Compare total of debit with credit. Which one is bigger.
This account has a debit balance of Rs. 350

Why does it tally?
In double-entry book-keeping, each entry on debit side has an equal entry 36 on the credit side.
So if we add up all the entries on the debit side, they will match the total of all the entries on the credit side.
34

Based on AccountAble 56, 57: Making a Trial Balance and Tallying the Trial Balance
‘Every action has an equal and opposite reaction’. We suspect Newton had some idea of double-entry book-keeping. 36
Sometimes the entry may be split – the resulting entries add up to the same amount as single entry.
35

36

In practice, there is a slight modification. We don’t add up all the entries. We only add up the account balances. Eh?
The account balances are the difference between debit and credit side of an account. Each account will have either a Debit balance or a Credit balance (as shown in the above picture).
So whether you add up all the entries or only the balances, the result will be the same.
If this sounds very complicated, don’t bother. Not everyone is meant to be a mathematician.

Computers and Trial Balances
If your accounts are computerised, you don’t really need a Trial Balance. This is because the accounting package does not allow posting or totalling errors 37. Obviously, this saves a lot of time and hard work.
However, many accounting packages still give you a trial balance. The reason is that accountants find Trial Balances useful in making the Balance Sheet and Income and Expenditure Account.

Periodic Trial Balance
Most NGOs prepare a periodic trial balance. This includes the entries / balances for current period only. Opening balances are not brought forward or considered.
However, they face a problem with cash and bank balances. The closing cash in hand includes the opening balance also. What is to be done?
With ingenuity typical of
NGOs, they put the opening balance of cash and bank on the credit side of the trial balance. This acts as a counter-weight and the Trial Balance tallies. Periodic Trial Balance is used mainly for making the Receipts and Payments Account 38.

Cumulative Trial
Balance
If you want to make a proper Balance Sheet and
Income and Expenditure Account, you need a cumulative Trial Balance.

37

Some packages (Quicken, Microsoft Money) allow entries to remain un-posted. These also have a feature by which you can find all un-posted entries easily.
38
Strictly speaking, you cannot make a Receipts and Payments Account from a Trial Balance, but that is another story.

37

This one includes the balance carried forward from last year also. So no counter-weight is needed. If you compare this graphic with the earlier one, you will find that there are more figures
(written in italics). These are balances that get missed out in a Periodic
Trial Balance.
Cumulative Trial Balance is the real Trial Balance of accounting world.
Here, we will be discussing the cumulative Trial Balance only. How to make a
Trial Balance
1.

Decide on a cut-off date. Normally, this is end of a month, end of a quarter or end of the year.
Let’s say this is
31 st
December
1999.

2.

Work out all closing balances of ledger accounts as on 31-Dec-99 (the cut-off date). Mark each balance as Dr. or Cr.

3.

Work out the cash book (and bank book, if you use one) closing balances on 31-Dec-99 (the cut-off date).

4.

Take a fresh sheet of paper. A ruled sheet is better. Write ‘Trial Balance of __________
(name of NGO39) as on 31-Dec-9940’ on top of the sheet.

5.

Make four columns and mark the headings:
Account Head

L.F.

Debit (Rs.)

Credit (Rs.)

6.

Find a pencil and eraser.

7.

Open the ledger. Turn to page41 1. Is there a balance here on 31-Dec-99 (cut-off date)? If yes,
Account Head

L.F.

Debit (Rs.)

Salary

39
40

Credit (Rs.)

14,200

If you maintain separate project-wise cashbooks, write the name of the project also.
The cut-off date

38

note it down on the Trial Balance Sheet with the pencil. Try to make sure that figures are right aligned. This makes it easier to add up.
8.

Go to the next page. If there is a balance here for 31-Dec-99, note it down, otherwise skip it.

9.

For some accounts, the ledger balance may have been carried forward to another page.
Keep this in mind. You should only take the closing balances on 31-Dec-99.

10.

Continue through the ledger like this till you come to the end of the ledger.

11.

Pick up the cashbook. Turn to the last page for 31-Dec-99. Note down the closing balance of cash in hand (and bank balances) from here (or the bank book).

12.

Normally, the cash in hand should be a debit balance42. That means the Receipts side should be more than the Payments side.

13.

You now have all the balances of 31-Dec-99 on your sheet.

14.

Carefully bolt and lock the door to your room. Turn off the ceiling fan.

15.

Total up both the sides on your sheet (debit and credit).

Does it tally?
If you are very lucky (or very careful), both the sides will tally at first go. You can then file the
Trial Balance and ink up all the ledger and cash balances. Lock the office before you go home.
If the totals do not tally, ask for a cup of tea and settle down for an evening of hard work.

Tracking the difference
A trial balance will always tally. This is quite unfortunate. You can’t just make up an excuse like ‘I don’t know, there must be something wrong with it’, or ‘Never mind, we’ll tally it next time around’.
So you really have only two choices: find the difference or hide it. If you take the second option, the auditors might find43 it. Even if they don’t, you will always have a guilty feeling. Remember
Dostoevsky’s ‘Crime and Punishment’?
Assuming you will want to take the first option, try these tricks. After each one of these, you should see whether the
Trial Balance is tallied. If yes, you can stop there.
Use a coloured pencil for ticking as you go through the ledger and cash book.
Use any colour you wish, except green and purple44 .

41

Accountants call these ‘folios’.
You might be fortunate enough to have a credit balance in your cashbook. This is known as deficit financing. Attend the next parliamentary budget session at Delhi to understand how this works.
43
Mind you, it’s not easy to hide a trial balance difference.
44
These colours are normally reserved for auditors. Purple is a kind of bluish violet.
42

39

Common Errors
The best way to tally a trial balance is to work systematically. But sometimes you can get lucky. Look for the following before you start on the long trail:

Cash book balance not taken
Common and very obvious mistake. Still many people forget to include this in the trial balance.

Transposition errors
Look at the numerals in the difference. Do these add up to 9?
For example, let’s say that the difference is Rs.6,120. Add these up: 6+1+2+0. What do you get? You get 9.
This means that there has been a transposition somewhere. A transposition happens when digits remain the same but change position. For example, when 9318 is posted as 3198.
Look for transposition in posting as also in copying down the balances in trial balance.

Compensating Errors
Sometimes, two errors cancel out each other. This is very rare but happens. What is more common is that the net difference is composed of many mistakes. So the difference will keep increasing or decreasing as you go along.

Entries not posted
Many accountants follow a procedure during posting from cash book to ledger. They first mark the ledger folios against all cash book entries to be posted.
Then they start the actual posting. At the time of posting, they put a line under the ledger folio for each cash book entry they post.
Cash Book
Receipts
Date

Payments
Particulars

L.F

Amount

Date

Particulars

L.F

Amount

41.9
.29

Slre aais Slr t tahr fr aay o eces o
Nov ‘99

56

8,600

41.9
.29

Slre aais Slr t Sd poet aay o ia rjc s a fp rd t i s tf e eal

56

14,200

61.9
.29

Travel
Visit to Ahmedabad by Sri Venkat for meeting 72

1,230

Ledger Folio number written before posting

If you also follow this procedure, you can easily find un-posted entries by looking for those where the ledger folio is not underlined.

40

Cash Book
Receipts
Date

Payments

Particulars

L.F

Amount

Particulars

41.9
.29

L.F

Amount

Slre aais Slr t tahr aay o eces for Nov ‘99

56

8,600

41.9
.29

Slre aais Slr t Sd poet aay o ia rjc s a fp rd t i s tf e eal

56

14,200

61.9
.29

Travel
Visit to Ahmedabad by Sri Venkat for meeting 72

1,230

91.9
.29

This underscore shows that entry has been posted

Date

Training material
Mango saplings purchased 48

780

Double your money errors
Sometimes, entries are posted to the wrong side i.e. on debit instead of credit (or vice versa).
Divide the difference by two. Look for the resulting figure in the cash book, ledger and trial balance. If you find it, see whether it is on the correct side.

The Long Trail
If the above short cut of tracing common errors did not work then you have to work systematically.
See if any of the following 8 steps help. You can tick off each as you go along:

1. Check the totaling
Before you get deeper, check the totalling of the Trial Balance. Try adding up from the bottom upwards this time45.

2. Have you included all the ledger balances
Open the ledger again and go through it page by page. Put a small tick on the ledger balance and another on the Trial Balance sheet. l Are all the balances there, including closing balance of cash book? l Are these the right ones, meaning for 31-Dec-99? l Have you put Debit balances on the left and Credit balances on the right in the Trial Balance?

3. Check the ledger totals & balancing
If you still have a difference, check the totals of the ledger accounts. This means you should total the columns and work out the closing balance on 31-Dec-99.
Also check that no entries beyond 31-Dec-99 have been included in the totalling.
The closing balance will be the difference between total of debit column and the credit column.

45

Strange but true. Changing the direction of totaling helps break the jinx of wrong totaling sometimes.

41

You have a debit balance when debits total up to more than credit. You have a credit balance when the credits add up more than the debits.
Also check whether you have marked each balance in ledger correctly as debit or credit.

4. Check the cash book totaling
If this doesn’t help, check the totalling of cash book. This involves three things: l Check the totals on each page (Receipts side and Payments side), l Work out the closing balance on each page (deduct total payments from total receipts). l Check the carry forward – the closing balance will be next day’s opening balance.

5. Make an opening Trial Balance
Before going to the next step, make an opening Trial Balance on another sheet. This is prepared from the opening balances appearing in this year’s ledger and the cash book.
Does this tally? If yes, you can go straight to step 7. If the totals do not tally, then you have to do step 6 also.

6. Check the opening balances46
For this take out the last year’s Balance Sheet, its Schedules 47 and Groupings 48 .
Compare last year’s closing balances 49 with the opening balances in this year. The opening
Balances will appear on the first line of each ledger account this year. Put a tick mark on both50 as you proceed.

7. Check the posting
The difference continues? Well, bad luck. Now you will have to check the posting of entries from the cash book to the ledger.
Open the cash book and check all the postings for Payments side (right side) first. These will always appear on the left side (debit side) in the ledger. Put a tick on both the cash book entry and the ledger entry as you go along.

46

This check is not needed for Periodic Trial Balance.
Schedules give additional detail for main Balance Sheet figures.
48
Groupings provide breakup of items showing in Schedules.
49
You will find these in last year’s groupings, schedules and the Balance Sheet.
50
On opening balance in the ledger as also the closing balance in last year’s Balance Sheet, etc.
47

42

Now check the Receipts side (left side). The postings will be made on the right side in the ledger
(credit).
After completing this, go through the cash book and the ledger carefully. Are there any un-ticked entries in the cash book?
If yes, re-check the entry. Was it really not posted or did you just forget to tick it?
Now look for un-ticked entries in the ledger. If you find an un-ticked entry in the ledger, it may mean that you have made a double-posting51. Or it may mean that you forgot to tick it. Check carefully before making a correction.

8. Does it tally now?
With any degree of luck and careful work, the Trial Balance should be tallied by now. If a difference still exists, close the books and go home.

Do it again
Start again next morning, with a fresh mind. You will probably need to go over all the 8 steps again. Good luck.

51

Only one entry in the cash book but posted twice into ledger by mistake.

43

Computerised Accounts52
Computerising accounts is not as simple as they say. It can also be the most frustrating experience for an NGO.
There are three main issues: selecting a software, deciding on the accounting structure and tying on your safety belt. All three are discussed here.
Before you read further, a solemn thought: To err is human, but to really mess things up, you need a computer.

Software – Selecting a Package
There are hundreds of accounting packages available commercially. Still new accounting packages get written every day - to suit the needs of individual organisations. A fresh programmer may be willing to develop a package specially for you for less than Rs.10,000 but the package is unlikely to be half as good as those available in the market.
When you buy a package, look for the following: q Windows type screen (easier to use than DOS type screen) q No need for account codes q A good on-line help system q No dependence on key-diskette (these are very unreliable) q Preview and editing of reports on screen (will save you a lot a paper) q Facility of sub-ledgers or similar classification of transactions (essential for multi-donor environment) q Memory for repeat transactions (will speed up data punching) q Security restrictions to prevent people from changing data by mistake q Back-up of data files
Some of the more popular packages are listed below. Very honest people pay around Rs.6 8,000 for any of these - others pay nothing:

E.X. 3.0
Much-hyped package by Tatas. Has good sub-ledgers. No screen preview of reports. It is said that the copy-protection is a nuisance - if your hard-disk is formatted three times, you have to buy the package again!
TCS is now giving commissions ranging from 20-35% to dealers and ‘key-men’ who recommend their package (EX-Next Generation). Beware and negotiate accordingly.

FACT 6.57
Designed by Vedika Software of Kolkata. The copy protection is very awkward. No on-line help.
Sub-ledgers are possible. Good screen reporting and back-stepping to the original vouchers.

Quicken
Designed by Intuit Inc. of UK mainly for individual users. No copy protection. Very user-friendly

52

Based on AccountAble 25: Computerised Accounts

44

- available for DOS and Windows. Excellent classification, search, on-screen reporting. Good on-line help. Unusual accounting structure - does not give you a Trial Balance!

Tally 5
Popular software by Peutronics of Bangalore. Sub-ledgers possible by using groups. Uses a
‘dongle’ on the printer port or a key-diskette for copy protection. User interface is not very friendly, though.

Total
Made by Datasoft of Mumbai. Good interface but no sub-ledgers. Poor on-line help. On-screen reporting and back-tracking possible.

WinCA
Designed by Softek of Delhi. Has a Windows version. No sub-ledgers. Good on-screen reports.
Repeat vouchers possible. Average help system.

Wings-6
Developed by Wings of Hyderabad, a working (limited options) version of this package is available free. Good interface - limited use sub-ledgers possible through groups and supergroups. Good help but poor on-screen reporting.

Setting Up an Accounting Structure
Once you have selected a software, you need to work out how to set up the accounting structure. If you give some thought to this, you will get a lot more out of your system.

Problem with Separate Files
One of the most common mistakes NGOs make is opening separate files (companies) for each project. This is done to get a separate cash book and ledger for each project / funding agency.
However, this leads to three peculiar problems:
1. You are unable to get a tallied trial balance from the computer.
2. Each time you wish to make an entry related to a different project, you have to ‘exit’ and then choose your ‘company’ again. This slows down the work of punching transactions.
3. For making a transfer between two projects, you have to enter the transaction twice in two separate ‘companies’.
This also means that you will have to reconcile the accounts manually.

Using One File
There is a very simple alternative to this. Almost all accounting programs allow you to: l open more than one

cash book in the same file; l open sub-ledgers in the

same file.

This is how your accounting structure may look like.

45

Separate cash books in the same file are opened by defining ‘cash accounts’. For example, you can open a cash account called ‘FCRA Cash’. You can also open another cash account called ‘Indian Cash’. Each of these accounts will print exactly like a normal cash book. In the same way, you will be able to open more than one Bank Book also (separately for FCRA and other bank accounts). Make sure you open a separate cash book for Income Generation
Projects also (if you have these), as required under Income Tax law.
Once again, separate sub-ledgers are opened in the same file. You can have one sub-ledger for each Agency or project. Each of these will show up expenses / transactions related to that
Agency / Project.

Account Heads
Depending on the program you are using, you may need to assign sub-ledgers to each accounthead at the time of defining the head itself. It is also possible that you may be able to simply assign the ledger at the time of punching transactions.
If your program does not allow you to use sub-ledgers or an equivalent classification system, you can still follow the above system. Just add the Agency / Project initials before each account head. For example, you can have an account for
Ford Foundation’s salary by calling it ‘Ford-salary’.
The First Computers
CRY’s salary may be punched as ‘CRY-salary’.
Devices that aid counting have been around

Punching Transactions

for thousands of years. About 5,000 years

When you punch the transactions, you will need to keep three things in mind:

ago, Mesopotamians made their calculations by sliding small stones along

1. When you book FCRA expenses, you should credit FCRA Cash or use FCRA cash book.
Likewise, when you punch Indian expenses, credit Indian Cash.

furrows in the ground. This idea is somewhat

2. Bank transactions should similarly be credited / debited to the correct Bank book.

In 1642, Pascal built a calculator that could add and subtract eight-digit numbers.

3. Expenses should be debited to respective projects / agencies, using the correct subledger / classification option.

Jacquard’s loom was invented in 1805 and

Please fasten your safety belts... In 1830’s Babbage designed the first

When you computerise your accounts for the first time, expect everything to go wrong. The accounting structure will not work out; you will keep making punching mistakes; your data will not get saved; your computer will be visited by
‘Die Hard’ virus (and couple of its friends); your hard-disk will get formatted accidentally; your computer operator will leave for a better job; the paper will get stuck in the printer when you print the reports; and so on and so forth.

similar to the abacus which appeared later in Japan and China - AccountAid still uses this as a logo.

used punched cards, similar to what the Delhi
University computer used till 1980’s.

programmable machine, which was never built. Had it been, it would have covered an area equal to a football field and required the power of five steam engines!
The first ancestor of present-day computers was ENIAC, built in 1946. It contained 18,000 vacuum tubes and could make several hundred multiplications per minute. Today, just 50 years later, the speed of your personal computer is counted in MIPS, which stands for million instructions per second!

Delays
You should not expect the computer to deliver any real accounting for the first six months or so. Even after these six months are over, you will need to be sure that the system is working
46

properly and you are getting your reports in time.

Manual Accounts
It is therefore a very good idea to keep your manual accounts going side-by-side for at least six months to one year. Discontinue manual accounts only after you are completely satisfied with the computerized reports and the stability / capacity of your staff.

Fall-back
Try to get more than one person to become comfortable with the accounting program. This will help if the programmer falls ill or gets married when you need to file your FC-3.
Take final printout of the ledgers and cash book at least once in six months. Also remember to ‘backup’ your data files on a floppy at least once a week.

Cash Log
In the NGO environment, computerised accounts can almost never give you minute-to-minute cash balance. Normally the backlog of transactions for punching will run into several days, if not weeks. It is therefore absolutely necessary for you to maintain a rough cash log.
This cash log is like a normal bound cash book, except that posting of entries is not made from this. It is normally maintained by the cashier.
Apart from giving you better control over cash, this log can help you reconstruct your accounts, in case your computer files are lost. Your auditors may also refer to it during the audit process.
Also as this is part of the official record, it should not be destroyed.

Virus Protection
Get a resident software for virus protection which will automatically check each floppy when it is inserted. Scan your computer for viruses regularly. Discourage people bringing floppies with computer games. Check especially the floppies used by computer service engineers. Very often these floppies pick up viruses from other computers.

Three Myths and a Half-Truth
1. You just press a button and you can get whatever information you want. If you believe this, try getting a simple trial balance from the computer without anyone’s help. You’ll soon find out that computers are much more complicated than this.

2. You can save a lot of paper by using computers. Computers have actually increased use of paper.
No one corrects a typing error on computer print out using correction fluid - they just take another printout. 3. Computers need air-conditioners.

More likely the people using the computers need air-conditioning! The computers, which you get now are very tough and will mostly work without even a cooler. 3½. Computers need clean, dust-free environment. True, you should not try to keep the computers in a dustbin. But you certainly don’t have to take off your shoes and wash your hands before using the computer. 47

Buying a Computer & Printer
What kind of hardware do you need? Normally53 a P-III computer (assembled) with 64 MB RAM
(memory), 20 GB hard-disk and a SVGA monitor will do (Budget: Rs.30,000). RAM prices have tumbled - you can get an extra 8 MB for just a thousand rupees.
This kind of a computer will run Windows 2000 also (Rs.8,000) – most new softwares now do not run on DOS or Windows 3.1.
An assembled computer works just as well as a branded computer. It also costs about just half the price. But make sure you purchase your computer from someone who has a good reputation, otherwise getting service back up will be a problem.
Be wary of large ‘reputed’ companies who promise to deliver the machine within four weeks.
There are many customers who did not see their machines for six months, after paying 100% advance. Get a noiseless inkjet printer instead of a dot-matrix. It’s quite cheap now: just 4 to 5,000 rupees will get you a Hewlett-Packard Deskjet. The ink is quite expensive though - it will cost you 13 rupees to print a single page. You can also try other printers like Epson – the cost of ink is comparatively lower with these printers.
You will need a CVT (Rs.2-3,000; don’t use a stabilizer). You don’t need a UPS - just save your work more often. In any case, a generator will be more useful than a UPS, which lasts you for just half-an hour.
The prices given here are Delhi prices in Jan ‘02. In smaller towns, add about 10%.

Gilb’s Law of Unreliability
1.

Computers are unreliable, but humans are even more unreliable.

2.

Any system which depends on human reliability is unreliable.

3.

Undetectable errors are infinite in variety, in contrast to detectable errors, which by definition are limited.

4.

Investments in reliability will increase until it exceeds the probable cost of errors, or until someone insists on getting some useful work done.

53

Computer technology and prices change very fast. Please check for the latest information with a few computer dealers before finalising your purchase.

48

Receipts54
What is a Receipt
It is difficult to say what a Receipt is. From birth till the time we are twenty-one, we live in a-World-withoutReceipts (the more fortunate may meet a Receipt once or twice in teenage days). On reaching adulthood, we are gradually introduced to the beauty, charisma, power and glory of the Receipt. Some of us fall in love with a Receipt, marry one and become respectable
Accountants. Others, who lack the human touch necessary for an Accountant, may take up Audit as a profession.
A generally acceptable definition of a Receipt goes thus:
‘A Receipt is a self-protection device, for use in life-threatening situations with Accountants and
Auditors’.

When do you need a Receipt
In case of NGOs, a Receipt must be issued whenever cash is received. Sometimes, people ask for a Receipt even when a crossed account payee cheque is received. Legally speaking, both these Receipts can be issued on the letterhead of the NGO. However, for accounting control in an NGO, it is essential to have a printed Receipt. This Receipt can be used both for cheque as also cash transactions.

‘Un-Receiptable’ situations
Most specialists agree that it may not be necessary to ask for a Receipt in the following five situations: 1.

Paying Rs.5 to a rickshaw in Kolkata;

2.

For buying one tender coconut in Madurai;

3.

From a pick-pocket in Mumbai Central Station;

4.

During a fund-raising drive by Shri Man Singh in Chambal valley;

5.

From a waiter in Delhi for a tip.

Format for a Receipt
There are three types of Receipts that are popular:

1. Stub Type
In stub type Receipt, a person first fills up the larger section and then the stub.
In practise, some people hand over the main Receipt to the donor and fill up the stub later. This causes a problem – sometimes they forget how much was the Receipt for. This problem occurs frequently in door-to-door fund raising. A sample of Stub Type Receipt is given in next page.

54

Based on AccountAble 45: Receipts

49

2. Carbon Copy
Main advantage with the carbon type Receipt is that you can retain an exact copy of the Receipt given to the donor. This means your record can show full details including address of the donor etc. Secondly, you do not have to write the same particulars twice. However, you have to use a carbon – some people find this a nuisance.

50

3. Clay Tablet Receipts
People who have been born in the last 3-4,000 years may not have used these Receipts. These were very popular in Sumer (now in Iraq) before the Egyptians invented paper.
An Accounting Manual dating back to 2,853 BC goes somewhat like this55 :

1. The Potter shall mould a Receipt from fresh Euphrates clay for each transaction. 2. The blank Receipt shall be taken to the Scribe while the clay is sufficiently wet.
3. The Scribe shall fill in all the details specified in Rule 3(1), as provided by the Cashier. The Scribe shall use a uniform cuneiform script for this purpose.
4. The Cashier shall then check the Receipt for accuracy, affix his seal and send the Receipt to the Accountant.
5. The Accountant shall affix his seal before taking it to the Master for signatures. 6. The Accountant shall then ensure that the Receipt is baked under Sun
Ö for three hours and scanned for microfilming56 .
7. The Receipt shall thereafter be handed over to the Customer.
8. No Receipt shall be issued on any rainy dayØ.
9. Copies of all Receipts issued in a month shall be sent to Central Audit on microfilm by the 7th day of the next month.

A suitable Receipt…57
A good quality Receipt should show the donor’s full name, full address, phone number (if donor has a phone). Some people also note the donor’s profession as this helps in future fund-raising drives. The purpose of the donation should be shown. The mode of donation (cash or cheque) should be noted. The amount should be noted in words and figures (numbers).

For Credit Programs and Loans
The same Receipts can be used for collecting training material or other Receipts. In all cases, details. In case of repayment of an IGP loan spouse’s name also. This will help ensure that

repayment of loans, payment against sale of it is a good practise to note down the above from a beneficiary, note down the parent’s/ the posting is made to correct loan account.

These Receipts should also be used whenever you borrow money on loan. Once again you need to note the person’s full address, profession and phone number. Remember that your total outstanding loan from one person should not exceed Rs.20,000. If it does exceed, then you should take the money by account payee cheque only. In any case, it is a good practise to borrow and repay money by cheque only. Cash loans are often fictitious.

Plain Paper Receipts
In some cases, Receipts can be taken on plain paper. For example, if an individual sells her scooter, she may give a Receipt on plain paper. Such a Receipt should have the seller’s name and address.

55

The original manual has been written in cuneiform script. This is an approximate translation.
This part of the translation is doubtful. Archaeologists have not found any evidence that micro-filming equipment existed in Sumerian times. - ed.
57
Apologies to Vikram Seth
56

51

Bi-lingual design
Instead of printing the Receipt simply in English, you can also print bi-lingual Receipts. This can be understood both by the local people as also the auditors/ tax officials.

Save Your Receipt from Deceit
Receipts sometimes fall in wrong hands, with undesirable results. Following precautions will help you keep your Receipts safe and secure:

Use one Receipt book at a time
People sometimes start separate Receipt books for different purposes. These are used simultaneously (at the same time). For example, they will use one Receipt book for issuing Receipts to donor agencies, another for collecting donations from individuals and a third one for borrowing money. What could be the reason for this weird practise?
In some cases, this happens due to ignorance or a misplaced zeal to create accounting compartments. In others it is done during a fund-raising drive when books are issued to several persons. Sometimes, it is also done by accountants to manipulate accounts. Resolution for printing
Is there a procedure for printing Receipts?
Yes, printing of Receipt books should be authorised by a resolution of the Governing
Body. The resolution could be like this:
“Resolved that the Treasurer be and is hereby authorised to print twenty Receipts books, each containing one hundred receipts in duplicate, pre-numbered from 1 to 2,000. The format for the Receipt would be per the design placed before the Board and initialled by Secretary for identification.”

Power flows from the barrel of a Receipt …
India Education Society was formed in 1918 in
Mumbai. The only condition of life-membership was a one-time donation of Rs.25,000. The Society also had title to a lot of waste-land.
In the 60 years that followed, the city grew around the Society. The waste land became prime property, valued at thousands of crores. At the same time, real value of the required Rs.25,000 became negligible.
Rameswar Singh discovered this loophole in
1978. He along with three gun-men, barged into the Society’s office one winter evening and ‘deposited’ eight bank drafts of Rs.25,000 each. This was towards life membership of eight new members. He took proper receipts for this from the cashier. And thus automatically acquired control of the Society. Or so he thought.
During the long court-battle that followed, it was found that only the treasurer was authorised to issue Receipts. The Receipts were therefore not valid. India Education Society won their case because of this. Of course, the Society’s reputation in the local community also helped.
True story. Names changed to protect privacy

Who can issue a Receipt?
By default the treasurer is authorised to issue Receipts. In many NGOs the treasurer is not available on a daily basis. In such cases, the Secretary or Chief Functionary can be authorised.
In small or medium NGOs, the authority to issue Receipts should not be delegated totally to accountant. The accounts department’s role can be to prepare the Receipt and sign it. The
Receipt, in order to be valid, should be counter-signed by an Authorised Official. In larger NGOs and Agencies, this rule is not practical. Here a senior Accounts person or Finance Officer can be authorised to counter-sign Receipts.
This rule can also be printed on the Receipt itself: ‘Not valid unless countersigned by Treasurer or Secretary’.

52

Receipt Books Control
Once the Receipts are printed and received from the printers, these should be entered in a
Receipt Book Register.

Instead of opening a separate Receipt Book Register, you can set aside a few pages for this in the Administration Register. The Administration Register is used for keeping track of other items as well. For example, you can keep record of expensive stationery items or insurance policies in this register.

11th Commandment: Thou shalt use pre-numbered Receipts…
All Receipts should have a number. This helps in giving cross-reference. It also helps in ensuring that all Receipts are accounted for. How should this numbering be done?
Some people do this numbering by hand. This is wrong. Receipts should be pre-numbered. This means that the printer should do the numbering before sending you the Receipts.

Cancelling a Receipt
Sometimes you have to cancel a Receipt. This may be because there was a mistake or the
Donor changed their mind. In such case, take back the original Receipt and staple it to it’s book copy. Cross out both diagonally, saying ‘Cancelled’.

Other Issues
Voucher for a Receipt
Some people prepare a covering voucher for each Receipt. This increases the paperwork somewhat.
But this also helps provide additional information regarding a receipt. Such information may include purpose of receipt, account-head, nature and period of project, etc.

Revenue Stamps
Put a revenue stamp (Re.1) if the Receipt is more than Rs.500. Revenue stamps are not required on Receipts for donations. But these may be required on the Receipt for a grant.

How can I keep old Receipts safely?
Tear out the book copy and staple it to the covering voucher made for the receipt. File the voucher normally with others. This is simpler than storing the bound Receipt books.

A last bit of advice…
When visiting an Accountant for an important payment, always take a good-looking Receipt along! 53

Revenue Stamps58
Auditors, accountants and NGOs have remained concerned with revenue stamps for as long as one can remember. It used to cost only 20 paise but was sure to be worthy of any junior auditor’s comment. Now when it has become 1 Rupee for each payment, it deserves attention of Finance Managers and NGO chiefs.
This is the 55th year of India’s independence. This chapter is, therefore, dedicated to a 200-year old relic of the bygone British Empire — The Revenue
Stamp!

History
Revenue Stamps and stamp paper are treated with awe and respect. People think that a document on stamp paper is somehow more authentic or genuine than one on plain paper.

Revenue Stamps are available in most Post

If we go back to the origin of stamp duty, we find that it was not intended to make documents more authentic. It was simply meant to raise revenue for East India Company.
Stamp duty was first introduced in India by the British in 1797. Initially it was limited to Bengal, Bihar, Banaras and Orissa. It replaced a tax, which was collected earlier from Indian merchants and traders for maintaining the police. It also helped pay for court fees and generally increase the revenue. At that time, there was no income tax, excise or customs duty the government was run mainly from land revenue.
As the British extended their empire, the coverage of stamp duty also increased. It was first formalized by
Act XXXV in 1860, just after the East India Company 59 had been replaced by the British Crown. After several amendments, the present law, called the Indian Stamp
Act emerged in 1899. Rules (Indian Stamp Rules) were framed in 1925. The Act itself has been amended 35 times since 1899. The last amendment was made in 1994.
The Act covers stamp duty in various forms. Stamp duty on transfer of land, insurance policies, promissory notes, power of attorney, etc. are all covered under this act. The Act has also been amended by various states and rates of duty differ from state to state.
The Act also covers revenue stamps on receipts. Apparently, this section operates uniformly across India. The discussion here is limited to revenue stamps on receipts only.

Stamps on Receipts
More than 500 rupees
The revenue stamp is required only on transactions exceeding Rs.500. No stamp would be required if the amount is Rs.500. But if the amount is Rs.500.01, a stamp is required.

58

Based on AccountAble 34: Revenue Stamps
East India Company appears to have laid down a curious employment policy. Its constitution said: ‘No
Gentleman will ever be appointed in the Company as an officer’. Most Indians will readily testify that the
Company followed this policy in letter and spirit!
59

54

Taking a receipt
If you make a payment of more than Rupees 500 to any one, you can insist on getting a stamped receipt (section 30). This does not apply to receipts covered by any exemptions noted above. If the payee refuses to give a stamped receipt, he can be punished with fine up to Rs.100
(section 65).

Receiver pays for the stamp
Who should bear the cost of revenue stamp? The person who receives the payment is required to affix the stamp and pay for it (section 30).

Cheque or cash
Revenue stamp is required whether the receipt is for cash or cheque. It is also required when you receive any movable property as payment against some debt / loan.

Cancelling the stamp
The revenue stamp should be cancelled so that it can not be reused. This can be done by crossing it with two lines or putting a cross mark (X) or by signing across the stamp (section
12).
If the stamp is not cancelled properly, the receipt is treated as un-stamped. A fine upto Rs.100 can also be imposed (section 65).

No stamp on donation receipts
If you are issuing a receipt for donation or a gift, there is no need for a revenue stamp. Such receipts are exempt under the Indian Stamp Act because these are payments without consideration (Exemption b, Article 53, schedule).

Grants from funding Agencies
The above exemption may not apply to grants from funding agencies. Give a stamped receipt if the funding agency desires it or you wish to use a stamp anyway.

Staff Payments
Advance for expenses
No revenue stamp is required when you pay the money to a staff member for office expenses.
Again, when unspent money is refunded later, no stamp is required. These are payments without consideration. Loan/ Personal Advance
Revenue Stamp is required on receipts for loan or personal advance given to any member of staff. Revenue stamp is required when the loan is recovered also.
Salary Payments
Revenue stamp is required.

IOU
IOUs (I owe you .................) are treated as receipts and require the normal revenue stamp.

Cash Memos
If the cash memo does not say that payment has been received (or goods delivered), then it is merely a memorandum of goods sold. No stamp is then required.

55

Fixing it later
Suppose you pay money to another person and he gives you a receipt without revenue stamp.
In such a case, you can yourself put a revenue stamp on the receipt/ voucher and cancel it.

Copy of a receipt
No stamp is required if you are giving a copy of a receipt which had been stamped to begin with.
But if you are issuing a duplicate receipt, you need to put a stamp!

Splitting payments
Anyone who splits the payments in order to avoid revenue stamp can be penalised up to Rs.100
(section 65).

Penalties
Can not be used as evidence
An improperly stamped receipt cannot be used (by the receiver) in a court case. However, the payer can use the receipt against the receiver by fixing the stamp later.
Confiscation
Documents which are not stamped properly can be impounded by any public officer. These may be then sent to collector who will order for extra duty and penalty.
Extra duty
The collector can order extra duty up to ten times to be paid.
Fine
Fine up to Rs.100 can be imposed for not using revenue stamps where required or for not canceling stamps properly (section 65) .
Who can Confiscate
Any public officer (collector, district magistrate, etc.) can seize / confiscate any receipt which is not properly stamped. The state government can decide which persons will be called public officers for this. However, police officers are not authorized for this (section 33).

56

Salary Records60
What is salary?
Under labour law, any payment (in the nature of remuneration) to an employee is salary.
But who is an employee?
If an employer-employee relationship exists with a person, that person would be your employee.
Generally speaking, any person who works for the organisation on a regular basis, and gets paid for the same is an employee. A part-time employee is also considered an employee. In some cases, ‘volunteers’ would be considered ‘employees’.
Is honorarium also salary?
This depends on your relationship with the person. Properly speaking, honorarium is a nominal fee, especially a voluntary payment for professional services rendered without the normal fee
(Oxford dictionary).
Under the labour laws, most important is an employee-employer relationship. If such a relationship exists, then the name given to the payment does not matter. You get no protection from labour laws by calling the payment as ‘honorarium’.

Is a salary register required under law?
Some NGOs are covered under Employees Provident Fund Act, Minimum Wages Act, etc. This depends on the state they are registered or the activity they carry out. In such cases, registers similar to salary register are required under law: q Register in Form B or Form E under ‘Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act, 1988’, implemented w.e.f.
1-May-1989

q

Register in form 10 under ‘Minimum Wages Act, 1948’ (applicable to NGOs in some states only)

And apart from the law?
A salary register is very important for accounting and control. It provides details of salary paid to all employees, along with their signatures. The employees do not have to sign separate vouchers. This register also means that you need not pass individual entries in the cash book for salary to each employee. Most auditors will expect to see a salary register if there are more than 5-6 employees.

How many registers?
Sometimes NGOs start separate salary registers for each project or agency. This creates unnecessary compartments and increases the number of records to be maintained. In reality only one salary register is required. In some cases, where the NGO has branch offices, each branch may have a separate register.

What about FCRA requirements?
FCRA rules do not ask for a separate salary register. However, the format of the salary register should show the amount of FCRA salary separately. This will allow separate entries to be made into FCRA and Indian cash books.

60

Based on AccountAble 43: Salary Records

57

Integrated Salary Register
There are two alternatives if you want to use an integrated salary register. Both allow separate identification of FCRA and Indian salaries. However, if you want to keep a separate salary register for FCRA, you can modify the design accordingly:
1. Plain register
You can use the existing register, dividing it into sections each month so that salary payments for each agency / project can be totalled up. The register would look as below:
Salary Register for the month of April ‘98
S. Name
No.

Sida

Designation
Designation is also important

Location

Salary

Give the location for better control

Allow ance Dedu ctions Net Payment
From
From
FCRA
Indian

1

Ms. Ramawati Coordinator

Machhera

2,500

2

Mr. Venkat

Sr. Animator

Machhera

500

3

Ms. Maya

Teacher

Tilbatia

1,000

4

Mr. Sebastian Health Worker

Tilbatia

1,000

This amount 2,500 will be entered
500
in the FCRA cash book as 1,000
‘Salary-Sida’
1,000

5,000

5,000

CRY

He is working partly in Sida project and partly in CRY.
Part of salary appears in Sida

1

Mr. Venkat

Animator

Machhera

1,000

2

Ms. Vanita

Health Worker

Machhera

1,000

3

Ms. Elizabeth

Animator

Purnea

980

4

Mr. Hussain

Incharge

Purnea

2,000

Total – Sida

Total – CRY

4,980

Grand Total

9,980

Venkat
He signs at both the places 1,000
This amount will be entered in the
Indian cash book as ‘Salary-CRY’

Signature

Venkat

1,000
980
2,000
4,980

5,000

4,980

2. Analytical Register
Analytical register is a little more complicated because additional columns are kept for each agency. If you have spare columns in your register, you can rename these. Otherwise you have to either make the columns in a plain register or get it printed.
Many NGOs deduct salary for excess leave. Others deduct excess leave salary for some categories of staff. Deductions from salary of core staff are not very common, except in very large organisations. Such deductions should be shown in the salary register.
The analytical register is a little more convenient to use but requires more effort in column layout. You can choose either.

58

Salary Register for the month of April ‘98
S. Name
No.

Designation

Location

Salary
(Sida)

1

Ms. Ramawati

Coordinator

Machhera

2,500

2

Mr. Venkat

Sr. Animator

Machhera

500

3

Ms. Maya

Teacher

Tilbatia

1,000

1,000

4

Mr. Sebastian

Health Worker Tilbatia

1,000

1,000

5

Ms. Vanita

Health Worker Machhera

1,000

1,000

6

Ms. Elizabeth

Animator

Purnea

980

980

7

Mr. Hussain

Incharge

Purnea

2,000

2,000

4,980

9,980

Grand Total

5,000

This amount will be entered in the
FCRA cash book as ‘Salary-Sida’

Salary
(CRY)

Salary
(Ford)

Total
Payment

Signature

2,500
1,000

1,500

Venkat

He now signs at one place only This amount will be entered in the
Indian cash book as ‘Salary-CRY’

Attendance Register
Some NGOs keep an attendance register, others do not. This largely depends on organisational culture and size. Where work-hours and leave rules are fixed, an attendance register would be useful. Similarly the register is useful where large number of people work. Attendance registers should be kept separately for each office location. However, agency-wise attendance registers need not be kept.
Normally, people initial the register each day to mark their presence. When a person is on

outstation work, ‘o/s’ may be written. At the end of the month, days of attendance and days of leave should be totalled and written against each person.

Leave Records
If the attendance register and salary registers are kept properly, there is no need for a separate leave register. However, most NGOs ask for leave applications – these should be filed systematically. A good way is to keep it in one file, sorted date-wise.

Joining Report / Appointment Letter
Practices vary from region to region. Some people avoid any kind of documentation, fearing problems under labour laws. They believe that once an appointment letter is given, it may be difficult to terminate services at the end of the project. This is a tricky matter and should be discussed with your advisors. However, you must always remember that lack of an appointment letter does not mean that a case can not be filed with the labour commissioner.

59

Some NGOs follow the system of an offer letter, a joining report and a formal appointment letter.
Increments are also made through increment / confirmation letters. These papers are normally kept in separate subject-wise files (joining report file, appointment letter file, etc). Larger organisations keep one separate file for each employee.

Paying salaries by cheque / bank transfer
Quite a number of NGOs are now paying almost 100% salaries by cheque. Many NGOs in metropolitan cities like Mumbai and Chennai follow this practice. Surprisingly, smaller NGOs in rural areas such as Nilakottai (Tamil Nadu) and Gondiwadhona (MP) have also started paying salaries by bank transfer.
Payment by cheque or bank transfer always carries more credibility than payment in cash.
When paying salary by cheque, make sure that the cheque is crossed ‘A/c Payee Only, Not
Negotiable’. Payment of salary by a bearer cheque is same as paying in cash.
If you want to pay salaries by bank transfer, the concerned staff should have their accounts in your bank. Then you can make just one cheque. Make the cheque for the total amount, attaching a list of payees and their bank account numbers. Deliver the cheque and the list to your bank, against acknowledgment. The bank will transfer correct amounts to each account.
Whether you pay salaries by cheque, bank transfer or cash, you must obtain signatures of the employees on the salary sheets.

Salary to office bearers
Office bearers can be paid salary only when they do extra work. Extra work means regular duties apart from those required as an office bearer (secretary, treasurer, etc.). Under section
50 of Indian Trusts Act, 1950, trustees can be paid salaries if specifically provided in the Trust
Deed.
However, there are restrictions on payment of salary to office-bearers (of registered societies) in some states such as Tamil Nadu [sec. 25(3)].

60

Fixed Assets Register 61
Auditors and Funding Agencies often demand to see Fixed Assets Register. As a result, many
NGOs have started maintaining such registers.
However, the format of the register is often very complicated. NGOs are also not clear why they should maintain the register and whether it has any practical use.
Here, we address these issues. It explains the need for a register, offers a simplified format and also shows how the NGO can use the register for better control.

What is a Fixed Assets Register?
A Fixed Assets Register (FA Register) is a register which shows all the permanent assets owned by an organisation. The register shows the quantity and value of things like chairs, tables, fans, furniture, vehicles, land, buildings, etc. It may also show where these assets are kept or used. Sometimes a serial number is also put on the item and noted here. Any assets that are sold are also recorded here.

Is it different from a Stock Register?
This register is sometimes confused with the stock register. However, these are two different records. A stock register is maintained to keep record of goods received and issued. It is mainly used for items which are not permanent. A record of medicines or of wheat bags would be kept in a stock register. Normally a stock register does not show value of the items received or issued. Why do you need such a Register?
A Fixed Assets Register becomes very useful when the organisation is growing. Having this information can help you check whether all these assets are in your possession. The total value of these assets can also be cross-checked with Balance Sheet or ledger. This is why most
Agencies insist on this Register.

Where can you get this register?
This type of register is available in the market. You should ask at a shop which keeps government forms and stationery for companies. If you can’t purchase this register, you can use the simple format given on page 64. Make about 80-100 photocopies and have these bound in one register.
Have all the pages numbered with a numbering machine. Insert two or three plain sheets in the beginning for an Index.
Heading

Typical items

Sheets

Buildings

For school sheds, office building, etc.

Equipment

For telephone, computer, cash box, music instruments, survey equipment, etc.

Furniture &
Fixtures

61

For own land

30

For chairs, tables, almirahs, wall units, partitions

Land

5

20
2

Based on AccountAble 13: Fixed Assets Register

61

Heading

Typical items

Sheets

Livestock

For cows, buffaloes, etc.

Machinery

For handlooms, reeling machines, etc.

Vehicles

For cycles, motor-cycles, jeeps, tractors, trucks, etc.

5
10
5

How do you maintain this register?
Different sheets are opened for different type of items. For example, all tables, chairs, almirahs etc. are written together on one sheet as Furniture. Similarly all cycles, motor-cycles, jeeps are written together on one sheet as Vehicles. You will need to open as many heads as the type of Fixed Asset accounts you have. After each type, you should leave a few sheets blank for future additions. Commonly the following classification is used (third column shows number of blank sheets that you may need).

Two Things to Remember...
There are two important things to remember here: Firstly, record is maintained only of those assets which are owned by us. For example, if a community center or tube-well has been constructed for the villagers, the villagers may be its owners. In such case, this item should not be recorded at all.
Secondly, if an item (such as land or furniture, etc.) is received by us as a gift, it should also be recorded in the register. You may show an estimated value for this or record it at ‘Nil’ value.

We have not started it…
If this register is started in the early years, it can save a lot of trouble for you later on. But suppose 10-15 years have passed and you have not started this register. Here you may have two choices:
Old Vouchers available
If old vouchers are available, you can re-create your register. Proceed year by year. First pick up the earliest (first year’s) Balance Sheet 62. See if any additions to fixed assets are shown.
If yes, note down the amounts under various categories on a sheet of paper. Then take out the ledger, cash book and vouchers for that year. Open the ledger account of a particular asset and trace the voucher numbers. From the vouchers, note down the relevant details on another sheet of paper. Tally the total of this sheet with that noted earlier from the Balance Sheet. Proceed this way for each category. After all the details for that year are noted and tallied, enter these in the Fixed Asset Register. Follow the same procedure for next year and subsequent years.
Remember, you must follow the sequence for the years.
Old Vouchers not available
If old vouchers are not available, you may have to divide you register into two sections. First go back to the earliest year for which vouchers are available. See the opening balances of fixed assets (category-wise) at the beginning of this year. Note down these balances as the opening balance for different categories of assets. After this, start recreating the Register from this year in the same manner as given above. You can call this Register as ‘Register B’.
Next, sit down and try to recall / identify assets which were purchased before this period. Note down whatever details you can remember on a sheet of paper. If the purchase happens to be

62

Sometimes the Balance Sheet does not show this information. In such cases, refer to the Receipts and
Payments Account.

62

land or vehicles, you may get additional information from the title deeds or registration papers.
Sort out the information according to categories. From these items, cut out the items which may have been sold or transferred later on. Now get another FA Register. Call this ‘Register A’. Enter the information in this register in the same manner as a normal FA Register. Some information may not be available – leave these columns blank. Total up the value figures for each category
(if possible), otherwise leave it un-totalled.
Approval
After you have filled up this register to your satisfaction, have it approved and signed by the
Secretary / Treasurer. You may want to write one sentence under each category (just above the signatures of the Secretary / Treasurer): “Certified that the above details reflect the assets in the Society’s possession as on ______ (date) and have been recreated on the basis of information gathered from various documents / persons, in the absence for accounting records for old years.” Physical Verification
Just keeping the register is not enough. You should verify the assets physically once in a while.
How often you verify depends on your situation. If you have many field offices, you may want to verify the assets there every year. Assets which are small and can be easily removed should also be verified each year.
When verifying the assets, you should get each department or location to prepare lists of assets they have in their custody. Some one from the main office can visit to cross-check these. These lists then should be compared with the FA Register. This is called ‘reconciliation’.
All variations should be investigated. Some assets may have to be written off because these have been lost or have become unserviceable.

63

Format of Fixed Assets Register
Asset Category:
Serial
No.

Accounting
Year

Page No.:
Description
of Item

Quantity

Bill
Date

Voucher
No. /
Date

Amount
(Rs.)

Purchased /
Sold

Location /
Identification

Funded by 64

Section II: Financial Statements
Financial statements are of many kinds: the ones we ha discussed here are annual financial statements. These are prepared once a year, on the basis of account books maintained by the organisation.
There are three main statements that a non-profit normally prepares: Receipts and Payments
Account, Income and Expenditure Account, and the Balance Sheet. These are then checked by the auditors, who issue a report. This is called an audit report.
The Receipts and Payments account is similar to a cash flow statement. Most NGOs follow cash basis of accounting. Therefore, in most of the cases, this is virtually the same as the
Income and Expenditure Account. Both these statements show the activity during the year, and are, in a way, parallel to a narrative program report.
The Balance Sheet, on the other hand, shows the financial status of the organisation on a particular day. Mostly, this day now is 31st March each year, when the Government of India closes its financial year. You are free to choose another date for closing the accounts -- so long as you close them on 31st March also!
The audit report is an important document. It can, and often does, give important information about the organisation’s financial health. Unfortunately, it is not written like a juicy news-story; most people, therefore, do not read it. The importance of audit report and the role of auditors is also discussed in this section.
Going through this section will not make you a financial wizard or analyst. However, it will give a basic understanding of the annual financial statements, and how to use these in your work.

Receipts and Payments Account

67

Income and Expenditure Account

72

Balance Sheet

77

NGO Auditors

82

65

66

Receipts and Payments Account
What is a Receipts and Payments
Account?
NGOs are required each year to prepare a summary of their cashbook. This summary shows all the money that they received during the year. It also shows the payments that were made. This is called the Receipts and Payments Account.

The Peacemaker
Payment is a noun. It comes from the verb pay. And where does pay come from? It’s been used in English for more than 800 years.

Utility
Some people think that the Receipts and
Payments Account is a leftover from the time of cash accounting. This is not quite correct. The Receipts and Payments
Account has several advantages. This is more so in the case of non-profit sector:
1. Trustees and other laypersons find the
Receipts and Payments Account easier to understand.
2. This Account discloses all loan transactions, even those which have been squared-off during the year.
3. Some accountants do not disclose revenue Grants in the Income and
Expenditure Account. In such cases, the true Income of the Non-profit can be known only from the Receipts and
Payments Account.

It seems that the original root of pay was the
Latin word pax. Pax means peace (as in Pax
Romana). One of the Latin forms of pax was pacare, which meant pacify. The idea was that you could pacify an angry creditor by paying him! The French changed pacare to payer. From there, it reached English in the 12th century as pay. It was often used in the sense of
‘pacifying’ people till the 16th century. After that, this meaning died out. For the last 500 years, payment has been used only to mean
‘the act of giving money’.

4. Manipulation of financial statements has become very common these days. It is, however, not easy to manipulate the Receipts and Payments Account 1 and the Income and Expenditure
Account together.

Receipts vs. Income
All receipts are not income. For example money received from sale of fixed assets, loans taken, advances from customers, etc. is not income.
Similarly, all income may not be received during the year. This happens if the organisation follows accrual accounting2. For example, money for credit sales may be received in the next year. Interest earned on fixed deposits.

Payments vs. Expenditure
Using the same logic, all payments are not expenditure. For example, money paid for purchase of fixed assets, loans repaid or given to others, advances to contractors, etc. are not expenditure.

1

In recognition of this fact, corporate reporting requirements have now changed to include cash flow statements also.
2
See ‘Basis of Accounting’ under chapter ‘Commonly Confused Terms’ on page 95.

67

In some cases, an expense may occur but may be paid later. For example, you may have organized a mela in Feb ‘02, but the bill of the tent house may be paid later in April ’02.
In this case, if you are following accrual accounting, then this will be shown as an expense in
2001-02, and as a payment in 2002-03.

Common issues
Before discussing the methods of making a Receipts and Payments Account, let us deal with some commonly confused issues:

Loan transactions
The Receipts and Payments Account should show all cash and bank transactions. This includes loans given or received. It even includes those loans that were given out and received back during the same year.
Unfortunately, many accountants simply prepare the Receipts and Payments Account from the
Balance Sheet and the Income and Expenditure Account. As a result, transactions settled during the year do not show up at all. This is not a good practice and should be avoided3.

Advances for expenses
During the year many staff members may be given advances for expenses. For example, people are given advance for traveling, for organising events, for purchasing stationery, etc. Should all these be shown in the Receipts and Payments Account?
This is a difficult question. If we do not show these advances then some people may feel that we are suppressing information. But if we show these, then the Receipts and Payments
Account will become hopelessly cluttered.
There are two ways to deal with this. One is to take a decision that all routine advances settled during the year will not be shown in the Receipts and Payments Account. This can also be disclosed in the Receipts and Payments Account by giving a note.
Second option would be to show all advances given on the payment side as one line item
‘Advances for Expenses’. On the receipts side, a corresponding one line item can be shown as ‘Settlement of Advances for Expenses’. This may look like below:

FCRA Receipts and Payments Account (partial)
Receipts
Settlement of Advances for
Expenses

Amount

Payments

40,224

Advances for Expenses

Amount
46,250

Why is there a difference of Rs.6,026 between the two sides? This represents advances given to staff, for which bills have not been submitted by the end of the year.

3

There is an important reason for this. Let us assume that there is a clever trustee of a wealthy Trust. On
1st April ’00, he took a loan of Rs.5,00,000 from the Trust. On 31st March ’01, he returned the entire
Rs.5,00,000. The loan was interest-free.
Then again on 1st April ’01, he took another loan of Rs.5,00,000. He returned this loan also on 31st March
’02.
In both years, the loan has been squared-off within the financial year. Should this loan be shown in the
Receipts and Payment Account?

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Accrued Expenses / Income
What happens to expenses or income, which have accrued during the year but not paid or received so far? These should not be shown in the Receipts and Payments Account of this year.
These will be shown in the next year when the actual cash payments or receipts occur.

Cash or Bank?
For making the Receipts and Payments Account, cash and bank transactions are treated as
4 is b i g t e s me. T e e o e d p s t o w t d a a o c s f o bank accountnot shown as en h a hrfr, eoi r ihrwl f ah rm a receipt or payment.
However, if you invest money in bank fixed deposits, this will be shown as payment item in the
Receipts and Payments Account. Similarly, encashment of fixed deposits will be shown as a separate item of receipt.

Level of Detail
Receipts and Payments Account is a summary of the cash and bank book. This means that all items of one type can be added together and shown as a single line item. For example, salary is paid twelve times a year. However, we need not show 12 entries for salary. We can show just one entry ‘Salary paid’ in the Receipts and Payments Account.
However, can we add up all our expenses 5 and show these as one item, say ‘Rural Development’?
No. This will give very little information. The basic purpose6 of preparing a Receipts and Payments
Account will be defeated.
We should therefore, try to give reasonable level of detail7 in the Receipts and Payments
Account.

Using Trial balance figures
Most accountants use a shortcut to make the Receipts and Payments Account. They pick up most of the income / expense figures from the trial balance. Then they derive other figures 8 of receipts / payments by using opening and closing balances of various accounts9.
This can work if the organisation is following cash basis of accounting. In case, the organisation follows accrual basis or mixed basis, then this shortcut can give wrong results.

Depreciation
Depreciation is not a cash payment. It is an estimated charge towards wear and tear of fixed assets. Therefore, depreciation never appears in the Receipts and Payments Account.

Computerised Accounts
What is the command for making a Receipts and Payments Account if your accounts are computerised? We do not know of any accounting software, which can generate a proper
Receipts and Payments Account automatically. This may be because the software is unable to link up an advance with its settlement.

4

Sometimes called ‘cash-bank contra’
Including salary, rent, various function, fuel, etc.
6
That is, financial disclosure
7
For more in this, see ‘Level of Detail’ in AccountAble Handbook: FCRA, page 77
8
Non-revenue items such as loans, purchase of fixed assets, etc.
9
This often means that some transactions do not get reported in Receipts and Payments Account, particularly where loan account had been squared during the year.
5

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Local Contribution and FCRA
Does your FCRA funded project require local contribution also? Be careful how you account for it. Any local contribution, whether cash or in kind, can not be brought into FCRA account books.
This should be accounted in the General or Indian cash book and posted to another sub-ledger maintained for concerned project. Please note that this sub-ledger is part of the Indian set of books and is different from the FCRA project ledger.
Also do not include this local contribution in the FCRA Receipts & Payments Account when you file your FC-3. If you do, you may get a notice from FCRA 'for mixing up local and FCRA funds'. How to make a Receipts and Payments Account
Receipts and Payments Account should normally be consolidated, that is, it should show the picture of the entire organisation. This includes FCRA funds, government funds, other funds as well as own funds.
Consolidated Receipts and Payments Account for the year ended 31st March ‘02
Receipts

Amount Payments

Opening Balance:

Amount

Salaries: Program Staff

– Cash

1,15,500

Salaries: Admn. Staff

2,75,200

1,16,000 Watershed Development Works

24,27,356

500

– Bank

9,24,300

Local Contribution

10,250 Rent

Grants from:

42,000

Stationary

24,350

– Indian Agencies

14,55,500 Loan to staff

– Foreign Agencies

55,75,500 Revolving Fund Loans given

– Govt. Dept.

15,800

8,75,000 Purchase of land

Interest from:

1,00,000

Education Centres

– Bank

4,85,760

11,85,320

1,500 Health Program

19,32,851

– FDs/ Investment

10,500 Traveling Expenses

2,53,057

– Rev. Fund Beneficiaries

12,500 Fuel & Maintenance

71,950

Loans taken

1,45,000 Leadership Program

Sale of Motorcycle

2,26,860

5,000 Advances for Exp.

Advances for Exp. settled

80,500

75,354 Loans returned

Rev. Fund Loan recoveries

1,06,000

1,10,200 Closing Balance:
– Cash
– Bank
Total

83,92,304

10,506
2,30,494

2,41,000

Total

83,92,304

However, in some cases, a limited Receipts and Payments Account is prepared. For example, a Receipts and Payments Account showing transactions for FCRA funds only is prepared and

70

attached to the FC-3. Similarly, some donor agencies ask for project based Receipts and
Payments Account, showing transactions of projects supported by them.
Following guidance applies mainly to the consolidated Receipts and Payments Account.

Opening Balance
Start with the opening balance10 of cash in hand, and cash in bank accounts. Remember to include the balance of all bank accounts and all cash books11 .
Opening bank balances should be taken from the bank book 12 and not from the bank pass book.

Receipts
Summarize all receipts appearing on the receipts side of the cash book and the bank book.
These are added up separately for each head of account and shown on the receipts side of the
Receipts and Payments Account.

Payments
Similarly, all payments appearing on the payments side of the cash book and the bank book are summarized. These also are added up separately for each head of account and shown on the payments side of the Receipts and Payments Account.

Closing Balance
The closing balance is once again taken from the cash book and bank book 13, as appearing at the end of the year.

Tallying the two sides
Now add up both the sides. The two totals should tally, if all the figures have been taken correctly. If the totals do not tally then you may have to go back to your account books and cross check the figures again.

10

At the beginning of the year
If you maintain multiple cash books for each project or for different locations
12
Or bank column of the cash book/ bank account in the ledger
13
Bank book maintained by you, not the bank pass book
11

71

Income and Expenditure14
As the development sector grows, size and complexity of NGOs is also growing. To handle the large amount of funds, both the NGOs and the funding agencies need a better understanding of financial statements. This will help them raise and answer questions.
The Balance Sheet shows how wealthy (or bankrupt) a person or organisation is. It is a status report and shows where the organisation has reached on a particular date. In this chapter, we deal with the Income and Expenditure Account.
Income and Expenditure Account is like an activity report – it shows what you did in one year.
Mostly this account is prepared for a year though it can be prepared for a longer or shorter period also. It shows all the income for the year on one side (the ‘auspicious’ right hand side) and all the expenditure on the other side (the ‘evil’ left hand side).
The difference between the two sides is shown as ‘surplus’ or ‘deficit’. If the right side (income) is more, you get a surplus. If the left side (expenditure) is more, it means you spent more than you earned – the result is a ‘deficit’.

How can I spend more than I earned?
This is not difficult at all – see how easily the Government has been doing it for 50 years. You do this mainly by: q Borrowing money from others. The loans will not show up on the Income side – these are shown as liabilities. q Spending stored surplus related to an earlier year. This adjustment will also show up in the
Balance Sheet.

What can the Income and Expenditure Account tell us?
For a good analyst, a decently prepared Income and Expenditure account is better than an annual narrative report. It can tell you: q How much the NGO received from different sources: grants, donations, interest, and other income. q How did it spend the money: salaries, travel, and physical program work.
And when you compare two or three accounts, you will know: q Whether the income of the NGO is rising or stagnating. q Whether it has been able to spend the money it receives. q Which types of expenses are growing at a higher rate than others.
With these figures, you can raise some relevant questions: q Is it practical to raise such large amount of donations from villagers or from small towns? q What are the expenses incurred against other income from consultancy, training, etc.? q Why is the pattern of expenditure changing? q Whether activities given in the narrative reports tie up with the Income and Expenditure
Account?

14

Based on AccountAble 38: Income and Expenditure

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Is it different from the Receipts and Payments Account?
The Receipts and Payments Account shows all receipts, including donations, grants, loans taken, sale of assets, and recovery of staff advances. In the Income and Expenditure Account, loans, sale of assets, recovery of staff advances, etc. are not shown.
Similarly, repayment of loans, purchase of fixed assets, etc. are shown in the Receipts and
Payments Account, but not in the Income and Expenditure Account.
Receipts and Payments Account is like a summary of the cash and bank book — it starts and ends with cash and bank balances. It can not tell you whether there is a surplus or deficit.

Why is that important?
You may be spending more than you earn by borrowing money. In the long run, this will get you into serious financial problems. The Receipts and Payments Account does not distinguish between ‘income’ and ‘loans’, etc. The Income and Expenditure Account can tell you whether you are breaking even each year or not. In any case, you need to know the figure of surplus or deficit to prepare your Balance Sheet.

What happens to the surplus?
The surplus is transferred to the Balance Sheet and carried forward to the next year. In most cases, the surplus shows up due to wrong accounting policies. It represents unspent grants which will be spent next year. There are really very few NGOs who will have a genuine surplus.
These NGOs may be doing public fund-raising or may be running some income generation activity, where they earn a profit.

Is ‘Profit’ different from ‘Surplus’?
The word ‘Profit’ is used for commercial organisations. ‘Surplus’ is used for non-profit bodies.
Surplus is also sometimes called ‘excess of income over expenditure’. The main difference between ‘profit’ and ‘surplus’ appears to be that you are not free to distribute the surplus among the members of the NGO. Even the profit earned in income generation activities can not be given to the members of the NGO – it must be used for the organisation’s objectives.

Can we transfer surplus to General Fund?
In most cases the surplus includes unspent grants. This part of the surplus can not be transferred to General Fund without the concerned Agency’s permission. However, general donations from public or other similar income (interest, etc.) can be transferred to General Fund or some other specific fund.

What about transfers to Corpus?
The entire surplus can not be transferred to the Corpus. Some part of the surplus will represent amounts received for purchase of fixed assets. This can be transferred to ‘Corpus’ or ‘Fixed
Assets Fund’ when the assets are purchased. This provides a balancing effect on the liabilities side. If you receive a specific grant for your corpus, this can be transferred to the corpus.
Donations from general public can be transferred to corpus, unless the donor has given some other instructions.

Are grants ‘Income’?
Some people say that grants are received for specific purposes and represent a liability. These should not be taken to Income and Expenditure Account but directly to the Liabilities side of the Balance Sheet. Unfortunately, this results in a distorted view. Even in case of NGOs receiving and spending crores as grants, the Income and Expenditure Account may show very little income or expenditure.
73

Another view is to treat such grants as ‘Conditional Income’.
This would mean that these become the organisation’s income if these are spent properly. That is to say, these are spent according to the terms and conditions of the grant. In such case, the entire grant is shown as income and a provision is made for unspent grant at the end of the year.
This presents a picture which is closer to reality.

What is a Consolidated Income and
Expenditure Account?
NGOs often prepare separate Income and Expenditure
Account for each funding agency. This reflects the transactions related to that particular project.
However, they also need to prepare a Consolidated Income and Expenditure Account showing transactions related to all projects (FCRA or Indian) as also the General section. This is a compulsory requirement under Income Tax, Societies Act, as also Bombay Public Trust Act.

What is Depreciation?
When you build or purchase a fixed asset, it will last you for several years. A jeep may be useful for 5-10 years, a good building will last you for 90-100 years. When you charge depreciation, you write off a proportionate amount each year. The jeep may be written off over 10 years by charging 10% depreciation each year; the building will be written off over 100 years by charging a lower rate.
Who pays for depreciation – the NGO or the funding agency?
Neither the funding agency nor the NGO pays for depreciation in a direct sense. Indirectly, the funding agencies or donors pay for it in most of the cases. This happens when they give grants to purchase assets as new or replacement.
Should NGOs charge depreciation?
It is very difficult to work out a proper rate of depreciation. Commercial concerns charge depreciation because a) it is required for calculating taxable profit; b) it is compulsory for companies if they want to declare dividend; c) it is recommended by most accounting bodies so that a reserve for replacement of the asset is created.
The first two reasons are not relevant for NGOs. They get a 100% tax write-off in the year they purchase an asset. They do not declare dividend either. Moreover, most assets are created out of grants. When the asset becomes worn out, a fresh grant is sought for replacement.
The ICAI has made AS - 6 on Depreciation Accounting compulsory from 1st April 1995. This applies to all NGOs which have any business or commercial type activities (see under ‘AS-6:
Depreciation Accounting’ on page 101.
For other NGOs, it is up to them whether they charge depreciation or not. If they wish to charge depreciation, they can use the rates given in Income Tax act or Companies Act (see chart alongside). Depreciation rates
The rates shown here are taken from the Companies Act and the Income Tax Act. In these Acts, many more rates are specified – for accurate information you should consult your auditors.

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WDV or SLM?
These indicate the method of calculating depreciation: SLM means straight line method. Here the rate is applied to original cost of the asset each year. If an asset is worth Rs.10,000 and the SLM rate is 10%, then the depreciation each year will be 10% of 10,000 or Rs.1,000 each year.

Asset

Companies Act I. Tax
SLM % WDV % WDV %

Office Building

1.63

5

10

Residential building

1.63

5

5

General Equipment

5.15

15

25

Cars / jeeps

7.07

20

20

Tractors

11.31

30

25

Bus / truck

11.31

30

25

Other vehicles

7.07

20

25

Format: Gujarat and Maharashtra

Computers

16.21

40

25

A special format has been given under the
Bombay Public Trust Act. This format gives minimum disclosure requirements. This has to be used by all NGOs registered under
BPT Act (the Act applies to Gujarat and
Maharashtra only).

Furniture

3.34

10

10

School furniture

5.15

15

15

WDV means written down value method.
Here the rate is applied is applied to the net balance of an asset. If the asset is worth Rs.30,000, and depreciation rate is
10%, then in the first year, depreciation will be Rs.3,000. In the second year, it will be Rs.2,700 [(Rs.30,000-Rs.3,000) x 10%].
In the third year, deprecation will be
Rs.2,430 [(Rs.30,000-3,000-2,700) x 10%].

SLM: Straight Line Method
WDV: Written Down Value

Horizontal or Vertical?
Horizontal Format
Most NGOs prepare the Income and Expenditure Account in horizontal format. Income is kept on the right hand side and expenditure on the left hand side. In this, it is similar to the Profit and Loss Account prepared by commercial organisations.
Using Schedules
But there the similarity ends. NGO tend to put all the line items on the main Income and
Expenditure Account, instead of classifying these into schedules. This makes the accounts very difficult to understand. Use of schedules could solve this problem.
Classifying account-heads
Secondly, there is no standard basis of classifying account-heads – it follows the agency budgets. Similar expenditure may be classified differently under two different agency budgets.
This causes confusion and makes comparisons difficult. In the present situation, there appears to be no real solution for this.

Vertical Format
When the Income and Expenditure Account is prepared vertically, Income items go on top.
Below these the Expenditure items are shown. Total expenditure, when subtracted from Total
Income gives you the surplus or deficit.
There is no major advantage in the vertical Income and Expenditure Account except that it is easier to type and file, and shows total income and expenditure clearly.

75

Notes to Accounts
These provide explanations or clarification regarding accounting policies, etc. This helps people understand your Income and
Expenditure Account better. These can be given with the horizontal format as well.

76

Balance Sheet15
A Balance Sheet is, to a true accountant, the crowning glory of a year’s hard work. To an auditor, it is the beginning of an exciting hunt. What does a Balance Sheet mean to you – a piece of paper with meaningless figures? An annual ritual to keep the authorities and donors happy?
If you say yes, you are probably right. Many Balance Sheets are the result of careless or
‘creative’ accounting. But not all. An honest Balance Sheet can give you invaluable insights into an organisation.

How to read a Balance Sheet
Quite simply, the Balance Sheet is a sheet of Balances to be carried forward to next year.
However, accountants are rarely satisfied with simple things. They have divided the Balance sheet into two parts: Assets and Liabilities. To make things more complicated, they offer you two forms of Balance Sheet: the traditionally Horizontal and the trendy Vertical (See on pages
79 and 80). But the Balance sheet is merely one part of the Final Accounts.

Final Accounts
Final Accounts are also called Financial Statements. Apart from the Balance Sheet, there are two other statements which form the Final Accounts: ‘Income and Expenditure Account’ and
‘Receipts and Payments Account’. All three are prepared at the end of each financial year. In
India, the financial year now is uniform and runs from 1st April to 31st March. In other countries, the financial year varies.

Audit Report
In addition to these three, there is an important statement called the ‘Audit Report’. The audit report contains comments of the auditor regarding the truth and fairness of the first three statements. The Audit Report is prepared by an independent auditor (normally a Chartered
Accountant).

Income and Expenditure Account
The Income and Expenditure Account is like an activity report. It tells you the income earned during one particular year (e.g. 1st April 1996 to 31st March 1997). It also shows all the expenses for that year. For IGPs, this is called a Profit and Loss Account.

Receipts and Payments Account
The Receipts and Payments Account is also like an Income and Expenditure Account. But there are two important differences: one, it includes capital transactions (like loans taken and assets purchased) during the year; and, two, it shows only those transactions where cash or cheque has been given or received during the year.

Balance Sheet
The Balance Sheet is like a status report. It will tell you what were the assets and liabilities of the NGO on, say, 31st March 1997. It will show all their assets (buildings, vehicles, investments, cash in hand, bank balances). If the NGO has taken loans these will also be shown here. The
Balance Sheet will also show you whether the NGO has a Corpus or Endowment Fund. Other things to look for:
Dynamic or Stable
You can often tell the age of an organisation by its Balance Sheet. As it grows older, its Balance
Sheet grows heavier. Assets acquired for operations over the years get accumulated in the
15

AccountAble 36: Balance Sheet

77

Balance Sheet. The organisation’s need for a secure future leads to a larger corpus. But insecurity is often a spur to action. Once there is a feeling of stability, the organisation becomes less dynamic. This is reflected by the less active Income and Expenditure Account.
How much cash
Cash in hand is important for day-to-day expenditure. But large amount of cash increases risk of theft and misuse. Normally a cash balance for three days’ payments is sufficient. A larger balance may mean unusual circumstances (planned purchase of land), several field offices, lack of planned withdrawals or even a partially fictitious cash balance.
Bank Balance
Money lying in a savings account or current account is no good for anyone except the Bankers.
Good financial management will show up in small bank balances (sufficient for a month or 45 days), with the rest of the money lying in short term bank deposits. Most funding agencies now accept this so long as the program is not affected.
Ratio Analysis
While the word ‘ratio’ has links to the word ‘rationality’, some of the ratio analysis can be quite hilarious and irrational (see ‘Business India Index’). Ratio analysis means analysing a relationship between two figures when there is a relationship.
For example, there is a relationship between amount of work done and infrastructure needed.
So you can see the relationship between value of fixed assets and amount of program expenditure.
This can be done by dividing the total program expenditure by the value of fixed assets. A ratio of ‘1’ will raise eyebrows while a ratio of ‘5’ may be quite acceptable.
Window dressing
Very common in the corporate sector. Virtually unknown in the voluntary sector16.
Notes to Accounts
Some of the figures in the Final Accounts often need additional explanation. These are given in the Notes to Accounts. Read these for better understanding of the Balance Sheet. Often important accounting Policies are also given here.

More tips on reading a Balance Sheet l If the Balance Sheet is not consolidated, it will carry some comment below the heading

(such as FCRA Accounts; CRY Project etc.). l It is also useful to compare this year’s figures with last year. See if some of the amounts

have remained unchanged. l If creditors or debtors appear on the Balance Sheet, they are probably following Mercantile

Basis (accrual) of accounting. l Revolving Fund loans are often treated as expenditure in accounts (though not in reality). In

such a case, no such loans will appear on the assets side. l Grants are sometimes not taken to Income and Expenditure Account — balance of amount

received and spent is shown in the Balance Sheet. l Fixed Assets are sometimes charged off to program expenditure. l Surplus shown in the Income and Expenditure is often due to expenditure on fixed assets —

it is not a real saving of funds.
16

Some say that it prefers to keep the windows closed rather than resort to dubious window dressing!

78

l Endowment Funds are often not properly set aside on the Liabilities side but merged with

surplus for the year.

The Horizontal Balance Sheet
Most NGO Balance Sheets are prepared in the Horizontal form. This has two sections: right and left. Assets are shown on the right side; liabilities are shown in the left. There is an interesting history to this. Traditionally, left has been considered evil: at one point in Europe’s history, left handed persons were thought to be witches and magicians and burnt at the stake. As we all know, all liabilities are also ‘evil’ – these are therefore shown on the left side of the Balance
Sheet.

Assets
All the assets which you own are put on the Right Hand side. Secondly, these are put in a descending order of ‘durability’ or ‘ease of realisation’. This means ‘Land’ comes right on top.
‘Cash in Hand’ comes right at the bottom. Buildings, equipment, furniture, debtors, recoverable advances, investments, bank balances come somewhere in between.
Fictitious Assets
The last line shows the total of all the assets. But watch out for the ‘fictitious assets’. These should be deducted from the total of assets side, if you want to make any sense out of the
Balance Sheet. Examples of fictitious assets are: ‘accumulated deficit’; ‘Miscellaneous expenditure remaining to be written off’. These are normally shown at the bottom, below ‘cash in hand’.

79

Liabilities
On the left side, the most pressing liabilities are put at the bottom: these include bills payable, creditors, provision for expenses. Above these come short term ‘unsecured loans’ taken by you.
Going upwards, you then put the ‘secured loans’ taken from people. Then come the Endowment
Funds. Corpus comes right at the top: this is a notional figure and shows the net worth of the organisation. The Vertical Balance Sheet
Some people find this easier to prepare: you do not need a double-spread sheet for typing this.
Most companies use this format – however, it is rarely seen in NGOs. The vertical form has given up its prejudice against left handed people – there are no left or right sides to this. It has two sections: 1. Sources of funds; and 2. Application of Funds

Application
The second section (Application of Funds) shows the assets of the organisation in descending order of durability. Fixed assets come first, Investments second and current assets come third.
Current assets include debtors, advances, stocks, cash at banks, cash in hand.
However, the current liabilities (bills payable, creditors) are deducted from the current assets to give a figure of net current assets. Only the net figure is shown in the total column.

80

The fictitious assets (‘accumulated deficit’; ‘Excess of expenditure over income’) are shown at the absolute bottom, below the current assets.

Sources
Going back to the first section, this shows the sources of these funds. At the bottom of this section, you have your unsecured loans (received), preceded by secured loans (received). Above this come the Endowment Funds. Right at top is the corpus, which is a difference between the total assets reduced by loans taken.
In many ways, vertical form is easier to understand. The information is more organised and it is easier to work out ratios. Being typed on single sheets means less complications in xeroxing, filing and physical handling.
Unfortunately, in several states (e.g. Gujarat and Maharashtra), local regulations do not allow
NGOs to use the vertical format.

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NGO Auditors17
Most human beings consider audit as an unnecessary evil.
Fortunately, there are some who differ: they think that it is a necessary evil.
There is much confusion among NGOs and agencies as to what an audit means. An auditor’s rubber stamp is often thought to be the ultimate certificate of financial propriety. On the other hand, if an employee fudges his travel bill, someone is bound to ask:
‘what were the auditors doing?’
Here, we try to provide a perspective on the auditor’s role, duties and liabilities.

Audit Report
Does an auditor’s stamp mean that everything is all right?
No, the stamp simply identifies the accounts which the auditors have checked. The stamp is put both on good accounts as also bad accounts.
You have to read the audit report to understand whether accounts show a proper picture.

You mean a report like:
‘checked and found correct’...
These reports (technically called ‘audit statement’) are not sufficient. For example, these do not tell what was checked. Someone may say that they simply checked the totaling of the accounts and found it correct. Another person may say that they checked the spellings only! The ICAI (Institute of Chartered Accountants of India) discourages such brief reports as these can be misleading.

What does a proper audit report look like?
Good audit reports are typed on the letterhead of the auditor. They show what was the scope of the audit, what type of checking was done and what are the findings. The details of the report depend on the type of audit.
An example of a proper audit report is given in the box.

Auditors’ Report
We have audited the attached Balance Sheet of
_________ (Society) as at 31st March 2002 and also the Income and Expenditure Account and
Receipts and Payments Account for the year ended on that date, annexed thereto and report as follows:
1 We have obtained all the information and explanations which to the best of our knowledge were necessary for the purpose of our audit;
2 In our opinion, proper books of account as required by law have been kept by the Society so far as appears from our examination of the books;
3 The Balance Sheet, Income and Expenditure
Account and Receipts and Payments Account dealt with by this report are in agreement with the books of accounts;
4 In our opinion and to the best of our information and according to the explanations given to us, the accounts give a true and fair view:
a. in the case of the Balance Sheet, of the state of affairs of the Society as at 31st March 2002;
b. in the case of the Income and Expenditure
Account, of the surplus of the Society for the year ended on that date; and,
c. in the case of the Receipts and Payments
Account, of the receipts and payments of the
Society during the year ended on that date. for xyz & Co.
Chartered Accountants
Place:
Date:
(abc) Partner

17

Based on AccountAble 39: NGO Auditors

82

All audit reports are same – should we really read each one?
It is true that most audit reports are not very exciting or different. The language used is very stereotyped and standard. Firstly, this is because each phrase in the report has been selected carefully to for its exact meaning. Secondly, the clients prefer to correct whatever mistakes the auditors find. If they don’t correct the mistake, then the auditors may give a qualification. You should look for qualifications when reading a report.

What is a qualification?
Qualifications are sometimes called ‘notes’ or ‘comment’ also. A qualification means that auditors are not very happy about something in the accounts. Qualifications are made only when the matter is quite serious – small errors are normally ignored. A strong qualification normally starts with the words ‘... subject to note number...’. Milder qualifications are indicated by the words ‘... read with note number ....’.

How does a qualification affect the accounts?
This depends on the wording and the amounts involved. Each qualification has to be read carefully and its meaning understood. Qualifications can be very embarrassing for the organisation concerned. Our auditors refuse to type the Balance Sheet on their letterhead...
They are right. The ICAI discourages use of letterheads of CA firms for typing Balance Sheets, etc. These can be typed on plain paper. The auditors then put the stamp of their firm to authenticate the accounts. The letterhead should be used only for typing the audit report.

Can audited accounts be checked again by another auditor?
Yes. Firstly, auditors merely express their opinion on accounts. One auditor’s opinion may be different from another.
Secondly, each audit may have a different scope of work. A normal audit of financial statements is concerned with true and fair view. An audit commissioned by a funding agency may be concerned with proper utilisation of funds. Both audits may result in differing reports.

The Things That Auditors Do…
What is statutory audit?
Any audit that is required under a law (statute) is a statutory audit. Audit under Income Tax (form
10-B), FCRA (form FC-3), Societies Act are all statutory audits. CAs normally refer to company audits as statutory audit.

What is internal audit?
Larger organisations set up internal audit system so that some one can review their accounting systems regularly. This results in less mistakes and makes internal controls strong. This may be done by some experience person or a CA firm. However, the statutory auditors of an NGO should not take up its internal audit.

What do CAs do, apart from audit?
CAs help NGOs mainly with registration, income tax, sales tax, computerisation of accounts, certificates, FCRA matters, and book-keeping. Discuss your accounting problems frequently with your auditors. This will give them a better understanding of your work and they will be able to give you good advice.

Our auditors don’t know anything about FCRA...
FCRA is not a major area of practice for most CAs. However, your auditors have been trained
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to understand and interpret various laws and their financial implications. If you share some relevant training material and the FCRA act with them, they will be able to help you much better.

What is 10-B report?
This audit report is issued under Income Tax and covers various issues. These include questions on the amount of salary, etc. paid to Governing Body members, investment of funds in private companies, etc.

Is it all right if my auditors write my accounts also?
No, it is not. Your auditors or their staff should not write your account books. If this is allowed, it becomes difficult for them to do a proper audit.

Should we re-appoint auditors each year?
This depends on your bylaws. If the bylaws say that auditors would be appointed by the General
Body each year at each Annual General Meeting, then this procedure has to be followed. For this you will have to pass a resolution at the meeting. Generally speaking, it is a good practice for the auditors to be appointed by the General Body. This practice is followed in all companies.
If the bylaws allow Governing body or chief Functionary to appoint the auditors, then they can do so.

Professional Ethics
Who can audit our accounts?
In a general sense, almost any person can audit or check your accounts, whether or not they are professional auditors. This includes gazetted officers and donor agency representatives.
However, for a proper audit of the Balance Sheet, Income and Expenditure Account, Receipts and Payments Account, the concerned person has to be either a practicing Chartered Accountant, a part-B state auditor or a person approved by the government. Of these, practicing Chartered
Accountants are governed by rules of ICAI.

What is ICAI?
ICAI means Institute of Chartered
Accountants of India. It has been established by the Chartered
Accountants Act, 1949. It trains new
CAs, conducts examinations and declares results.
The CA profession is very strictly controlled as compared to other professions in India. After a CA qualifies, he has to become a member of the
Institute if he wishes to practice as a CA the ICAI are subject to disciplinary action

Audit Under

CA

FCRA

Yes

No

No

Income Tax Act

Yes

Yes

No

Bombay Public Trust Act

Yes

No

Yes

Societies Registration Act Yes
(as amended by states)

B– State Approved
Auditor person

In some In some states states

or conduct certain types of audits. All members of by the Institute if they are negligent in their work.

What is negligence?
If a CA does not perform their work properly or according to professional standards, they may be treated as negligent.

Can any one complain against the auditors?
Yes. If the matter is serious, the complaint can be made on plain paper by writing to the ICAI.
The reason for complaint and relevant documents should be sent along with the complaint. The

84

name and membership number of the concerned CA should be given. You should also give your name and address so that ICAI can ask you for additional facts, if required.

Can the auditors be sued by the funding agency?
Yes. Apart from complaining to the ICAI, the funding agency can also file a civil suit against the auditors, if their negligence has caused loss of money to the agency.

How many CAs are there in India?
Some people do not take up or continue membership of the ICAI after qualifying. Excluding these, there are 96,392 CAs in India according to latest figures (1.4.01). Out of these, 56,626 are practicing as auditors. Most of the CAs are working in the five major metros. However, you will also find CAs in small places such as Akhnoor, Kadamtala, Naroli, Ayyampet, and Saugor.
Their addresses are published each year by the ICAI in a directory of firms and a list of members. These are available from the ICAI offices.

Has ICAI fixed some minimum audit fees?
These requirements apply mainly to larger firms having at least four partners. Such firms should charge at least Rs.1,000 (if the city has a population of less than 20 lakhs). If the population is more than 20 lakhs, then they have to charge at least Rs.1,500. For still larger firms, having at least eight partners, these rates are doubled. In case the work is done on honorary basis
(that is, without any fees or by charging Re.1 or so), then the requirements are not applicable
(Sch. 2, part 2, cl. 5 of the CA Act; notification no. I-CA(7)/158/87 dated 25.5.87).

Can we pay our auditors fees @ 1% of total grants received?
No. This is allowed only in the case of cooperative societies, where fees can be paid as a percentage of paid up capital, gross income, profits, etc. (Sch. 1, part 1, cl. 10 of the CA Act;
Regulation 192).

Then how much fees should we pay the auditors?
The fees should be calculated on the basis of time spent, complexity of work, whether senior or junior persons are required, and the responsibility associated with the work. Your auditors can give an idea of the fees calculated on this basis. However, amount of fees alone should not be a criteria for appointment of auditors. You should consider other factors such as accessibility, credibility, integrity, professional expertise, etc.

Can the auditors leak our secrets?
By training and habit, auditors do not normally discuss matters related to their clients with others if these are confidential in nature. Moreover, all auditors are legally bound by a code of conduct. This includes maintaining client confidentiality. Leaking confidential information to others, without consent of the client is treated as misconduct. It can lead to disciplinary action by ICAI.
However, they can be compelled to disclose such information if required by any law.

Sorting out differences
Our auditors are too strict...
In the case of commercial concerns, the audit issues are different, accounting department is strong and there is a good internal check system. This is missing in most NGOs. NGO accounts tend to be controlled by the chief functionaries. Most NGOs also do not have sufficient budget allocation for paying competitive salaries to accounts staff. These factors make NGO audits more risky for the auditors.

85

Secondly, most auditors view NGOs as working with public money. This calls for higher standards of accountability. The presence of funding agencies and involvement of their auditors also may make your auditors more careful and strict. This should be welcomed as it will help strengthen your accounts department.

How can we remove our auditors?
This step should not be considered lightly.
If you are dissatisfied about the quality of work or time and attention which you get, discuss this with the auditors. You can also wait till the appointment lapses with the end of the year. You can then appoint a different auditor. Unkindly yours, ...
“According to a writer in Time Magazine, accountancy is a profession whose idea of excitement is sharpening a bundle of No.2 pencils...” — Guinness Book of Humorous Anecdotes by
Nigel Rees
***
“... in your report here, it says that you are an extremely dull person. Our experts describe you as an appallingly dull fellow, unimaginative, timid, spineless, easily dominated, no sense of humor, tedious company and irrepressibly drab and awful. And whereas in most professions these would be considered drawbacks, in accountancy they are a positive boon.”
— Penguin Dictionary of Modern Humorous
Quotations, compiled by Fred Metcalf

If for some reason, you have to remove the auditors midway, then such removal can only be done by the body which appointed them (General Body or Governing Body as the case may be). You will have to pass a resolution at the meeting for removal. As a courtesy, you should also intimate the concerned funding agencies regarding change of auditors. In some cases, funding agency insist that they should be informed if the auditors are changed.
The new auditors will first write and discuss the reasons for change with the earlier auditors
(Sch.1, part 1, cl. 8). When they are satisfied, then only they will accept the audit.

What were the auditors doing...?
This question is often heard when some mistake is discovered in the accounts or some employee is found to have cheated the organisation. When auditors report on true and fair view, they are not expected to check each mistake or look for minor frauds. Overall they look for reasonable quality of book-keeping, supporting documents, a true and fair view. For this they may check all transactions or pick up a sample. Their responsibility is limited to exactly what they say in their report.

86

Section III: A Bit of Theory
Practice without theory is like a car without a steering wheel. Yet, today everything is tested on the touchstone of ‘practicality’. Anyone talking about theory is liable to be dismissed as woolly-headed or ‘impractical’. Still, with great risk of life and limb, we decided to put in a little bit of theory, for old times’ sake.
We start this section with a write-up on history of accounting, which right now is mostly limited to a history of double-entry book-keeping. However, there are several organisations working on this, and more history may emerge as time passes.
This is followed by a listing of commonly confused terms. Every discipline has its share of jargon. Accountants, at least in the old times, were probably not familiar with this requirement.
So they ended up with the simplest terms (A Balance Sheet is literally a sheet of balances.
A Trial Balance is an attempt to balance the books.) However, all is not lost. The present generation of accountants may yet succeed in setting new standards in making simple things complex. Which brings us to the question of accounting standards. As of now, there are no official accounting standards for NGOs in India. This means that a systematic analysis and understanding. History of Accounting

89

Commonly Confused Terms

94

Accounting Standards

99

Accounting Policies

105

87

88

History of Accounting
Many people think that accounting started with the industrial revolution. However, in recent times, a new specialisation has emerged: accounting historians. These people have been digging up the past, side-by-side with archaeologists. This chapter tries to give an overview of their work.

A bit of History
The backbone of modern accounting is the double-entry system of book-keeping. The present form of double-entry system of accounting has been around for an estimated 700 years. The story of double-entry book-keeping takes us back to an Italian monk during Renaissance.

1494 CE: Luca Pacioli
This system was first publicised by a Franciscan monk, Br. Luca Pacioli in 1494 CE 1 . Br. Luca
Pacioli2 described the system in his book called “The Collected Knowledge of Arithmetic,
Geometry, Proportion and Proportionality”3.
The book dealt mainly with arithmetic and geometry. Only a small chapter, added almost like a bonus or after thoughts, described double-entry accounting4. This book was printed on the new Gutenberg press5 and became an instant hit. Br.
Pacioli’s book caused this system to be widely adopted all over the world over the next 500 years.
Most of the system remains unchanged even today. This may be because accountants have not been very inventive or because the system itself was very robust to begin with6.
Br. Pacioli did not claim7 to be the inventor of double entry book-keeping. He gave credit for this to one Mr. Benedetto Cotrugli8 of Dubrovnik, Croatia.

1458 CE: Benedetto Cotrugli
Mr. Cotrugli had written about double-entry system in his book called
“Of Trading and the Perfect Trader9”. This book was written around
1458 but not published for more than a hundred years.

Modern Numerals and Accounting
ACAUS 10 makes an interesting observation regarding development of double-entry accounting. It suggests that double-entry accounting became possible due to introduction of Arabic numerals to Europe, which were a big improvement over Roman numerals (I, II, V, IX…
L, C...).

1

Common Era. We are now in 2002 CE.
Pronounced pot-CHEE-oh-lee
3
Original title: ‘Summa de Arithematica, Geometria, Proportioni et Proportionalita’
4
Curiously, academic mathematicians would have had very little interest in book-keeping. At the same time, traders and merchants of the time would have been most unlikely to spend time studying geometry!
5
Before the Germans invented printing presses, books were copied laboriously by hand. This automatically made books very expensive and limited their availability severely.
6
We naturally subscribe to the second theory.
7
Source: ‘Accounting: A Virtual History’, www.acaus.org
8
Benedikt Kotruljevic
9
Original title: ‘Delia Mercatvra et del Mercante Perfetto’
10
Association of Chartered Accountants in the US
2

89

What are Arabic numerals? The numerals (1, 2, 3, ... 0) used throughout the world today are often called Arabic numerals. This is because Arabs introduced these numerals to Europe towards the end of first millennium CE 11 . However, the Arabs themselves call these as Hindu figures (Al-Arquan-Al-Hindu). There are also visual similarities between the current Devanagari12 numerals and the modern numerals used internationally13. According to Mr. Ginsburg:
“The Hindu notation was carried to Arabia about AD 770 by a Hindu scholar named
[Shri] Kanka who was invited from Ujjain to the famous court of Baghdad by the
Abbaside Khalif Al-Mansur. [Shri] Kanka taught Hindu Astronomy and Mathematics to the Arabian scholars and with his help, they translated into Arabic the Brahma Sphuta
Siddhanta of [Acharya] Brahmgupta. The recent discovery by the French savant [Mr.]
M. F. Nau proves that the Hindu numerals were well known and much appreciated in
Syria about the middle of the seventh century AD.”14

Some more history
It is also believed that traders and bankers in Venice were using some concepts of double entry book-keeping a hundred years before Mr. Cotrugli wrote his book. Both Mr. Cotrugli and Br.
Pacioli have described an existing system rather than having suggested or invented a new one.
How did double-entry concepts develop in Venice so quickly, though the modern number system had just reached Europe15 ?
Some scholars believe that Indian merchants may have taken this knowledge across. For instance, Mr. Alexander Hamilton F.R.S. wrote 200 years ago:
“We would remark that the Banias 16 of India have been, from time immemorial, in possession of the method of book-keeping by double-entry, and that Venice was the emporium of Indian commerce at the time at which Friar Lucas’s (Pacioli’s) treatise appeared”17. This line of argument has been further developed by Shri B. M. Lall Nigam recently18, when he called the bahi-khata system as precursor to Br. Pacioli’s double-entry accounting.
What is the bahi-khata system?

The Bahi-Khata System
The Bahi-Khata system, used even today by Indian traders, is commonly referred as single-entry system in all standard text-books. These books stop at that, without bothering to explain the system at all. As a result, modern accountants know very little about traditional Indian accounting.
Curiously, the Bahi-Khata system makes a double-entry for all transactions affecting real or personal accounts. These transactions are first entered in the rokad-bahi19, and then posted into the khata-bahi20.
11

800-1000 AD
Script used for some of the Indian languages such as Sanskrit, Hindi, Marathi, etc.
13
Article 343 of The Constitution of India refers to these as ‘the international form of Indian numerals’.
Not knowing this, many Indians call these ‘English numerals’.
14
Mr. Ginsburg, ‘New Light on Our Numericals’, Bulletin of the American Mathematical Society, Vol.25,
1919, pp.366-9. Quoted in The Dawn of Indian Civilization, ed. Shri G.C. Pande, pp.672-3, ISBN 8187586-00-1
15
The modern number system came in general use in Europe only in mid-1400’s when the digit symbols were standardised.
16
Traders of Vaishya varn (caste). The term is sometimes used as a pejorative.
17
Monthly Review 26 (1798) page 129, quoted by Shri G. P. Kapadia in ‘History of Accountancy Profession in India – Volume I’, ICAI, 1973, page 27.
18
Shri Lall Nigam, B.M. (1986) ‘Bahi-Khata: the pre-Pacioli Indian double-entry system of book-keeping’,
Abacus, 22(2): 148-62
19
Cash book
20
Ledger book
12

90

The system also uses the concept of naame (debit) and jamaa (credit) for maintaining the books. It differs from the modern double-entry system in two significant aspects only:
1. Transactions, which affect nominal accounts, are not posted to the ledger. Thus, we cannot draw up a Profit and Loss Account 20A.
2. A trial balance cannot be prepared, as double-entry is not completed for all transactions.
It should be noted that most Indian traders follow cash basis of accounting. Credit sales are recorded by debiting personal accounts directly. The significance of a journal is, therefore, somewhat diluted.

Accounting and Arthashastra
About 2,400 years ago, the Prime Minister of the Maurya Empire wrote Arthashastra, literally, the ‘Manual of Means 21’. Among other things concerned with administering the state, a section of the manual discusses state accounting also. Surprisingly, some of the concepts are very close to modern notions of accounting.
This has been discussed in some detail by Shri Choudhury 22 and Shri
Bhattacharyya23. Reviewing Shri Bhattacharyya’s book, Mr. Mattessich24 comments: “…the Arthashastra is the very first treatise on accounting, as far as present historical documentation goes… Arthashastra [is] a treatise dealing with theoretical accounting aspects and [foreshadows] concepts that were systematically dealt with [only in] the twentieth century. [There is] reason enough to put [Acharya] Kautilya’s
Arthashastra beside Pacioli’s Summa, and revere both of them as the most crucial landmarks in the early history of [accounting] discipline.”
While agreeing with Shri Bhattacharyya’s overall thesis, Mr. Mattessich has also pointed out important shortcomings in the analysis. He has also lamented the fact that neither Shri Shamasastry nor Shri Kangle25 had any accounting training, and thus their translations may not be very reliable for accounting research. A new translation of Acharya Kautilya’s Arthashastra by Shri Rangarajan26, provides more systematic treatment and has devoted a separate chapter to ‘Budget, Accounts and Audit’. Shri
Rangarajan has also attempted a reconstruction27 of the form of accounts28 specified by Acharya
Kautilya. These appear very similar to some of the modern accounting records:

20A

However, there are clear references to a Profit and Loss Account in Mahabharat (Van Parv-Teerthyatra
Parv; III. VII. 98.5-17). Pages 1233-34, Mahabharat, Geeta Press, Gorakhpur. 11 th edition Vikram Samvat
2058 (2001 CE)
21
resources
22
Shri Choudhury, N. (1982) ‘Aspects of accounting and internal control, – India 4 th century B.C.’, Accounting and Business Research, 46 (spring): 105-10
23
Shri Bhattacharyya, A. K. (1988) Modern Accounting Concepts in Kautilya’s Arthashastra, Kolkata: Firma
KLM Private.
24
Mr. Richard Mattessich, “Review and extension of Bhattacharyya’s Modern Accounting Concepts in
Kautilya’s Arthashastra”, The Beginnings of Accounting and Accounting Thought, 2000, p.144-145, ISBN
0-8153-3445-1. Also published in Accounting, Business and Financial History, Volume 8, Number 2,
1998. Routledge
25
Shri R. Shamasastry discovered the text and translated it first in 1915. However, Shri R. P. Kangle’s
1965 translation forms the basis for most of the later commentaries.
26
Shri Rangarajan, L. N. ed. ‘Kautilya – The Arthashastra’, 1992, Penguin Books India (P) Ltd.
27
In all probability, accounting records in Acharya Chanakya’s times did not look like this. But then you can be also sure that the real dinosaurs did not look like any thing shown in the British Museum!
28
Ibid, p.277; References are to paragraph numbers in Shri R.P. Kangle’s three - volume translation of
Arthashstra. ISBN 81-208-0040-0

91

1

2

3

4

5

29

30

92

6

7

O;q"Vns'kdkyeq[kksRiÙ;uqo`fÙkçek.knk;dnkidfucU/dçfrxzkgdSÜpk;a leku;sr~
O;q"Vns'kdkyeq[kykHkdkj.kns;;ksxçek.kkKkidks¼kjdfo/kr`dçfrxzkgdSÜpO;;a leku;sr~
31
O;q"Vns'kdkyeq[kkuqorZu:iy{k.kçek.kfu{ksiHkktuxksik;dSÜp uhoha leku;sr~
For what use
Authority ordering payment Withdrawn from store
Delivered by

Expenditure Side

4
5
6
7
8
9
10
11
12

Balances Columns

8

Received by

Amount paid

Classification: current year or outstanding dues

Quantity received

Name of payer

By whose order

Received by

Recorded by

Income Side

Delivered to (name of
Treasury official)

Details of container

What was paid

5

Amount received

Occasion

Head of Account

4

Quality

Counter value received

Date and time of receipt

3

Form in which balance received into the Treasury

3
Head of Expenditure

Period of accounting

Place

2

Dues left outstanding

2
Date and time of payment

Period of accounting

1

Head of Account

Place
1

Date and time

Place

Form of Accounts per Arthashastra
{2.7.31}29

6
7
8
9
10

{2..7.32}30

13

{2.7.33}31

9

Accounting concepts in Mahabharat
The accounting trail does not stop with Arthashastra. We see references to it in Indian history as contained in Ramayan and Mahabharat. The Adi Parv32 of Mahabharat is particularly interesting and contains a clear illustration of the concept of ‘Nominal Pricing33’.
This occurs in a dialogue34 between King Vasuman and King Yayati. King Yayati refuses to accept a donation of good deeds from King Ashtak and then again from King Pratardan. At this
King Vasuman says: ‘O King, I give all my worlds to you. If you are hesitating to take these as a donation, then you can buy these for a handful of grass.’
King Yayati responds: ‘This sale-purchase is a complete fiction. I have never entered into such transactions. Why should I do this, when no true person does it?’

Cuneiform Tablets from Mesopotamia
Can we stop with Mahabharat? No. Accounting historians take us back further to Mesopotamia. In Mesopotamia, archaeologists have discovered proto-cuneiform tablets containing distribution records of barley. On these tablets, debit entries appear on one side and the credit totals appear on the other side.

Token accounting in Middle-East
This type of accounting appears to be a successor to something called token accounting, which evolved in the Middle-East from
8000 BCE to 3000 BCE. Token accounting used clay pouches 35 to seal tokens, such as pebbles. Each token represented actual objects. For example, a pebble may mean ten goats or sheep.
To record
50 goats, five tokens were placed inside the pouch, which was then closed and baked. To find out the number of goats in stock, you had to break open the pouch.
Later on, the accountants started making impressions of the pebbles (tokens) outside the pouch as well, before baking it. The main benefit of this was that you did not have to break the pouch to check the accounts! This double representation (a pebble inside, and an impression outside) is currently believed to be the origin of double-entry system of book-keeping.

32

Mahabharat war is currently estimated to have occurred around 1400 BCE. Adi Parva relates to period much before that.
33
Concluding a transaction for a nominal book price. For example, land occupied by Pragati Maidan was sold to Trade Fair Authority of India for one Rupee, when its market value was in crores of Rupees.
34

35

^olqekuqokp % --- Øh.kh"oSrkaLr`.kdsukfi jktu~ çfrxzgLrs ;fn /heu~ çnq"V%AA
;;kfr:okp % u feF;kga foØ;a oS Lejkfe o`Fkk x`ghra f'k'kqdkPNÄdeku%A ---*
Mahabharat (I. VII. 93. 3-4) Page 280. Ibid.
Called ‘bulla’

93

Commonly Confused Terms36
Most of the time accountants use normal English37. But there are times when they use words in a special way. For example, a harmless statement such as ‘I am processing your payment’ may mean that your voucher is being given third degree!
Other than that, what do accountants mean when they say…

Donations
Donations are made by individuals. Normally, there is no condition attached. This means you can use donations for any suitable purpose.
Some NGOs start special funds. For example, you may have a special fund called ‘Orissa
Cyclone Fund’. In such a case, donations become earmarked. Donations raised for ‘Orissa
Cyclone Fund’ should not be used38 for other work.

Grants
Grants are made by foundations or donor-agencies. Companies and governments also make grants. Grants are normally made for a specific purpose. You cannot use it for any other purpose. If you have to, then you need the donor’s permission first.

Honorarium
Honorarium is a fee for professional services. But all fees for professional services are not honorarium. So when can you say honorarium instead of fees?
One, when the professional does not ask for a fee. Two, when traditionally no fixed price is set for the service.
What does ‘profession’ mean? Most dictionaries emphasise specialisation. For example, Oxford’s39 says that a profession is a
‘vocation or calling, especially learned or scientific’. Webster’s40 defines it as ‘a calling requiring specialised knowledge and academic preparation’. On this basis, payment of salaries to staff should not be called honorarium. However, dakshina41 to a priest can rightly be called honorarium42.

Single Entry System
Single entry is a system of bookkeeping where you mainly make one entry for each transaction.
This entry is made in the cash book (called rokad bahi). This looks like the normal cash book and can tell you how much cash you have.
When the transaction is related to purchase or sale, the entry stops there. However, if you have given a loan to someone, you take one more step. You post the entry to his/ her personal account. This account is kept in a ledger (called khata bahi).

36

Based on AccountAble 59: Commonly Confused Terms
Or any other language
38
In some cases, these can be redirected. For example, suppose the funds can no longer be used for
Orissa Cyclone. In such case, the NGO’s Board may have to pass a resolution. This will allow the NGO to use the funds for some other purpose.
39
The Oxford Dictionary for the Business World, 1993
40
Webster’s New Encyclopedic Dictionary, 1993
41
Token payment for performing a religious ceremony
42
Chamber’s English-Hindi Dictionary, 1994
37

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So what is missing here? No ledger account is kept for sales, purchases, fixed assets, etc.
Single entry system is no longer taught in schools or colleges.
Most professional accountants do not have a clear idea what it means. The system is, however, still used in Indian villages and traditional business communities.

Double Entry System
The cashbook in double entry system is similar. But with one major difference: all entries made in the cashbook are posted to one or other ledger account.
Postings to personal accounts are similar to single entry system. But how do we handle sales, purchases, etc.? Here the double entry system does something very clever. It opens ‘nominal43 accounts’ for these. Similarly for fixed assets, it opens ‘real accounts’.
Using this trick, double entry system becomes a self-balancing system. This unique feature has led to double-entry system being adapted all over the world. All NGOs and grant-making agencies in India follow double-entry system of accounting.

Basis of Accounting
When should you pass an entry for expenses? When you receive the bill or when you pay it sometime later? This depends on the basis of accounting you have adopted.

Cash basis
If you follow cash basis, then you pass entries only when cash (or cheque) is paid or received.
This means an unpaid bill will not be treated as an expense. Similarly an outstanding grant will not be treated as income.
This is the most common basis of accounting among NGOs. However, it is not suitable for all
NGOs. If you get lots of services on credit, but use cash basis of accounting, then you have a problem. Your accounts will show a wrong picture.

Accrual basis (Mercantile)
Some accountants do not like cash basis. They say that if a service has been used, then you must pay for it. If so, then why not account for the expense? It will also help show whether you have enough money for all the pending bills.
Under accrual basis, you should pass entries for expenses or income when these become due.
It does not matter whether cash/ cheque has been received or paid.
Expenses become due when you become legally liable to pay for them. Income becomes due when you have a legal right to recover it.

Mixed basis
But do you have a legal right to recover donations? Donations are gifts. If someone promises you a gift and then fails to send it across, what can you do? Nothing. That’s what the law says for donations also. It is for this reason that you can’t do much about a donation cheque that bounces. 43

Nominal means ‘for the sake of name only’

95

Due to this reason, some NGOs follow a mixed basis44 of accounting. Expenses are recognized when services or goods are received. Donations and some grants are accounted only when received. But other contractual income, such as rent or interest, is accounted when due.

Corpus
Corpus is a Latin word, which means ‘body’. This word occurs all over in law and medicine. Both these disciplines owe a lot to Latin. For non-profit organisations, it means the main body (or principal) of the trust.
Most people think of corpus as an asset. This is reasonably correct from a common sense point of view. The corpus is represented by cash or investments, and sometimes by property (movable or immovable). All these appear on the Assets side of the Balance Sheet.
However, from an accounting point of view, corpus is a liability. It is the control entry (or mirror reflection) for funds kept in reserve.
It is generally believed that a corpus should not be touched or broken. However, income from the corpus (interest, rent, etc.) can be used for running the trust. It is normally unrestricted. This means it need not be reserved for a particular program.
How does a corpus grow? A donor may give some money or property, saying that it should form part of the corpus. This will get added to the corpus. Can the trust move some of its surplus into the corpus by passing a resolution? There is no clarity on this.
By the way, if you had more than one corpus, what would you call them? Corpora.

Endowment
Endowment means ‘money or property given to a person or institution to provide an income’.
In USA, people are more familiar with endowment than corpus. Endowment is shown on the liabilities side. The related investments appear on Assets side.
Endowment funds are normally kept in long-term investments. The income from endowment may be restricted for use in a particular program. Or it may be unrestricted – this means you can use it for any of the NGO’s activities.
Donors normally expect periodic reporting for endowments. How is it invested? How much income does it produce? How is the income used? Restrictions 45 on an endowment should be explained in notes attached to the Balance Sheet.

Surplus or Deficit
Surplus occurs when income in a year is more than expenditure. Deficit occurs when your expenditure is more than your income.
However, before calculating surplus, you must make provision for unspent grants. If you don’t, then your financial statements will show a wrong picture.
If you are into fund-raising, you may be raising funds for specific programs. At the end of the year, part of this fund may be unspent. You should make a provision for this before calculating surplus or deficit.
Such provisions are advisable even when you follow cash basis of accounting.

44
45

Also called ‘modified accrual basis’
Restrictions are conditions for the use of fund or its income.

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General Fund
General Fund is unrestricted fund. It is built up from surplus over the years. It can be used for any suitable activity of the society.
General Fund can be created in FCRA section also. It should be named in a different way such as ‘FCRA General Fund’. For more details see ‘Unrestricted FC Funds 46’.

Voucher
In accounting, a voucher has several uses. It explains a transaction. It also authorizes the transaction. It shows which account head is to be debited and which one is to be credited. The voucher also carries the name of your organisation.
Your organisation may use just simple vouchers (see page 14 for design, etc.) or specialised ones. This means you will have one type of vouchers for cash payments (called cash vouchers) and another for bank payments (bank vouchers). Then you might also have journal vouchers.
Sometimes, the voucher also provides proof of payment. For example, a person may sign a voucher to show that he or she has received the money.

Supports
In other cases, the proof of payment will be a cash memo or bill.
This is attached to the voucher as a support. A voucher may also have several supports.

Cash memo
When you buy something and pay in cash, you get a cash memo. The cash memo helps you keep the payment in your memory. It also helps prove that you have paid the money. Most shopkeepers will give you a cash memo if you ask for it.
A cash memo should show the name and address of the shop.
It should also show the items purchased (description, quantity, rate, value). The date of purchase should also be given.
For some items such as medicines 47, the shopkeeper must give a cash memo. All shops registered under sales tax also must issue a cash memo when asked.
In smaller places, it is sometimes difficult to get cash memos. In such a case, you can ask the shopkeeper to write the name and address of the shop on a paper. He / she then can write down what you have purchased, at what rate and the money you paid. The shopkeeper should then sign it. This would be enough for most small purchases.

Bill
A bill48 is similar to a cash memo. There is only one difference. A bill means that cash has not been paid yet. But you have received the items or services.
This means that a bill should be addressed to your organisation. Also when the bill is paid, you should get a receipt. If you don’t get a proper receipt, then the shopkeeper must acknowledge the payment on the bill and sign again.

46

Given in the AccountAble Handbook: FCRA, chapter titled ‘Puzzles of FCRA’; page 118.
Only licensed chemists can sell most medicines.
48
Also called invoice, credit memo or charge memo.
47

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When you make the payment by an account-payee cheque49, it may not be necessary 50 to get a receipt. However, you can ask the receiver to sign for the cheque.

Stock Register
Stock Register is for items that are purchased and sold or used. These may be raw materials or finished goods. In the NGO context, these are normally supplies such as stationery, medicines, construction material, etc. These will normally be used up or sold within one year.
Fixed Assets should not be recorded in stock register.

Fixed Assets Register
Fixed Assets are items that will be used for a long time51. Fixed Assets Register is a record for such items.
Sometimes, this register is called the Dead Stock Register. This is not a suitable term, as fixed assets are not part of stock.
Stock items should not be recorded in the Fixed Assets Register.

Final Accounts
Final Accounts are your financial statements. These are prepared at least once a year. These normally include three items: 1. Balance Sheet; 2. Income and Expenditure Account; and, 3.
Receipts and Payments Account. People sometimes casually call the entire set as Balance
Sheet.
Financial statements are not very useful for public or authorities without an audit report.

Audit Report
Audit Report is report of the auditors on your final accounts. It normally gives auditor’s opinion on the accounts. It is different from the accounts. Auditors sign the accounts only for identification.

Contingency
A contingency is uncertain. It is something that may or may not happen. Mostly, it is also unexpected. For example, a worker being injured in an accident is a contingency.
Some people keep a little money aside for contingencies. This may be a budget item or may be a fund. If it is a fund, it may be called ‘contingency fund’.
Many Agencies now avoid contingency as a budget item. Reason? It seems they found that if one has a budget for contingency, then a suitable contingency is bound to occur!

49

The cheque must be made in the name of the shop.
If required, the bank will give a letter proving the payment was made to the party.
51
More than one year, at least
50

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Accounting Standards52
The word ‘Standard’ has been in use since 12th century. It comes from the Anglo-Norman estaundart – flag displayed in a battlefield so that troops can rally to it.
The sense ‘criterion, norm’ emerged in the 15th century. It probably is a metaphor based on the notion of the ‘royal standard’ or banner as being the point from which authoritative commands are issued53.
But what do accounting standards mean? How do these affect NGOs?
Here, we try to provide some basic information on this.

Accounting Standards
Accounting Standards are a collection of generally followed accounting principles, policies and practices. These help to ensure a common basis for financial statements of different organisations. This means that people can understand these more easily and make useful comparisons.

Accounting policies
Accounting policies develop from Accounting Standards. Different organisations may have different policies, if the concerned standard allows alternative treatment.
For example, it may be necessary for everyone to charge depreciation. However, basis of charging may differ. This depends on the accounting policy followed.

International Standards for Non-profits
In UK, the Charity Commission for England & Wales (CCEW) issues guidance notes on accounting and related matters. In USA, the FASB (Financial Accounting Standards Board) and
AICPA (American Institute of Certified Public Accountants) have also prepared some useful material. Standards in India
Twenty-three standards have been issued so far in India. Many of these have become compulsory for most organisations. These are summarised later-on in this section.
These apply mainly to business or commercial organisations. However, in some cases, these are compulsory for NGOs also.

Applicability to NGOs
Compulsory for some
There has been some controversy as to whether these are applicable to NGOs or not. The
Institute of Chartered Accountants of India (ICAI) has clarified that the standards are mandatory
(compulsory) for all NGOs who have any income-generating activities, no matter how small.
Commercial or business activities
These may include sale of cards, sale of handicrafts or publications, sale of farm produce, feebased consultancy or training, etc. Some examples are: q Charity shows where entry fee is collected q Web designing, documentary services against charge
52
53

Based on AccountAble 6: Indian Accounting Standards
John Ayto, Dictionary of Word Origins, 1990, p. 498

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q Consultancy / professional services where fees are charged q Sale of books, publications, etc. q Sale of garments or handicrafts – chikan work, applique work, embroidery work q Sale of handloom/ power-loom items: saree, towels, bedsheets q Sale of pickles, jelly, jam, squash, honey, papad, ayurvedic medicines, chywanprash, churans, etc. q Sale of agro-forestry products such as mahua, mahua seeds, amla, herbal medicines, etc. q Vermiculture, pisiculture, farm animals, dairy where products are sold q Sale of stationery, cards, hand-made papers, file folders, envelopes q Screen-printing unit or printing press, on charge basis. q Photocopy / phone booths q Running waste collection / disposal or public conveniences for charge / under contract q Schools / education centres where students pay fees q Hospitals, clinics or veterinary centres where fee is charged q Running guest houses, hostels, boarding halls against charge q Training centres where hire charges or fee is taken q Micro-credit revolving funds, where interest or service charges are taken
The essential feature in all these cases is that services / products are given against money.
Secondly, the activity must be ongoing or regular. For example, if you sell your old newspapers once in a while, it does not become a business. Similarly, if you sell off a vehicle or some other asset, it would not be business.
Donation or sale?
Some people issue donation or contribution receipts for sale or fees for above things. This may be done for various reasons 54. From an accountant’s view, these remain sale price or fees.
Therefore, Accounting Standards would apply in all such cases.

Voluntary for others
NGOs today deal in substantial amount of public funds. If these standards are followed, it will increase public confidence in the accountability of NGOs. It is suggested therefore, that even other NGOs should follow these on a voluntary basis.

Penalty for non-compliance
If the standards are compulsorily applicable to you, and you decide not to follow these, your auditors will have to disclose this fact in their report. This may have a negative impact on your image. Indian Accounting Standards
In India, Accounting Standards are prepared by the Accounting Standards Board, which has been set up by the ICAI.

54

Some NGOs wrongly believe that charging a price will affect their non-profit status. Others do it to avoid sales tax complications or rules related to running of guest-houses or to meet donor stipulations.

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The standards became applicable on different dates. This means that the standard applies to all financial statements for periods beginning on or after that date. For example, a standard effective from 1-April-95 will apply for financial year55 95-96.
Accounting standards apply only to material56 items.

AS-1: Disclosure of Accounting Policies
All significant accounting policies should be disclosed in financial statements. If fundamental accounting assumptions (such as accrual) are not followed, disclosure is necessary. Effective date: 1-April-93.

AS-2: Valuation of Inventories
How to value and account for stocks. This standard was revised in June-99. Effective date: 1April-99.

AS-3: Cash Flow Statements
Preparing and presenting a cash flow statement. Revised in March-97. Effective date: 1-April2001.

AS-4: Contingencies and events occurring after the Balance Sheet Date
How to treat and disclose contingent losses and liabilities. Treatment and disclosure of postBalance Sheet date events (such as fire after 31st March but before signing of audit report).
Revised in April-95. Effective date: 1-April-95.

AS-5: Net Profit or Loss for the period, Prior Period Items and changes in
Accounting Policies
Treatment and disclosure of these. Revised in February-97. Effective date: 1-April-96.

AS-6: Depreciation Accounting
Depreciation should be charged on assets. Related information should be disclosed. Revised in
August-94. Effective date: 1-April-95.

AS-7: Accounting for Construction Contracts
Determining cost of construction and its disclosure in accounts. Effective date: 1-April-93.

AS-8: Accounting for Research and Development
Criteria for determining Research and Development costs and disclosure. Effective date: 1-April93.

AS-9: Revenue Recognition
When and how revenue (such as interest) should be recognised. What disclosure is necessary.
Effective date: 1-April-93.

AS-10: Accounting for Fixed Assets
Determining cost of fixed assets. Disclosure of gross and net values in accounts. Effective date:
1-April-93.

AS-11: Accounting for effects of changes in Foreign Exchange Rates
How to account and disclose foreign currency assets, liabilities and fluctuations. Revised in
December-94. Effective date: 1-April-95.
55
56

All financial years which begin on or after 1-April-95
Where amounts are large or important. Auditors use their judgment to decide materiality.

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AS-12: Accounting for Government Grants
Covers government subsidies etc. for businesses. Effective date: 1-April-94.

AS-13: Accounting for Investments
Accounting, valuation and disclosure on investment related information. Effective date: 1-April95.

AS-14: Accounting for Amalgamations
Mainly relevant for companies. Effective date: 1-April-95.

AS-15: Accounting for retirement benefits in the Financial Statements of
Employers
Provision, treatment and disclosure of provident fund, gratuity, pension, etc. Effective date: 1April-95.

AS-16: Borrowing Costs
Accounting, capitalising and disclosure of interest, etc. Effective date: 1-April-2000.

AS-17: Segment Reporting
Presenting financial results according to business or geographical segments. Applies to listed companies or to organisations with turnover exceeding Rs.50 crores per annum. Effective date:
1-April-2001.

AS-18: Related Party Disclosures
Disclosure of related parties and transactions with them. Effective date: 1-April-2001.

AS-19: Leases
Accounting and disclosure of financial and operating leases. Traditional leases (land, mines, patents etc.) are not covered by this standard. Applies to both lessee and lessor. Effective date:
1-April-200157.

AS-20: Earnings Per Share
Relevant only for companies with equity share capital. Effective date: 1-April-2001.

AS-21: Consolidated Financial Statements
Designed for holding companies and group companies. Applies only if consolidated statements are prepared by the group or parent company.
Some concepts are relevant to consolidation of accounts of NGOs. Effective date: 1-April-2001.

AS-22: Accounting for Taxes on Income
Estimating and disclosing income tax. Applies selectively from 1-April-2001 onwards. Applies to all from 1-April-2003.

AS-23: Accounting for Investments in Associates in Consolidated Financial
Statements
Applies only if consolidated statements are prepared. Effective date: 1-April-2002.

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Applies only for assets leased on or after this date

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ICAI Clarifications
Some of the clarifications issued by ICAI are given below. These are mainly meant for Chartered
Accountants. Ordinary mortals should not try to read or understand these.

Accounting Standards for NGOs
‘The Accounting Standards Board has received a query as to whether the accounting standards formulated by it are applicable to organisations whose objects are charitable or religious. The Board has considered this query and its views on this matter are set forth in the following paragraphs.
The Preface to the Statements of Accounting Standards states:
“3.3 The Institute will issue Accounting Standards for use in the presentation of general purpose financial statements issued to the public by such commercial, industrial or business enterprises as may be specified by the Institute from time to time and subject to the attest function of its members.”
The reference to commercial, industrial or business enterprises in the aforesaid paragraph is in the context of the nature of activities carried on by the enterprise rather than with reference to its objects. It is quite possible that an enterprise has charitable objects but it carries on, either wholly or in part, activities of a commercial, industrial or business nature in furtherance of its objects. The Board believes that Accounting
Standards apply in respect of commercial, industrial or business activities of any enterprise irrespective of whether it is profit-oriented or is established for charitable or religious purposes. Accounting Standards will not, however, apply to those activities which are not of commercial, industrial or business nature (e.g., an activity of collecting donations and giving them to flood affected people).
It is also clarified that exclusion of an entity from the applicability of the Accounting standards would be permissible only if no part of the activity of such entity was commercial, industrial or business in nature. For the removal of doubts, it is clarified that even if a very small proportion of the activities of an entity was considered to be commercial, industrial or business in nature, then it could not claim exemption from the application of Accounting standards. The Accounting Standards would apply to all its activities including those which were not commercial, industrial or business in nature.’ The Chartered Accountant, Sep-95, Page 79

Responsibility of CAs
‘... while discharging their attest function, it will be duty of the members of the Institute to: (a)

to examine whether Statements relating to accounting matters are complied with in the presentation of financial statements covered by their audit. In the event of any deviations from the Statements, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviations; and

(b)

to ensure that the Statements relating to auditing matters are followed in the audit of financial information covered by their audit reports. If, for any reason, a member has not been able to perform an audit in accordance with such Statements, his report should draw attention to the material departures therefrom...’
The Chartered Accountant, December-85

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Qualification/ disclosure in Audit Report
‘...12. In the event of non-compliance by enterprises not governed by the Companies
Act, 1956, with the disclosure requirements of AS 1 in situations where the relevant statute requires such disclosures to be made, the member should make adequate disclosure in his audit report without necessarily making it a subject matter of audit qualification... 15. In making a qualification / disclosure in the audit report, the auditor should consider the materiality of the relevant item. Thus the auditor need not make qualification
/ disclosure in respect of items which, in his judgment, are not material...
17. A disclosure, which is not a subject matter of audit qualifications, should be made in the auditor’s report in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification. The paragraph containing the auditor’s opinion on true and fair view should not include a reference to the paragraph containing the aforesaid disclosure...
The Chartered Accountant, July-90

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Accounting Policies58
Accounting Standard59 – 1 is compulsory for most Societies / Trusts (NGOs) from Financial
Year 93-94 onwards. It covers two matters: Accounting Assumptions and Accounting Policies.
What does this mean for your organisation?

Accounting Standard – 1
24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.
25. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place.
26. Any change in the accounting policies which has have a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
27. If the fundamental accounting assumptions, viz. Going Concern, Consistency and
Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.

Accounting Assumptions
The Standard covers three Accounting Assumptions:

Going Concern
It is assumed that the organisation will continue working for many years - all assets and liabilities are valued at cost. But if the organisation is likely to close down in one or two years, then this assumption can not be followed. In this case, assets and liabilities should be valued at market value.

Consistency
Same accounting policies should be followed from one year to next.

Accrual
Accrual assumption is generally not being followed by NGOs. Most of the NGOs are maintaining accounts on cash basis. This means that they account for expenses only when payment is made. They do not make provisions for unpaid expenses at the end of the year. This makes it easy to prepare Final Accounts but gives a wrong picture of the actual financial position.
Many auditors have been pointing this out in the audit report. Now all auditors will have to comment on this if the accounts are not made on accrual basis60. You are advised to change to Accrual basis of accounting – at the earliest to avoid comment in audit report.

Accounting Policies
Different NGOs are following different accounting policies. For example, depreciation is calculated on Straight Line basis or Written Down Value basis. Different percentage rates are used for

58

Based on AccountAble 7: Your Accounting Policies
Issued by Institute of Chartered Accountants of India
60
Or the other two assumptions are not followed.
59

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depreciation. Fixed Assets are sometimes recorded at cost less grant. For NGOs running
Income Generation projects, different stock valuation methods are used. Grants from donors are sometimes not shown as income. Some of these policies are justified. Others may be considered wrong under law and Generally Accepted Accounting Principles (GAAP). One such example is not showing ‘grants’ as income.
Now all Accounting Policies (like the above), have to be disclosed. This should be done by attaching a schedule to the accounts “Accounting Policies and Notes on Accounts”. All Accounting
Policies and clarifications on accounts should be included in this schedule.
If this disclosure is not made, auditors will have to comment on this in their report. If you are following a wrong Accounting Policy61, they may even have to qualify the audit report.
Suggested Accounting Policies are given below as an example. Please discuss these with your auditors and follow their advice.

Suggested Accounting Policies
MATTER

SUGGESTED POLICY

1. Basis of
Accounting

Accounts are maintained on Accrual Basis.

2. Grants
Received

All grants received are treated as income and disclosed in Income and
Expenditure Account. Provision is created in Accounts for unspent grant balances and shown as a liability in Balance Sheet.

3. Fixed Assets

Grants received for Fixed Assets are transferred to Capital Fund Account.
Fixed Assets acquired out of such grants are shown at gross cost of acquisition less accumulated depreciation.

4. Depreciation

Depreciation is charged on Fixed Assets on Written Down Value basis at the rates specified in schedule XIV to the Companies Act, 1956.

5. Inventories

Inventories held for Income Generation Projects are valued at Cost or
Net Realisable value, whichever is lower.

6. Investments

Investments are valued at cost. Aggregate market value of quoted investments at year end was Rs.............. These investments were purchased for an aggregate cost of Rs...............

Other Accounting Policies may relate to accounting for Community Contribution, Valuing and
Recording Donations in Kind, Valuation of liability for Staff Benefits (gratuity, superannuating, etc. where relevant).

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Such as not showing ‘Grants’ as income or recording Fixed Assets at zero value.

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Section IV: Non-profit Issues
Many for-profit accounting and financial management principles apply to not-for-profit organisations as well. However, there are some issues which call for a special treatment when these principles are applied to not-for-profit activities. Budgeting is one such issue. NGOs in India often have to prepare and submit project or grant budgets to their grant-making agencies.
Ways to make these budgets more useful and self-explanatory are discussed here.
We also discuss valuation and accounting procedures for contribution in kind, i.e. when you receive material or services instead of money. The Income Tax Act in India does not allow a deduction for these to the donor. As a result, this has remained a relatively neglected area.
Accounting and control issues related to credit-based revolving funds are also covered in this section. FCRA implications of this activity are also discussed in detail here.
Lastly we deal with an emerging subject: corpus and endowments. The chapter on corpus discusses the concept of corpus, talks about legal and accounting requirements related to investing such funds and finally, explains how to estimate the size of a corpus or endowment fund. Grant Budgets

109

Contribution in Kind

116

Micro-Credit Revolving Funds

121

Corpus and Endowments

126

107

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Grant Budgets1
Budgets are sensitive documents. The Government of India takes extraordinary precautions to ensure that budgets are not leaked before the Big Day. People are locked up in their offices.
Armed guards are posted. But once the Finance Minister lets the cat out of his bag, the circus starts. There are speeches, analyses, accusations, clarifications...
The NGO budgeting process is simpler. A Budget is treated with the contempt it deserves till approved. If it is approved, it will be locked up in the Director’s safe for one year to ensure complete [lack of] transparency. It will be taken out when the Final Report is to be prepared for the Agency.
By then it is too late...
Budget means an estimate of the amount of money to be received and to be spent for various purposes in a given time. The word ‘budget 2’ was first used in a financial sense in 1764. Let us see if we can do something to restore the Dignity of Budgeting.

What is a Budget
Different things to Different People
You can view Grant Budgets (or budgets in short) from different perspectives:
In the Funding Agency: q Jack-the-Ripper View: Budget is Something that needs a lot of cutting and slashing

q

Managerial View: Budget is the Means to getting rid of our funds.

q

Philosophical View: Budget is a Meaningless Mass of jumbled figures.

q

The Sadistic Auditor’s View: Budget is a Delightful Mechanism to inflict intolerable torture on the NGO for the unpardonable sin of working in an inaccessible region by pointing out inevitable variances.

q

Technocratic View: Budget is a means of allocating scarce resources to achieve meaningful results with Maximum Efficiency.

At the NGO: q The Scriptural View: Budget is a Holy Document.

q

The Tantric View: Budget is a Mystical Mantra, which will lead to everlasting peace, harmony and an endless flow of funds.

q

The George Bush View: Budgets are Missiles fired with monotonous regularity to scare the Agency into releasing funds.

q

The Consultant’s Confusing View: Budgets are Action Plans resulting from a participatory process with the people and the program team.

q

1
2

The Creative Accountant’s View: Budget is a means of Writing Account Books without vouchers. Based on AccountAble 37: Grant Budgets
It originally came from the French word bougette which means bag or pouch (15th Century).

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Side Effects of a Budget
Whatever a budget may be, everyone agrees that it is a most desirable thing to have. But like all desirable things, it can create problems also. Biggest problems come up at the end of the year or during evaluation.
When you agree to a budget, you often think of only the total figure. But the total figure is made up of many smaller sub-totals. Each sub-total itself is made up of smaller line items.
Therefore, when you agree to the budget, you are also agreeing to the line items. The line items are based on some calculations (for example, 10 teachers x Rs.800 p.m. x 12 months =
Rs.96,000).
Now suppose, at the end of the year, if your accounts show payment to 8 teachers @ Rs.1,000 per month. Don’t you think an auditor or evaluator is going to comment on that?

Why does this happen?
There may be several reasons:
1.

A budget means looking into the future. There are bound to be some variations.

2.

The budget was not prepared or finalised carefully. We concentrated only on getting the total figure right.

3.

The program coordinator did not get a copy of the budget. He/ she planned only for 8 teachers. 4.

The Accountant did not have a copy either and did not object to payment @ Rs.1,000 p.m.

You can’t really do anything about the first. Let’s see how the others can be taken care of.

Towards clearer budgets
There are many ways to make budgets. Some need one line and others need several reams of paper. Even so, there are ways we can make clearer and more useful budgets.
Vision: You start with a vision. This vision will help focus your discussions. Talk to the people and your team. They will help you understand what is practical and what is not.
You may want to do a lot of things. But resources (money, material, time) are always limited.
Get a rough idea of how much resources you can collect. Talk to the concerned Agency. What is the point in preparing a budget for 16 lakhs when the Agency has only 3 lakhs?
Detailing the activities is very important. This will help you make better calculations. Present your plan to the Agency so that it all hangs together. One such format is given on pages 112113 under ‘The Logical Budget’.
Once the budget is approved, give copies to the Program team and the Accountant (see under
‘The Accountant’s Budget’ on page 114). It will not only help your program, your reporting problems will also reduce.

110

The flow chart towards clearer budget is presented below:

The Logical Budget
The Logical Budget helps show the logic or necessity for each activity. This budget starts with the program activity and ends up with an amount. In the logical budget, you should try to be as specific as possible. Avoid general statements like ‘upliftment of the poor’, ‘hundreds of villagers’. Possible headings for this budget are given in next page:

111

Name of Yoy may have the many items or program activities under or each program. program Give the logic or componecessity or nent rationale for each separately.

How many persons / households will benefit directly. Be as specific as possible.

Give name of villages. If the school will run in the Community center, say so.

Give number of days / months (under this budget).

Describe the line item Show how the amount was calculated Show the amount for each line item here. Lok Jagran Manch Budget for ‘Education & Health Program’ for the period 1.4.98 to 31.3.99
Sl. Name
No.
of
Program

1

2

Specific
Objectives
of this program

Logic / reasoning for each activity/ item

NFE l To run 12
Schools
NFE centers for children from tribal groups. l To give basic literacy, general knowledge to children

For teaching the children.
Each teacher will work for six hours.
One teacher for each school. Senior teachers are paid more.

NFE
Schools

As above

As above

No. of direct benefi ciaries Village / location where the activity will occur
1. Jasidih

150 girls; 170 boys 2. Haldia

Dura
Budget
tion
Line
of
Item
activity Narration

Budget
Amount
Line
(Rs.)
Item
Calculation

12
Salary to months 8 Senior teachers Rs.1000 x 8 96,000 teachers x
12 mths

Salary to
12
months 4 new teachers Rs.850 x 4 tchrs. x 12 mths. 40,800

Over
Teaching
12 resource months material
(Blackboard,
charts, etc.) Rs.500 x 12
NFE
centers

6,000

Rs.20 x
(450
children +
12 teachers
+ 10 others)

9,440

3. Parsidiha
4. Jajori
5. Terahawi
6. Koldiha
7. Jalalpur
8. Khapatia

60 girls;
80 boys

1. Chakrata
2. Khekda
3. Jewar
4. Korwani

As above

3

NFE
Schools

4

l Increase
NFE
crossSchools community linkages l 5

NFE
Schools

Increase competitive spirit

Health

210 girls; 250 boys Above 12 villages As Bal mela will run from
10 a.m. to 4
p.m., lunch will be provided to children and organisers. 210 girls; 250 boys At community 1 day land in Jajori

210 girls; 250 boys At above

As above
Transportation
for cooking material, etc.
Prizes will be given to children. NFE
6

Needed so that can explain more clearly and show pictures, etc.

1. Provide basic medical support to people 2. Encourage use of herbs and naturopathy PHCs do not exist / work in the region.
Private
medical treatment is inaccessible / expensive. 1 day

Food etc. for Bal
Mela

Transport, Rs.4,000 stage, lump sum prizes for
Bal Mela

SubTotal
50
persons x3 times x
6
villages

1. Jasidih
2. Haldia
3. Parsidiha
4. Jajori
5. Jalalpur
6. Khapatia

112

12
Stipend
months to 8
Vaids

4,000

156,240
Rs.1000 x 8 96,000 vaids x 12 mths. Sl. Name
No.
of
Program

Specific
Objectives
of this program

Logic / reasoning for each activity/ item

No. of direct benefi ciaries Village / location where the activity will occur

Dura
Budget
tion
Line
of
Item
activity Narration

7

Health

Prevent spread of diseases such as polio. Vaccination of children coming to NFE classes and their brothers / sisters. 500 children All 12 NFE villages Twice

8

Health

Strengthen basic hygiene and reproductive health.

Health workers will inform and motivate women for personal hygiene, health check-up, nutrition and birth control.

30 women x6 villages Above 6 villages 12
Salary to months 3 Community
Health
workers

Health
9

Administration

Jeep for
Govt.
Doctors

Budget
Amount
Line
(Rs.)
Item
Calculation

Rs. 450x4 days (3 villages each day) x
2 times

Rs.500x3
18,000
workersx12 months Sub
Total
Program
Coordinator

Project
Manager will be responsible for coordination and monitoring of program.

3,600

117,600

N.A.

Based at
Pilakhua
office. Will cover all 12 villages 12
Project
Rs. 3,000 x months Manager’s 12 months
Salary

36,000

10 Administration

Accountability Accountant will maintain of Funds accounts and provide Agency reports. Will also handle other accounts.

N.A.

Based at
Pilakhua
Office

Salary to Rs. 1,000 x
12
months Accountant 12 months
(shared)

12,000

11 Admin

Program and Required for correspondence office coordination and reports.
Accountability For providing audit report of funds regarding Agency funds.

N.A.

At Pilakhua
Office

12
Postange Rs. 300 x months and
12 months
Stationary

3,600

N.A.

At Main office Once a Auditor’s year fees

1,500

12 Admin

Rs. 1500 x once Sub
Total

Admin

Budget Summary
Rs.
NFE
156,240
Health
117,600

%
48
36

Administration

53,100

16

326,940

100

Total

113

The summary and percentages help in under standing the budget 53,100

The Accountant’s Budget
Your accountants may find the Logical Budget a little confusing. For them, the same budget can be summarized in a different way. This will help them make proper vouchers and entries.
If your accountants are clear about the budget, your reports to the funding agency will be easier to prepare.
If you use a computer to make your budget, this will be very easy. Use a spreadsheet program such as ‘Lotus’ or ‘Excel’ to make your budget. The program will do all the calculations for you.
You simply have to type a simple formula such as ‘=1000*8*12’. The program will show ‘96,000’.
It will also add up all the figures for you. Once you put your budget in this program, it becomes easy to make changes.
The logical budget shown on previous pages has been re-classified below. See whether your accountant likes this one or the previous one!

114

Forget me nots...
When making a budget, don’t forget the following: l Inflation: When you are giving a budget for the first time to an agency, they may take a long time to evaluate and approve your budget. By the time it is approved, your estimated rates will become useless. Renegotiate the budget at the approval stage.
When budgeting for one year, remember that prices will go up gradually over the year
(approximately 10% each year). When budgeting for more than one year, provide for next year’s inflation also.

l

Salaries: Salaries rise because of inflation. But they also rise due to increased experience.
Budget extra amounts (5% or so) for salary, over and above the inflation.

l

Accountant’s Salary: Ask for some share of the Accountant’s salary in each budget.
Each agency that gives funds and expects accountability, should bear some proportion of the accountant’s salary.

l

Audit Fees: Don’t forget the auditors either. Their fees will rise when your work increases.

l

Basis of Calculation: Give the basis of calculation of each and every line item. Where it is a lump sum, say so.

l

How much can you grow: When you prepare a budget, keep both your feet firmly planted on the ground. Overall growth beyond 30% a year will give you headaches. Quality of your work may suffer.

l

Local Contribution: Don’t give in too easily on this just because the agency insists on this. Assess how much can you really raise in cash? How much in labour? How much in materials? l

Name of Organisation: Put the name of your organisation on top of each of the budget sheets. That way these will not get mixed with others. Also put the name of the program if possible. l

Budget Period: Sheets from different years get mixed up very easily over a period. Give the budget period at the bottom of each sheet.

l

Revision Date: Often you may have to revise your budget several times. Type the revision date at the bottom of each sheet every time. Give this date the first time also.

l

Final Budget: With so many budgets floating around, it’s a good idea to mark the final approved budget clearly as ‘Final Budget; Approved on _____’.

115

Contribution in Kind3
Many NGOs, including funding agencies, receive a large amount of donations or support in the form of goods or services. These are seldom accounted. How can we value and account for these in our books? In cash or in Kind
Suppose you are building a school for the village. The villagers agree to donate some money and materials. They also agree to put in some labour as shramdaan4. You issue receipts for whatever money is raised. But the value of labour and materials given by the community is much more. This is sometimes known as ‘Contribution in Kind’.
Should you account for this also?
If you do not account for these goods and services, the following happens: l Your accounts show a lower value of the school building - which is not the real value;

l

The community’s economic participation is not reflected in your Income and Expenditure
Account or ledger books.

l

In the long run, it becomes difficult to have proper internal control over goods received from the community. This may lead to pilferage or wastage.

Contribution in Kind occurs in many forms. Just a few examples are: l Lunch provided by villagers during a community function;

l

One day’s free labour in digging a pond or well;

l

Allowing free use of tractor-trolley for carrying stone, etc.;

l

Free saplings during tree plantation;

l

Allowing free use of personal shed for school / meetings.

Most field level NGOs are not accounting for these. In some cases, they show receipt of money when actually they have received items or services. Then they show payments out of this money
– which had not been received to begin with! This kind of transaction results in questions and doubt. There is another way to account for these properly. This involves passing entries for the items or services actually received. This is internationally accepted and will solve a lot of problems faced in reflecting ‘local contribution’. Many funding agencies insist that there should be some local contribution in any project budget. Accounting for these materials or services will also make it easier for you to demonstrate the economic value of local contribution.
If you decide to account for local contribution in kind, you will need answers to the following questions: 1.
2.

How to pass accounting entries;

4.

4

What kind of vouchers/ receipts will be needed;

3.

3

How to estimate the money value of the material or services received;

What kind of disclosure to make in Final Accounts.

Based on AccountAble 30: Contribution in Kind
Literally donation of labour or services

116

Apart from this, you may wish to keep simple stock records (or value un-utilised contribution at the year-end as stock-in-hand). However, we this paper deals only with the four questions listed above.

Estimating Values
The main problem with ‘Contribution in Kind’ is estimating its value. Accountants are comfortable with clear-cut money figures. Estimating the value of goods or services is likely to give them a headache or a nightmare. Some practical suggestions are given below: l Account only for large value items/ services. For example, it will be difficult to pass an entry every time a person donates ten nails worth Rs.5.

l

Account only for those items/ services which have a ready market value. It will be difficult to estimate the value of customary hospitality or sleeping space in the village at night.

l

Have a clear basis for valuing the items/ services. Show this basis on the voucher also.

l

Do not account for items/ services where there may be serious dispute about estimating the value.

Lower Wages
Often the villagers agree to work for lower wages per day. For example, for deepening a village pond, they may agree to work at Rs.20 per day. The local contractor may be paying Rs.25 per day for road-repair. Can we say here that Rs.5 per day is the community contribution? It can be argued that the villagers may have agreed to accept lower wages because they feel motivated to work for the village.
However, it can also be argued that the villagers may have agreed to work for lower wages because, they will not have to walk far to road-repair site. Or they may have accepted lower wages because they will get regular work. Or they may think that deepening a pond is easier than repairing a road.
It can be seen that this is not a clear case of ‘Contribution in Kind’. Accounting for Rs.5 per day as ‘Local Contribution’ will give rise to such doubts and arguments. Therefore it would be best not to account for this. Some other cases are illustrated below:
Free item/ service

How to value

1. Manual Labour/ Shramdaan
2. Wheat/ rice/ seed

At local market price

3. Lunch for participants

At the local meal price at a shop

4. Bricks, stone, old wood, bamboos

At local market price

5. Use of tractor trolley (without diesel)

At local hire charges for tractor trolley

6. Use of bullock cart

At common hire charges

7. Livestock (goats, kid/ calf, pigs, etc.)

At local market price

8. Land

At estimated market value

9. Services of professionals

At normal fees of such person

10. Regular use of room for office

At local rent for similar room

11. Participation in padyatra5

5

At local wage rate per day

No market value; do not account

Foot-march

117

Accounting Entries
Accounting for ‘Contribution in Kind’ is easy if you use a double entry voucher ( see The Multi purpose Voucher on page 14).
For the case shown below (Mr. Pawan Rai), you can prepare the voucher shown alongside.
Attach one copy of the Acknowledgment to this voucher as support.
If you keep a journal, you can pass this entry through the journal. You will then post all three amounts to the respective account-heads. If your accounts are computerised, then you can use the journal entry facility.
If you do not maintain a journal, you can pass this entry through the cash book also. After making the entry, your cash book will look like the one shown here. These entries can be posted to respective ledger heads in the usual manner.
Receipts
Date

Description

17.12

Cont. in Kind: Items A/c

17.12

Cont. in Kind: Services A/c

Account Head

Amount

Dr. School Building
Total
Cr. Cont. in Kind: Items
Cr. Cont. in Kind: Services
Total

Cash Book
Amount

370
300
70
370

Payments

Date

Description

17.12

300

370

School Building A/c

Amount
370

70

Acknowledgment
You will also need an Acknowledgment form (see sample on next page). This can be printed and bound like a Cash Receipt book. The Cash Receipt is used for cash / cheques etc. The
Acknowledgment form will be used for items/ services. In other respects, it is similar to the Cash
Receipt and can be bi-lingual.
It will not be necessary to account for all the acknowledgments which are issued. In some cases, the accountant may find that the amount is too small. Or it may be difficult to value the items (see next page 119). In such cases, a particular acknowledgment may not be valued and accounted. But the reason for this should be recorded on the third copy of the acknowledgment.
The number/ date of the accounting voucher should also be put on the third copy of the acknowledgment. This will help you cross-link the entries and make the auditors’ job easier.

118

Balance Sheet Disclosure
If you account for contribution in kind, then you need to disclose this in your Income and Expenditure
Account (see example):
Income and Expenditure Account for year ended 31st March 2002
Expenditure
Deepening of Ponds

Amount
129,350

Income

Amount

Contribution in Kind:

Teachers’ Salaries

87,470

- As Materials

29,360

Training Camps

93,810

- As services

34,450

In addition, you should give the following notes 6 as part of your final audited accounts:

Accounting Policies
Contribution received in Kind, whether items or services, is accounted at estimated values.
However, only those materials or services are valued and accounted which are: l l

which have a ready market and would have been otherwise purchased for money; and,

l

6

material (large value) in amount;

which can be valued on a reasonable basis.

Your auditors can help you choose suitable wording for the notes in your case.

119

Materials or services for which a lower price has been paid are not treated as contribution in kind. Contribution in Kind
During the year 96-97, items and services worth a total of Rs.63,810 were received as contribution in kind. These were utilized as below: l Construction of village school sheds

Rs.23,250

l

Deepening of Ponds

Rs.30,360

l

Training Camps

Rs.10,200

The above have been accounted as expenditure in the Income and Expenditure or as assets in the Balance Sheet, as appropriate.
The above form of disclosure is given as a suggestion. Your auditors can help you choose suitable wording for the notes in your case. For example, the following notes appear in the audited Balance Sheet of an international funding agency:

“Donated Materials & Services
Donated materials and equipment, if material, are reflected as contribution in the accompanying statements at their estimated values on the date of receipt. Donated services, if material, are recorded when the following criteria are met: the services performed are a normal part of the program or supporting services and would otherwise be performed by salaried personnel; the corporation exercises control over the employment and duties of the donors of the services; and the Corporation has a clearly measurable basis for determining the amount. Certain amounts have been reflected in the financial statements for donated services; however, a substantial number of volunteers, for which no amount has been reflected in the accompanying financial statements, have donated significant amounts of their time in furtherance of the Corporation’s objectives and program services.

Donated services
During the year ended ______ , 1995, the managers of the Corporation donated two weeks of their time to the Corporation. The value of this donation was $_____ and has been reflected as both contributions and salaries expense in the accompanying statement of functional expenses.” 120

Micro-Credit Revolving Funds7
Revolving Fund is a very wide term – it includes funds for purchasing raw material, stocks, running an Income Generation Project as also a credit program. Revolving Funds for running
Income Generation Projects are also known as Working Capital.
In this issue, we are concerned mainly with Revolving Funds for credit programs.

What is a Revolving Fund
Running a credit-based Revolving Fund is very similar to managing a Bank. In fact Revolving
Funds are created by NGOs mainly to overcome the shortcomings of commercial banks.
A commercial bank raises money by selling shares or accepting deposits. An NGO raises money for Revolving Funds through grants from Funding Agencies.
The bank generally avoids giving out small loans because they find management costs of such loans too high.
An NGO gives loans to people who cannot get loans from banks. These people may be women or men working in small business / trades (micro-enterprise) or they may be small farmers or they may wish to take up goat-herding, pig-rearing, poultry, etc. on a small scale. The loans given may range from Rs.750 to Rs.20,000 or more.
Quite often the loans are given through a small group of 5–30 persons. This helps group formation and improves recovery rate. Some NGOs have extensive paperwork (application forms, photographs, attendance records, pass-books, collection sheets, receipt books, loan agreements), whereas others may simply be satisfied with a thumb-impression on a voucher or a register.
In almost all cases, no security is taken. Some-times these loans are interest-free – in other cases, flat interest (10% of the loan) or annual interest (10-25% per annum) may be charged.
The interest helps pay operating costs and protects the Revolving Fund from inflation.
This kind of micro-credit programs have proved highly successful, much to the surprise of traditional bankers. Some of the better known examples are Grameen Bank, Bangladesh;
SEWA Bank, Ahmedabad and MYRADA, Bangalore.

FCRA Treatment
If your Revolving Fund has been created out of Foreign Contribution, then you should keep the following in mind:

1)

When the loans are given out:
a) When the loans are given out to the people, these should be shown on the Payment side of the FCRA Receipts and Payments Account.
b) The loans given out should not be shown as an expenditure in the Income and Expenditure
Account.
c) Whatever amount is given out as loans during the year should be shown as utilization in
FC-3 [Table 2, column 10].
d) The loans given to beneficiaries are recoverable and, therefore, an asset for your organisation.
These should be shown as assets in the FCRA Balance Sheet.

7

Based on AccountAble 24: Micro-Credit Revolving Funds

121

e) In order to tally the Balance Sheet, a Revolving Fund Account should be created on the
Liabilities side of the Balance Sheet. This account would show the original amount of grant received for the Revolving Fund.

2)

When the loans are recovered:
a) Loan recoveries should be deposited in organisation’s FCRA Bank Account as per FCRA requirements. However, some people prefer depositing the recoveries in a separate bank account for better control over revolving fund.
b) Show these as receipt in the Receipts and Payments Account.
c) Also show these as receipt in FC-3 [table 2, row 108, column 7]. The amount should also be included under table 4, sub-head (iii) ‘Individual donors below 1 lakh’. The amount should also be reported in the country analysis (table 5) as receipts from ‘India’.
d) Show the total recovery in the Balance Sheet on the Assets side.
FCRA Balance Sheet (partial) of Lok Jagran Manch as at 31-March 2002
Liabilities

Assets

Revolving Fund:

Beneficiary Loans:

Opening Balance

450,000

Closing Balance

Add: Loans given this year

275,800

Less: Loans recovered

186,700

4,850

Less: Loans written off

428,300

500,000

Add: Grant Received this year

Opening Balance

Less: Loans written off

4,850

50,000

495,150

Interest on Rev. Fund:

512,550
Bank Balance

Opening Balance

10,000

Add: Received this year

23,900

31,300
41,300
Total

3)

536,450

Total

536,450

Interest received on micro-credit loans:

In some cases, NGOs receive interest and other service charges from the self-help groups.
Both these are treated as FC funds 9.
FCRA Receipts and Payments Account (partial) of Lok Jagran Manch for year ended
31st March 2002
Receipts

Payments

Opening Bank Balance

31,700

Grant received this year

50,000

Loans recovered from benef.

31,300

Total

8
9

275,800

186,700

Interest received on RF loans

Loans given out

Closing Bank Balance

299,700

23,900
Total

Micro-finance projects, including setting up banking, co-operative and self-help groups
It generated on a revolving fund created with foreign contribution

122

299,700

a) Show these on the receipt side of the FCRA Receipts and Payments Account.
b) Also report these10 in FC-3 under table 2, row 56, column 7. You can specify this as
‘interest / service charges on revolving fund’.
c) Interest income should be shown in table 1A also. This can be done under sub-heading
(ii)(b) as ‘interest on revolving fund loans’.

4)

Interest paid to funding agency

In some cases, the NGO has to pay a nominal interest to the funding agency for the revolving fund11. This interest should be reported as an expense in FC-3. You could show this as utilization (column 10) in row 56 of table 2.

5)

When the loans are given out again:
a) Show these on the Payment side of the FCRA Receipts and Payments Account.
b) Do not show these as an expenditure in the Income and Expenditure Account.
c) Whatever amount is given out again as loans during the year should be shown as utilization in FC-3 [table 2].
d) Show these loans on the Assets side of the FCRA Balance Sheet.

You should not transfer these funds to Indian section of the Balance Sheet at any time. Any loans that become irrecoverable during the year can be written off by reducing the Revolving
Fund in the Balance Sheet as shown on the previous page.

Village Level Organisations
Can you transfer an FCRA Revolving Fund or its recovery to Village Level Organisations, such as Mahila Mandals12 or self-help groups?

6)

What is the law?

Let us first look at FCRA provisions regarding this.
1.
2.

Foreign contribution includes delivery or transfer of funds from a foreign source. This is much wider than the commonly understood sense of ‘donation’ or ‘grant’ only [section
2(1)(c)].

3.

The FCRA registration letter13 prohibits transfer of FCRA funds to any other organisation not registered (or having prior-permission) under FCRA.

4.

7)

FCRA covers all ‘associations of individuals’, whether incorporated or not [Section 2(1)(a)].

However, receipt of foreign contribution is regulated only if the ‘association’ has a ‘definite cultural, economic, educational, religious or social programme’.

Applying the law

How does this apply to our situation? To under-stand this, Mahila Mandals or self-help groups can be categorised into five stages of evolution:

10

Interest and service charges, etc.
Provisions of Foreign Exchange Management Act, 1999 may also apply.
12
Women’s Groups
13
Also see explanation to section 2(1)(c) of FCRA, 1976
11

123

Stage Association14

Program15

1

People just meet every week. No formal leadership. No program. Just a common interest. 2

Meetings continue. A name is given to the Mandal.
Leaders start emerging.

No program. Just a common interest in savings and credit.

3.

Group becomes more organised. A membership register is started. Office bearers are appointed.

Objectives of the group are widened and put down in writing.

4.

Memorandum of Association is signed.
Society is not yet registered.

Memorandum of Association serves as a definite program.

5.

Society is formally registered.

Definite program continues to exist. What happens if these groups want to receive FC funds? q Groups at stages 1 and 2 do not need FCRA registration or prior permission. q Groups at stage 3 may or may not need FCRA registration or prior permission. q Groups at stages 4 and 5 definitely need FCRA registration or prior permission.

Accounting and Control
Classic accounting wisdom holds that recoverable loans should be treated as an asset. All banks follow this practice (though sometimes one wishes they wouldn’t!). It is on this basis that
FCRA department insists on revision of FC-3 wherever NGOs write off recoverable loans as
Program Expenditure (see FCRA Treatment). Keep in mind that FCRA Revolving Funds should always be accounted in FCRA Cash Book and Ledgers.
When you treat the loans as an asset, the following issues come up:

8)

Individual loans

You need to keep track of each loan separately. However, you can not open hundreds of loan accounts in the main ledgers. A sub-ledger is normally kept for individual accounts of the beneficiaries. In the main ledger, only total entries for each day may be recorded – the details are recorded in each individual’s account. The main ledger and the sub-ledger are periodically tallied (reconciled). This system is similar to how your bank maintains your organisation’s account in a sub-ledger.

9)

Pass Books

Individual beneficiaries are issued loan pass-books. The loans given and the installments collected are entered in these pass-books. It is a good idea to have a photograph of the beneficiary pasted on the pass-book. Also if the pass book is printed bilingually (English and local language), it will help both your auditors as also the beneficiaries. If possible, try to cross-check the passbooks periodically with your sub-ledger accounts.

10)

Loan Documentation

You need to have enough details in your office to locate and identify the beneficiaries. This may mean that apart from the address and parent’s / spouse’s name, you also keep a photograph of the beneficiary on the files. Getting a photograph may be easier than it sounds – you can use your own camera and photograph two persons at a time, standing side-by-side. Village people are often known by common names or pet names - keep a note of these also.
14
15

Section 2 (1)(a)
Section 6 (1)

124

A loan agreement on stamp paper is often useless in development work. However, use it if you find it relevant as a psychological tool. In such a case, have the standard agreement reviewed by a lawyer or your auditors.
If you don’t want to get into the stamp paper routine, try plain paper instead. The agreement remains effective whether it is on stamp-paper or not.
You will need to keep proof of payment. This can be on a voucher or on a plain paper. Use a revenue stamp if the loan amount exceeds Rs.500. If the beneficiary is going to use their thumb, make sure it is the left thumb. Thumb impressions should normally be witnessed by one or two villagers whose names and addresses should be noted on the receipt / voucher.

11)

Recoveries

If you want to keep your auditors happy, deposit the recoveries in the bank account first. In the long run, this will strengthen your internal controls and you are less likely to lose money through fraud. Remember that you need to issue individual receipts. These should be pre-numbered and should have a carbon copy. Avoid using receipts which have a tear-off counterfoil. Bi-lingual receipts are better than English or local language receipts.

12)

Internal Reporting

You need to generate regular reports to monitor how the credit program is progressing. These reports can show you how the recovery is progressing around different areas and how the funds recovered are being given out again. This will help you identify weaknesses in group-formation as also potential problems.
The key to managing a Revolving Fund is keeping the maximum amount of money out on loans at any given point of time. At the same time, you need to ensure that the money rotates from hand-to-hand reasonably fast. This will help you spread the benefit of your revolving fund.

13)

Donor Reporting

Quite often the donors are satisfied to see a one time expense on their reports – ‘All loans disbursed’.
However, this misses out on the basic idea behind a Revolving Fund. Donor reports should show how much money has been recovered and how much has been disbursed again. The reports should also show how much loan amount remains healthy and recoverable at the end of the period.
A 400-year-old Debt

Report to Donor
Revolving Fund Status on 31st March ‘02
Total Revolving fund Grant received so far

500,000

Utilization of This Grant:
Opening Balance of Beneficiary Loans

428,300

Add: Fresh loans given out in this period

275,800

Total

704,100

Less: Recovery of Loans in this period
Balance of Beneficiary Loans
Less: Loans written off as irrecoverable

-186,700
517,400
-4,850

LONDON: Money owed to William
Final Balance of Beneficiary Loans
512,550
Shakespeare’s father, who was mayor of Stratford-Up-on-Avon in
1599, will be paid back to his civic successor almost 400 years late. Mr. Derrick Smithers, who has followed the father of England’s most famous bard into Stratford Town Hall, was due to drive to Marlborough, south-west England, where the town’s mayor, Mr. Charles
Bates, will hand over the £21 at a public ceremony. But Marlborough has decided not to repay interest on the debt, which would be worth about £1,50,000 at today’s prices.
Source: The Hindu, 1st August 1996

125

Corpus & Endowments16
What is a corpus? What are its features? How does it help an organisation? There is very little systematic literature on this. We try to deal with some of these questions here.

What is a Corpus
Corpus is a Latin word, which means body. In financial usage, it means a collection of bonds, stocks, or other holdings, which form the principal17 of a trust fund.
The concept of corpus is closely linked to the concept of trust. When you set up a trust, you are effectively saying that you are placing your trust in some one. That some one is called the Trustee.
What does the trustee do? He or she manages the assets donated by you. These donated assets are the subject of the trust. These are also called the corpus of the trust. The corpus actually forms the financial heart of the Trust.

Corpus Features
Building it up
Is the corpus a onetime thing? Not really. The settlor18 starts the corpus. Others can also help in increasing the corpus. You can do this by donating more assets19 to the trust. The donor should tell you that the assets should be added to the corpus.
Can you add to the corpus on your own? You can. However, the money should not be taken from earmarked20 funds. It should come from unrestricted21 funds.

Corpus or endowment?
Can a donor give you funds for the corpus and say that its income should be used for a specific project? Not really. Income from the corpus can be used for any of the activities of the Trust.
This discretion remains with the Trust. Therefore, it’s better for the donor to call it an endowment.
Endowments can be earmarked for specific activities.

Breaking the Corpus
When can you break the corpus? If corpus is the financial heart of a Trust, then the answer is obvious: You can break it when you are winding up the Trust.
Alternatively, you can also dip into it, if there is a very serious financial emergency facing the
Trust. In such a case, you should also have a workable plan to replenish the corpus.

16

Based on AccountAble 8: Corpus & Endowments and AccountAble 67: Corpus
‘Principal’ means the main body, as opposed to interest or income from the corpus.
18
Person who formed the trust
19
Money, property, investments, etc.
20
Funds given by donors for other specific activities
21
Where you have the right to decide usage / allocation. An example is own income from interest.
17

126

Origins
Trusts have existed for a long time in
Western countries, particularly UK and
USA. We do not see a similar history 22 in India. This may be due to a different socio-economic structure23 in India.
For a long time, trusts were created only by the wealthy. The purpose was to tie up their wealth so that it was not misused after their death. The money would be used only according to their wishes.
Trusts could be private – where their heirs could benefit, without being able to ‘blow up’ all the money. Or these could be public, where the money would be used for some socially useful cause.

Real or Nominal?
A trust like the ones above is a real Trust.
How? Well, there is a real and substantial fund, which is the subject of the trust.
On the other hand, there is another type of trust, where the original fund is very small. It could be as low as a hundred rupees. In this case, the corpus is created only to meet the legal requirement of a
Trust. We call these nominal Trusts.
Why? Because, the corpus here is not significant in financial terms. (see box:
‘How did Nominal Trusts emerge?’)

Corpus in a Society
Speaking from this point of view, corpus should exist only in Trusts and not in societies. However, there are many societies, which have created ‘corpus funds’. This has probably occurred because of the Income Tax Act, 1961. It uses the term corpus for both Trusts and
Societies.

How did nominal Trusts emerge?
Around 19th century, a different type of organisation emerged: the society. This was similar to a company based on shares. You did not need a lot of start-up funds to set up a society. Instead you could raise money from public as you went along. The Societies Registration Act was also passed in 1860, recognising the new form of organisation.
The Act merely provided for registration and recording of basic information about a society.
However, over a period of time, the Registrars became more powerful. There were endless delays: disputes over names, over clauses in the memorandum, residence proof, etc. It could take you upto a month to register a society – you might also have to spend 5-6,000 rupees in the process.
Registering a Trust, on the other hand continued to be simple. You could type a trust deed and register the trust in about two hours. Lawyers also pointed out a unique feature of the corpus. It did not have to be big – it could be just 1 rupee also.
The whole process of forming a Trust would just cost 5-600 rupees.
These trusts emerged as an alternative to the lengthy process of forming a society. They are societies in reality, but structured as Trusts. We have called these Nominal Trusts.
An example of such a Trust is Pratham in Mumbai: on 31st March 1999, it had a corpus of Rs.500, while donations in 98-99 came to Rs.3.5 crores
(source: Annual Report 98-99 on Pratham’s website).
In this process, the corpus appears to have deevolved. From being the heart of a trust, it became merely a legal formality. As a result, the practical significance of a corpus has been lost to most people. 22

This does not mean that charity did not exist in ancient India, merely that Indian charity did not use
Trusts as a mechanism. In fact, the English word ‘donation’ is derived from Latin ‘dõnum’, which itself is based on the Sanskrit ‘ danam ’. So while we have the practice of dharmada and of endowments, we do not have an exact parallel for trusts.
Ignoring these facts and the existence of Acharya Chanakya’s Arthashastra (300 B.C.), Mr. Powell has ascribed this to the ‘primitive’ state of Hindu society! [Introduction to Powell on Trusts, 2 nd ed.]
23
For instance, existence of Hindu Undivided Family meant that property was jointly owned by the family.
The Karta acted as head of the family, but not as owner of family property. Further, in a joint family, there would be no shortage of able heirs.
On the other hand, Western legal structure emphasized individual ownership. This, combined with lack of a joint family, evolved into a society where lawyers were needed to guard an individual’s property after his / her death.

127

What is the actual status of these funds? In our view, a society’s corpus is a special fund, just like any other fund in a society. It looks like a Trust corpus but is not really a corpus. Therefore, some of conditions that normally apply to a Trust corpus would not apply to a society ‘corpus’.
For example, a society can dip into its corpus at will24. A society can also dissolve its corpus, without affecting its existence. On the other hand, for a trust, dissolving its corpus is like winding up. What does the above mean? Can societies continue to hold their ‘corpus’? Yes. Most certainly.
Only they should be aware of the true nature of such ‘corpus’.

Utility of a Corpus
For nominal Trusts, a corpus has no real utility. These trusts raise funds each year from public or from other grant-makers. Such trusts, therefore, tend to neglect the corpus.
On the other hand, nurturing and building up a corpus is very important for real Trusts. If such a trust has a large Corpus, they can run their entire program with income from the Corpus.
There are many such organisations (called Foundations) in the USA25. Such trusts can focus their entire energies to building up the program. They do not have to worry so much about raising funds. Corpus and the law
What does the Indian law say about Corpus?

Income Tax Act, 1961 q Donations towards corpus 26 need not be spent. These are not treated as income for calculating the 85% (from 1st April 2002) figure of expenditure-requirement 27. This applies to both societies and trusts.

q

In addition to corpus donations, NGO can transfer28 up to 15% ( from 1st April 2002) income to its corpus in a year.

q

Funds have to be invested in approved modes 29.

Foreign Contribution (Regulation) Act, 1976 q Corpus created with FC funds should be shown on FCRA Balance Sheet. Related investments should also be shown on FCRA Balance Sheet.

q

If you create (or increase) a corpus with FC funds, then its income becomes foreign contribution. Such income should be deposited in FCRA account. This interpretation30 is used by FCRA authorities and is supported by accounting logic.

24

Unless the donor has put a restriction.
In India, tax-exempt organisations have to spend 85% of their income each year. In the USA, they have to spend 5% of their assets each year. Why? The US tax structure is designed for corpus-based organisations. Some people argue that liberal deductions for tax-payers in the USA also encourage people to form Foundations.
26
Donor must give a letter saying that the donation is towards corpus.
27
NGOs exempt under section 12A have to spend 85% of their income each year. There are some exceptions to this.
28
These funds should be under the NGO’s discretion.
29
Secs. 10(23D) and 11(5), Rule 17C
30
FCRA is silent on this issue.
25

128

Bombay Public Trusts Act, 1950
(Applicable only in Maharashtra and Gujarat) q Donations made towards corpus are excluded from definition of income31. This means you don’t have to pay cess32 on this amount to the Charity Commissioner.

q

Investments have to be made in approved modes 33.

Accounting
Is corpus an asset or a liability? Most people talk of corpus as an asset: ‘Oh, they don’t have to worry about money – they have a big corpus.’ Or ‘I wish we had a big corpus.’ When a person sets up a trust, he / she gives it some assets, which form the corpus. So you can say that a corpus is an asset.
However, this interpretation34 does not fit in double entry accounting. To complete the double entry for corpus assets, we create a nominal account. This is called ‘corpus fund’. The corpus fund is kept on the liabilities side. Why so? Well, this symbolises the legal liability that is attached to the corpus assets. From another perspective, this is the money owed by the Trust to the beneficiaries.

Disclosure
In a trust balance sheet, corpus would show up as below:
Does corpus always mean investments such as bonds and deposits? No. Land, building and any other similar asset can also be part of the corpus.

Liabilities

Rs.

Corpus fund

1,000

Other liabilities
Total

100
1,100

Assets
Corpus Investments
Other assets
Total

Rs.
1,000
100
1,100

When you look at a Trust’s
Balance Sheet, see whether their investments match their corpus or not. If the investments are less than the corpus, it’s time to ask questions.
What happens to income from the corpus investments? It normally shows up in the Income and
Expenditure Account. Where? On the Income side: mostly as interest35. Some Trusts in India have also started investing in mutual funds. So you could also see some income from sale of such investments.
What about the expenditure against this? Expenditure from corpus income is not tracked separately. So it will be spread over several expenditure heads.

31

Explanation 2, Section 58(1)
In Maharashtra and Gujarat, fund-raising attracts a cess of around 2%. Some types of activities
(education, medical relief, calamity relief, etc.) are exempt from this.
33
Section 35
34
See Corpus on page 96 under ‘Commonly Confused Terms’.
35
Some people mark it as ‘Interest on Corpus Investments’. This is a good practice.
32

129

Some Indian figures
There is little data available on the corpus of Indian trusts. Some available figures are:
How much would corpora36 of all the Indian trusts add up to? Following is based on estimates at www.Indiainfoline.com: …The total aggregate corpus of all trusts is estimated at
Rs.25,000 crores while the total incremental investment would be approximately
Rs.4,000 crores per annum.

Trust

Date

CRY – Child Relief and You, Mumbai

30-6-00

6.88

India Foundation for Arts, Bangalore

31-3-00

8.41

National Foundation for India, Delhi

31-3-00

12.52

National Innovation Foundation,
Ahmedabad

Start-up:
Feb 2000

20.00

National Trust ... Disabilities

Start-up:
Jan 2000

100.00

31-3-97

42.00

Rajiv Gandhi Foundation, Delhi

Rs. in Cr.

Religious trusts and
Charitable trusts range from the very small ones to large ones like Tirupati Devasthanam, Mata Amritanandmayi Mission,
Ramkrishna Mission, etc.
Other trusts include:
1.

hospital trusts like Jaslok, Bombay Hospital, etc.,

2.

armed forces trusts like Army Wives Welfare Association, Air Force Officers Association, and, 3.

general trusts like Rajiv Gandhi Foundation, Birla Science Foundation, etc.

At first glance, these figures may appear to be exaggerated. However, consider that Tirupathi temple Trust raises 10 crores 37 annually from auction of pilgrims’ hair alone! Then there is a growing trend among corporate houses: set up a Trust as part of corporate social responsibility.
Both Infosys and WIPRO38 have set up such trusts in Bangalore. Dr. Reddy’s Laboratory has also set up a trust in Hyderabad.

Creating a Corpus Fund
Following points should be kept in mind when creating a corpus: q As there appears to be no law dealing directly with this, common law or derived law would apply. Indian Contract Act would be relevant in this matter.

q

A Corpus should be created with specific consent of the donor. This would not apply if the donor has not attached any conditions to use of funds. For instance, a grant from Funding
Agency can not be used to create a Corpus without Funding Agency’s specific consent.
However, a donation from an individual can be used to create a corpus, unless the donor had stipulated a specific use for the donation (“Please use this money to provide education to children of my native village, Jalalpur.”).

q

Donations under 80G can be used to create a corpus.

q

Donations under section 35AC can also be used for a corpus, if the National Committee has approved the Corpus specifically.

36

Plural of corpus
Guinness Book of World Records: 2001
38
Azim Premji Foundation
37

130

Before deciding on a Corpus grant, the organisation should take a very hard look at the objective and need for creating the Corpus. If the organisation creating the corpus does not have a mature and stable Board, it may not be a good idea to go in for a corpus. The benefits of a corpus may be outweighed by the attendant risks. This is especially true in the Indian context where civil law and regulatory authorities are comparatively ineffective.

Endowments
Legally, an Endowment Fund is similar to a Corpus. The differences are only with respect to use of income from the Endowment Fund.
An Endowment Fund is created under specific direction from the Donor. Income from the
Endowment Fund can be used only for the purposes specified by the Donor.

Accounting for Endowments
Accounting for Endowment Fund is different from a Corpus. It should be segregated from other
Revenue Grants and taken directly to the Balance Sheet. The Fund should be identified separately in the Balance Sheet 39. Assets which represent the Endowment Fund (investments, bank balance, etc.) should be either shown separately40 or should be identified by a note. The market value of the investments should also be disclosed by a note.

Endowment Income
Income from the Endowment Fund investments should be shown separately as a line item41 in the Income and Expenditure Account.
Total Expenses incurred out of such income should be disclosed by a note42 along with purpose of expenditure.
With regard to control mechanism and calculations, considerations similar to the Corpus would apply. 39

Such as ‘CRY Endowment Fund’
Such as ‘CRY Endowment Assets’
41
Such as ‘Income from CRY Endowment Investments’
42
Such as ‘During 93-94, Rs.1,22,030 were spent out of CRY Endowment Income for core expenditure related to Machhera office.’
40

131

Seven Steps to a Corpus
1.

First we need to find out the amount that would be required annually to maintain the core program, staff and facilities.

2

Next calculate the annual assured income you are likely to enjoy,
Ignore any investment income related to other endowments or to existing corpus investments.

3.

Deduct the annual assured income from the annual core expenses. 4.

Work out how much return you are likely to get on your future corpus investments. This will vary depending on your ‘mix’ of investments. 5.

Work out the percentage rate of return. 6.

The net amount is divided by expected rate of return on investments. 7.

This gives the total size of the
Corpus. Any existing Corpus or
General Funds would be deducted from this to arrive at the net amount required for Corpus.

132

Control Mechanism
When a corpus or endowment is to be created, the Funding Agency and the Organisation creating the Corpus would together develop special control mechanisms: l l

Strict legal documentation should be created so that the desired objective is fulfilled and funds cannot be diverted even after change of trustees.

Without Joint signatures of NGO Trustee and
Settlor (Funding
Agencies)

Forming the Corpus

Corpus

One popular way is
Expenses at its own discretion
Investments
to tie up the Main
Funds so that these can not be withdrawn — the Society is able to access only the earnings on the Corpus investments for its expenses. For this purpose, the Main Fund may be kept in a separate
Bank Account or in Investments which can not be sold or divested without the Funding
Agency and the Society both signing the release or transfer papers.

Corpus would appear on the Liabilities side of the Balance Sheet as “General Fund” or “Trust
Fund”. Practically, it is a liability of the Trust or Society to itself. On the Assets side, it may be represented by Fixed Assets, Investments, Currency, Bank Balances or Recoverables.

Income Tax Implications
If a donor instructs the NGO that the donation or Grant will form part of the Corpus of the Trust, then such grant is absolutely exempt from tax under section 11(1)(d). You should therefore get a letter from the Donor to this effect. However, the Trust (or Society) should be registered under section 12A.

Permitted Investments43
The funds can be invested only in specific securities. For example, you can not invest in shares of public companies, in commodities (or in gold bricks!). Presently following investments are permitted under Income Tax Act. However, local laws (such as Bombay Public Trust Act) may specify other investments. You will need to work out a common list of permitted investments for your state before investing44.

Nature of Security

Examples

Ÿ
Ÿ

Indira Vikas Patra

Deposits in any Post Office Savings Bank account Ÿ

Post office Cumulative Time Deposit

Deposits in any account with State bank,

Ÿ
Ÿ
Ÿ
Ÿ
Ÿ

State Bank of India

Investment in Government Saving
Certificates

Scheduled bank or cooperative bank

43
44

Kisan Vikas Patra

Punjab National Bank of India
Bank of Baroda
Citibank N.A.
Standard Chartered Bank

Section 11(5), Rule 17C, section 10(23D)
Please confirm with your auditors / advisors before investing

133

Nature of Security

Examples

Ÿ

National Savings Certificates VIII issue

Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ

Unit Scheme 1964

Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ

Bharat Heavy Industries Limited

Ÿ
Ÿ

ICICI Safety Bonds

Ÿ
Ÿ
Ÿ

HUDCO

Ÿ
Ÿ

Land

Ÿ
Ÿ

Deep Discount Bonds

Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ
Ÿ

Investment in Central/ State Government

Reliance Growth (G)

Securities
Investments in UTI Schemes

Investments in debenture of any company
(the principal and interest should be guaranteed by the Central or State Government)
Investment or deposit in Public Sector
Companies

Deposits in / investments with financial corporations (engaged in industrial development)
Deposits in / investments with financial corporations (engaged in financing for residential houses)

Unit Scheme 1995 (G)
UTI Bond Fund - 1998
UTI Equity Tax Saving Plan
Indian Railway Finance Corporation Limited
Power Finance Corporation Limited

Bharat Electrical Limited
Indian Oil Corporation Limited
Madras Refinery Limited
Steel Authority of India Limited
The Mysore Paper Mill Ltd.

IFCI

HDFC
LIC Housing Finance

Deposits with or investments in any bonds issued by a public company (engaged in housing finance or urban infrastructure in India)
Investments in Immovable property

Deposit with IDBI

Mutual Funds (notified45 by Government or registered with SEBI)

45

Buildings

IDBI Flexibonds

Morgan Stanley
Master Growth
Tata Income Fund (G)
Taurus Starshare
Zurich India Top 2000
LIC Mutual Fund
IDBI Mutual Fund
ICICI Mutual Fund
GIC Mutual Fund
20th Century Mutual
Alliance Capital
Birla Mutual Fund
IDBI Mutual Fund

The Government / SEBI does not guarantee or recommend these investments as safe or prudent.

134

Section V: Banking
This section is devoted to banking procedures and use of cheques. We deal with various aspects of cheques in the first three topics: what are cheques, how are these cleared, what are the various types of crossings etc. These topics also provide more information and tips on using cheques safely.
The fourth topic gives some information on the risk associated with banks -- not all banks are safe. Also you can lose your money lying in the bank if you don’t take good care of it.
Finally, we explain how a bank reconciliation is done. This is often not very relevant if you have very few transactions or all your transactions are in cash. In other cases, it can sometimes help prevent frauds and wrong debits by the banks.

About Cheques

137

Filling Cheques Safely

143

Blank Cheques

146

Safer Banking

148

Bank Reconciliation

150

135

136

About Cheques1
Cheques were first used in the 1600's. At that time, people used coins as money. Paper currency had not been introduced. Cheques were therefore very convenient and safe.
When paper currency was introduced, most people did not trust it. Laws were passed to force people to accept paper notes instead of coins. Today, people have forgotten what real money was like.
Times keep changing. There are now laws 2 which will punish you for using currency notes, instead of cheques.
What are cheques? How does the banking systems treat cheques?

What is a cheque
When you keep money in a bank, you can draw and spend it yourself. But, suppose you have to pay someone (called the payee). You can go to the bank, draw the money and give it to them.
You will have to spend time and money to do this.
Banks give you an option. You can order them to pay someone, on your behalf. You can do this by giving a cheque to the payee. A cheque is like an order to the bank. When the payee shows it to your bank, the bank will pay the money. This is called honoring a cheque.

Depositing a Cheque
You have received a cheque from the donor. The donor has a bank account in Citibank,
Chowringee in Kolkata. You live in 15 kms. away at Behala. What do you do now? Go to
Chowringee and collect the money?
Not really. Your account is with SBI, Behala. You can request your bank to collect the money on your behalf. You do this by simply depositing the cheque in your account with SBI.

Clearing
What does SBI do now? They must collect the money from Citibank, before they can pay you.
How will they do this? Remember that SBI would be receiving hundreds of cheques each day from customers like you. These may be payable by dozens of different banks.
In good old days, bankers used to meet in a pub in the evening. Each banker would have some cheques for collection from others. Similarly, other bankers would have claims on them. The bankers used to make lists and settle the cheques by paying the difference.
This is how clearing houses work even today. Except that these are more sophisticated and have cheque processing machines. In big metros, these machines process lacs of cheques each day.
In most cities, the clearing houses are located in one of the SBI branches. Both the banks (your bank and the donor's bank) should be a member of the clearing house.

Clearing time
Local clearing takes two working days. Normally, the bank will send all cheques received till 11
a.m. in same day's clearing. Cheques received after that will go next day. So if you deposit a local cheque on Monday at 10:30 a.m., you can draw the money by around 12 noon on
Wednesday.

1
2

Based on AccountAble 66: More about cheques
Income Tax Act, 1961

137

At the Clearing House
All the cheques received on Monday will be sorted. Sorting is done according to branches where these are payable. The cheques are then sent to the concerned branches.
Your cheque will reach Citibank,
Chowringhee by Monday evening. Next morning, a bank officer will check your donor's account. Is there enough money? Do the signatures tally?
Is there a stop-payment? If everything is all right, they will keep the cheque with them.

You

Donor

SBI Behala

Clearing house Citi bank,
Chowringee

Suppose, something is wrong.
For example, the signature does not tally. Citibank will send the cheque back on Tuesday to the clearing house. A small slip will be attached, giving the reason for dishonor. The clearing house will return the cheque to SBI, Behala, the same evening.
On Wednesday morning, the SBI officers will see what cheques have come back. These will be returned to the concerned customer's account. Other cheques will be credited3 to the respective customer accounts.

Manual clearing
What if the donor's bank is not a member of the local clearing house? Your bank will have to send the cheque for manual clearing. The cheque is sent by registered post or courier.
This means a delay, normally 10-14 days. Most outstation cheques have to be sent for manual clearing. Collection Charges
Banks don't like manual clearing. It involves a lot of paperwork and some expense. So they may levy collection charges on you. These sometimes depend on the amount of the cheque.
In some cases, banks waive collection charges. This may be because you give them a lot of business or they appreciate your work. This waiver is reviewed by banks' auditors. Therefore, the banks do not do this lightly.

Types of cheques
Self cheque
When you want to withdraw cash, you make out a cheque to 'Self'. This is known as a self cheque. This means that the cash will be paid to the account-holder. In practice, the bank will give cash to the person who brings the cheque.
The words '…or bearer' should not be

3

Actually, the bank records a memorandum credit in your account on the day you deposit the cheques. By a special magic, the bank ensures that you are not able to see it or withdraw the money for another two days! 138

crossed out. Also, you should put the NGO's stamp and sign on the reverse of the cheque.
For Lok Jagran Manch

Bearer cheque

signed

A bearer cheque can be paid to the person who brings the cheque to the bank. For example, the cheque shown below can be paid to Mr. T. K. Biswas or to the person who 'bears' the cheque to the bank.

Secretary

signed

Treasurer

What if you cut out the words 'or bearer' as shown below?
The cheque can now be paid to Mr.
T.K. Biswas only. For this, he may have to go personally. Or he can deposit the cheque in his own bank account. If he goes personally, the bank will normally ask for some proof of identity (driving license, identity card, etc.).

Crossed cheque
A cheque with two small parallel lines is a crossed cheque. You can not encash such a cheque across the counter. It will only be credited to a bank account. Such a cheque has to go through clearing.
There are two types of simple crossing:
Cheques with above type of crossing can be endorsed (see 'Endorsing a cheque'). The only exception in practice is cheques which are crossed as 'Account Payee'.
However, in some special cases, banks may honor endorsement of an account-payee cheque also4. To prevent this, the cheque must be crossed as 'Account Payee only, Not Negotiable'.

Endorsing a cheque
Suppose you receive a crossed personal cheque. You can deposit this cheque into your bank and receive payment in 2-3 days. What if you needed the money urgently?
If the cheque is simply crossed, you can endorse the cheque to a friend. The friend can give you cash against the cheque. He / she will then deposit the cheque into their account.

4

See Filling cheque Safely on page 143.

139

How do you endorse a cheque? Endorsement is done on the reverse of the cheque. It may look like this:
Normally only bearer and simple crossed cheques can be endorsed.

The Payee
A cheque will mostly be paid to the person named as payee. Therefore, try to be as clear as possible. Making out a cheque in the name of 'Mr. Singh' is not a good idea. Say 'Mr. Satbir
Singh, Patiala' instead.
Suppose, you want to make a payment to 'Godrej Soaps Limited.' You should then write out the full name. Just saying 'Godrej' is not enough.
When it comes to NGOs, names can be quite a problem. There are at least five organizations named 'Disha', that we know of. Similarly, there must be many organisations named Parivartan,
Prayas, Sahyog, Rural Development Centre.
If you are uncomfortable about this, there are at least two ways to tackle the problem:
Firstly, always write the full legal name of the organization, in addition to the acronym. For example, you should write 'CRY- Child Relief & You', instead of just CRY.
Second, add the name of the city where the NGO is located.
However, let us suppose that the amount involved is large and you are sending the cheque by mail5. What can you do to add more safety?
Ask the NGO for their bank account number and name of the bank. Then make out the cheque as follows:
Also cross the cheque as 'A/c Payee only - Not Negotiable'.

Pen or Pencil
Unbelievable but true! There are people with cheque books who treat both pen and pencil as equals. So once in a while, these artistic souls will make out a cheque in pencil. Surprisingly, by a special providence, their bank balance continues to grow! Dating the cheque
A cheque cannot be paid before the date which is put on it. Also the cheque is usable only for six months from its date.
In a recent case, a cheque dated 6th March 1998 was deposited in the bank on 5th September
1998. The cheque reached the paying bank on 7th September. By then six months had passed.
So the bank returned the cheque. Such cheques are known as stale cheques.
What happens if you put an impossible date on the cheque? For example, 31st November 2000?
The bank will treat the date as 1st December 2000.

5

Cheques must be sent by registered post or courier

140

Amount in words
Why do you have to write the amount in figures (numerals) and in words? To make it difficult for people to alter the amount. Still this is not a foolproof system. For example, a cheque for
Rupees Six Thousand can be changed6 to Rupees Sixty Thousand, by inserting 'ty'. Therefore, write the amount in words clearly. Do not leave spaces. Try to write in an even handwriting.
In most cases, if the amount in words and figures do not match, then the bank will return the cheque. However, if the bank does not suspect an alteration, then the bank can pay the amount in words.

Living Dangerously
When you put a future date on the cheque, it is called a post-dated cheque. Post dated cheques can land you in trouble. How? For example, Satnam issues a cheque for Rs.15,000 today. The date on the cheque is for the next month. Three weeks later Satnam goes to the bank and finds that there is a lot of money there. He withdraws some and spends it. One week later when the post-dated cheque comes for clearing, there may not be money to pay it. It will then 'bounce'7.
Bounced Cheques
If Satnam's cheque bounces, the payee will obviously get in touch with him. He should then pay the amount within 15 days. If he doesn't, then he could be arrested8.
Kiting
When a cheque is issued, it takes time for it to appear in the bank. This may be two days to a fortnight. For example, electricity bills, telephone bills often do not show up in the account for two weeks.
People sometimes try to take advantage of this. They issue a cheque, hoping to deposit enough money to cover it.
Sometimes it works, sometimes it does not. This is known as kiting and can cause severe embarrassment to say the least. Float
However, suppose there is already money in the bank. The cheques will not show up for some time. When you are issuing lots of cheques all the time, mostly there will be some money lying
'idle'.
This money is sometimes called a float. It can run into lacs, depending on your transactions.
Large companies find clever ways to use the float. Others should not try it as it can cause loss of goodwill or even criminal proceedings.

Stop Payment
Sometimes you may lose a cheque. Or you may find that the supplier has cheated you. If the cheque is not already paid, you can ask the bank to stop payment. For doing this, you should issue the instructions in writing. Take an acknowledgement. Some foreign banks also accept the instructions on phone. Most will first verify that the cheque has not yet been paid. If it has not been paid, then they will accept your instructions. The stop payment remains effective for six months.

6

Who loses the money if this happens? You. See Safer Banking for more on this and forgeries.
You should the words ‘returned unpaid’ in polite company.
8
Section 138 of Negotiable Instruments Act, 1881
7

141

If the cheque is paid due to an oversight by the bank, the bank will bear the loss.
For issuing the instructions, you must give the correct cheque number, payee's name, amount and date. The instructions can be issued by anyone who is a signatory. It is not necessary that both signatories
(in case of joint operation) should sign. You can even give the instructions by telegram/ telephone and follow it up with a written letter. Upto what time can you issue stop payment instructions for a bearer cheque? Till the time the cash is actually passed across the counter.
If the cheque comes through clearing, your bank can accept 'stoppayment' before the expiry of time for returning unpaid cheques as per clearing house rules.

142

Filling Cheques Safely9
Most NGOs maintain comparatively large bank balances throughout the year. They also draw large amounts of cash frequently. Very few reconcile bank accounts regularly.
Another complication is that bank accounts of many NGOs are in small rural branches. These banks do not have strong control systems.
All these factors make NGOs sitting ducks for bank frauds. One of the risk areas is cheques.
Here we discuss some of the ways you can make your cheque-writing safer.

Some Tips
Cuttings & Changes l Put Society’s stamp near the cutting.

l

Both signatories should put full signatures again.

l

If this is not done, bank will return the cheque.

Carbon for safety l Put a carbon (black side up) under the cheque when making it. This practice is standard in banks and government offices (see ‘ The Confused Bankers’).

Registered Post l l

If sending a cheque by post, use
Registered Post. This is also a postal rule. The Confused Bankers
Orissa, 1995: Based on the AccountAble circular, Social Service Center’s management started using a reverse carbon under the cheques.

Local cheques should be handed over to trusted persons only.

Use Special Ink Pens l One such ballpen (price: Rs.15) is
‘Reynolds 041’ made by G.M. Pens
Limited, 76, Janakpuri, Velachery Road,
Guindy, Chennai – 600 032.

A few days later, the bank manager met the Managing Trustee. The manager requested that Social Service Center should stop using reverse carbons under the cheques. l

Black ink (India ink) used by traders and small shop-keepers is also suitable for this.

Reason for the request: ‘Our staff get confused – they mistake your cheque for a bank draft due to the carbon on reverse’!

Special Stickers l In some metros, you can also get special adhesive stickers. These cost about 10 paise each. You can put these over the amount and other sensitive places on the cheque.

l

Name of the bank: Indian Bank

Do not use cello-tape. Cello-tape can peel off during processing and jam the cheque processing machines.

9

A year later, CBI investigations into the
1,336 crore Indian Bank scam have shown that Indian Bank staff were really confused, most of the time!!
Real story: Some names changed

Based on AccountAble 12: Filling Cheques Safely

143

Some things are Not Negotiable…
To protect your cheque from being misused, you can cross the cheque in several ways:



o.
& C

The plain crossing, without any words means that cheque can be paid only through another banker.
This crossing is similar to the one above. The words ‘& Co.’ do not add any protection.



The words ‘Account Payee’ make a big difference. Normally, no banker will credit this cheque into a different bank account. However, this cheque remains negotiable and can be endorsed. The bank, in good faith, can legally credit this cheque to another account.
You can recover your money only from the person who stole the cheque or received the money.



If you add the words ‘Not Negotiable’, the cheque can not be endorsed. If the bank credits this cheque to a different account, you can recover the money from the bank.

ayee
/c P
A
ee
Pay
A/c otiable
Neg
Not

144

AccountAid Kit # 12

Crossing the
Cheque
• Cross the cheque here, at top left hand.
• The crossing should cover some of the shaded portion also Filling Cheques

Bearer Cheque
• If the cheque is to be deposited in a bank, these words should be crossed out.
• If you want to withdraw cash from the bank, don’t cross out these words.
• If a bearer cheque is made out to self, put the society’s stamp on reverse and sign again. Safety Pattern
This is how the pattern on your cheque looks when magnified. It helps prevent alterations. Any erasure or use of chemicals will leave a mark on the pattern.

Name of the Payee
• Put the full name of the persons or firm.
• Write the name of the city, if possible.
• Cross out any blank spaces after the name.
• Always write in ink
(ball point or fountain pen). ank of Magadh Bank of ank of Magadh Bank of ank of Magadh Bank of

Date of the cheque
• Your cheque is valid for six months from this date.
• A cheque with a wrong date (31 September) may be returned by the bank.
• Write the month in full
(such as January or June).

22 August

19 9 6

Pay M/s Didwania & C ompany, Udaipur ---------------X--------------X------------------X or bearer
Rupees Three thousand f our hundred and seventy f paise sixty seven only ------X----------X---ive,
Rs.3,475/6 7

---------------X---------------------------------------X---------------------X-Bank of Magadh

for L ok J a gran Manc h

Maharani Bagh, Udaipur

t ; k feJk

S ec retary

A/c. No. 43040
!#$!
"
$

Your bank account number appears here.

Cheque number
• When depositing a cheque, you have to write the cheque number on deposit slip.
• The funny markings on both ends of this number should be ignored.

!% $& %
!% %
"

$" &
'( #

Name of the bank
• This is the name of the bank which issued the cheque book.
• When you deposit a cheque, you have to give the name of the bank and branch on the pay-in slip.

Signing the cheque
• Society’s stamp is necessary. • Signatures should not spill into the white band below.

The amount in words
• If amount includes paise, write the paise as ‘and paise sixty seven only’.
• At the end of the amount say
‘only’.
• Cross out the blank portion after the amount like this.

12 - 2

T.R.Singhi
T re as urer

!
%

The amount in figures
• Do not leave any gap between ‘Rs.’ and the first figure.
• If the amount includes paise, use a ‘/‘ to separate rupees and paise (such as
3,475/67).
• If amount does not include paise, put a slash at the end, followed by
‘=‘ (3,475/=).
• Use a slash ( /) instead of a decimal point ( • ).
• Use commas to separate thousands.

Blank Cheques10
Signing blank cheques is a very common practice amongst NGOs. Mostly this is done due to practical reasons, such as a long outstation trip or one of the signatories
Shankar’s Self-Help Program living in another town.
Many people feel uncomfortable in signing blank cheques. But this practice has continued due to lack of a practical alternative. Here we discuss one of the ways by which the risks of signing blank cheques can be minimized.

Signing Blank Cheques
Normally money can be drawn from the bank only when two trustees (or
Governing Body members) sign the cheque. When both trustees are available in the office regularly, this is not a problem. But when one of them goes on a tour, a problem arises.

Gujarat, December 1992: There were two trustees
- Vijay and Lata. Signatures of both the trustees were required on each cheque. Vijay used to travel frequently. He used to put his signatures on several blank cheques before going on a trip. Lata then would sign the cheque as and when required.
Shankar (the cashier) used to then withdraw the money for the Trust.
One day Shankar decided to help himself to some money. He forged Lata’s signatures on one of blank cheques (already signed by Vijay) and withdrew
Rs.20,000. The bank officers did not get worried about the variation in signatures because: a. Vijay’s signatures were genuine, and b. they knew Shankar.
The fraud was discovered only six months later.
Part of the money was recovered from Shankar.

In some case, one of the trustees who signs may not be present in the office of the NGO on a daily basis. Again a problem arises because his / her signatures are required frequently. Someone has to visit him / her every other day with the cheques for signatures.
To get over this problem, quite often, one of the trustees signs a few blank cheques at a time and leaves them in the office. If you think about this practice carefully, you will find that this is very dangerous.

A Safer Alternative
Most of the payments are very small, less than
Rs.5,000 each. Emergency cash requirements are also small. The Society can therefore adopt a system where cheques below Rs.2,000 (or
Rs.5,000) can be signed by either of the trustees.
Cheques for higher amounts will have to be signed by both the trustees as earlier.
This is a system which is very common with large companies where hundreds of payments are made every day. It makes work simpler while maintaining a reasonable degree of security.

10

Based on AccountAble 11: Blank Cheques

146

Real story; All names changed

Faithfully Yours...
West Bengal, 1989-1996: Mr. Chatterjee had a lot of faith in his friends and colleagues. That’s why he would sign as treasurer of the society whenever they sent him some cheques. Later they started sending him blank cheques. The friendship and the faith continued.
Therefore, Mr. Chatterjee got a shock when he received court summons in 1989.
He was accused of having siphoned off
Rs.12 lakhs over a period of 5 years.
Mr. Chatterjee had a tough time proving to the court that he had signed blank cheques in ‘absolute faith’. His name was cleared only after seven years of court appearances. Real story; All names changed

What you need to do
At the next meeting of the Board or Executive Committee, pass a simple resolution (specimen shown below). Give a certified copy of this resolution to the bank manager who will ask for some papers to be signed. He / she may also suggest some modifications in the wording of the resolution according to bank policy.

Sample Bank Resolution
Certified True Copy of Resolution passed at Meeting of Board of Trustees / Governing Body of
_______________________________ (name of NGO) on _______________ (date)
“Resolved that with respect to the Savings Account No. ________ in the name of the Society / Trust being maintained with the _______ Bank, __________ (Address of Bank) and that the said bank be and is hereby authorised to honour all cheques, Bills of Exchange, promissory notes drawn, accepted and all negotiable instruments whatsoever made and signed on behalf of the Society / Trust either by Ms./Mr.
__________ (name), _____________ (designation), or by Ms./Mr. __________ (name), _____________
(designation), of the Society / Trust, provided that the value of any such individual instrument does not exceed Rs. ______ (Rupees ________ thousand only).
Also resolved that the said bank be and is hereby authorised to honour all cheques, Bills of Exchange, promissory notes drawn, accepted and all negotiable instruments whatsoever made and signed on behalf of the Society / Trust, jointly by Ms./Mr. __________ (name), _____________ (designation), and
Ms./Mr. __________ (name), _____________ (designation), of the Society / Trust irrespective of the value of any such individual instrument.
Resolved further that the above resolution be communicated to the said Bank and is to remain in force until the same is canceled or modified by the Board of Trustees / Governing Body by another resolution and extract whereof forwarded to the Bankers by the Chairperson / President / Secretary / Treasurer /
Trustee of the Society / Trust.”

Amending Bylaws
In some cases, your bylaws may not permit this kind of bank resolution. Then you will have to amend these. Therefore, before passing the bank resolution, check the Memorandum and
Bylaws of Association. There you may find a clause which says that such and such officebearers will be authorised to sign the cheques.
If you find such a clause, then you can not follow the above procedure right away. You will have to first call a General Meeting and change your bylaws to say the following:
“ ...bank accounts in the name of the Society may be operated by such persons as are authorised by a resolution of the Board/ Executive Committee, which should have been passed at a meeting attended by not less than 75% of the members of the Board/ Executive Committee...”
After passing this resolution11, you will have to register the change with the Registrar of Societies in your state. The procedure for this varies from state to state.
The bank will ask for a copy of the amended bylaws before registering your new resolution.

11

In some states, the registrars may object to this amendment.

147

Safer Banking12
Frauds
Frauds in banks are more common than you may think. This year, over 22,000 major frauds were reported. A fraud normally involves bank officials. It may not affect your account directly.
Its effect on you will depend on its size. Frauds like the Share Market Scam are quite capable of wiping out entire banking networks. Even a small fraud may affect the confidence of the depositors. They may queue up at the bank and demand their money. This is called a run on the bank. What follows depends mainly on mass psychology and to some extent on the bank’s liquidity and intervention of the RBI.

The Changing Scene
As the economy liberalises, we need to be more watchful. Bank ownership may change (Bank of Benares was sold a few years ago). There may be tussles for takeover (as in Catholic Syrian
Bank). A bank may get involved in a scam and may suspend business till RBI bails it out (such as the Bank of Karad).
All these events will affect your work - some may cause minor inconvenience, others may even result in a major loss. So choose your bank wisely. Keep an eye on what it is upto. Don’t keep all your money in one bank - spread it around over different banks13.

The Benzene Miracle

Alterations
Suppose the bank receives a cheque for payment. You had originally made out the cheque for Rs.6000 only. Someone changes the word ‘six’ to ‘sixty’. He also adds a zero to 6,000, making it 60,000.
This alteration is done very cleverly. It can not be seen unless one examines it very carefully. The bank pays Rs.60,000 to this person. Can you recover the difference from the bank? No, you can not!
Section 89 of the Negotiable Instrument
Act protects the banker in such a case.
Only exception is where you can prove that the bank was careless on other counts
- for example if the person who encashed the cheque looked like a beggar. Or that one of the bank employees had made the alteration, as in the case of Trilok Nath
Sood (See box ‘The Benzene Miracle’).

12
13

In 1948, Bank of India paid Rs. 25,000 to a person over the counter. This was a bearer cheque favoring Krishna Baldev. Krishna
Baldev denied taking the payment in cash.
The publishing firm also insisted that it had issued an ‘A/c Payee Cheque’. The cheque however did not bear any such crossing.
Later the story came to light. The cheque had come to Trilok Nath Sood, Chief
Accountant of the bank for initials. He saw that the ‘A/c Payee’ stamp was on the white edge of the cheque. It did not cover any of the background pattern on the cheque. So he erased the crossing with
Benzene. The pattern was not disturbed.
Then he initialed the cheque and collected the payment in cash, being himself a top official of the bank.
Trilok Nath received a jail sentence of seven years. Based on AccountAble 9: Banking
Except your designated FCRA Bank

148

Forgeries
No protection is available to the bank in case someone has forged your signatures (See ‘The
Hard-working Postmen’). This is so because a forged cheque is treated as never having been issued. It does not matter how good the forgery was. It is also immaterial that the forger got hold of the cheque due to your carelessness, such as from your unlocked drawer. The Hardworking Postmen
In 1976, Lalit Kumar and Radhey Shyam put on the khaki uniform of post-men. Then they went around stealing mail from letter boxes placed at selected locations. Later they would open these and take out things which were useful for them. One day they got a signed cheque of Jnanpith Sansthan.
First they printed an exact copy of the requisition slip. Then they forged the signatures and obtained a cheque book from
Syndicate Bank. Then they started forging bearer cheques of Jnanpith Sansthan. In ten days, they managed to draw seventy thousand from the account. The next cheque was for forty thousand. The bank got suspicious and the balloon went up. But the bank had already lost seventy thousand rupees. What to do?
Even though the banker may be liable for the loss in case of forgery, it is better to try and prevent it. Try these tricks: l Get a dual-level cheque signing authority.
This allows a single person to sign cheques below a certain limit, say
Rs.5,000 (cheques above Rs.5,000 will continue to be signed by both signatories as earlier). Then you won’t have to leave partially signed cheques (i.e. cheques signed by one signatory) lying around to tempt people.

Later it was discovered that these people had defrauded several banks of lakhs of rupees in the same manner.

l

Try not to leave your specimen signatures around. l

Tear out the cheque from the cheque book before signing it. This way you don’t leave a traceable impression on the cheque below.

l

Keep your cheque book in a locked drawer.

l

Don’t disclose the account balance to other people unnecessarily.

l

Put a carbon (black side up) under the cheque when making it out. This will leave an impression on the reverse of the cheque, making it difficult to alter.

l

You can also get special transparent stickers from the market. These cost about ten paise each. You put them over the amount and other sensitive places after the cheque has been made out. You can also use cello-tape instead if you are not using an MICR cheque book.
Use of cello-tape should be avoided except where manual clearing is done.

l

Get a ‘Not Negotiable, A/c Payee’ stamp made. Use it whenever possible.

l

You can also mark a cheque with something like ‘Under Rupees Two thousand only’.

l

If sending cheques by post, use registered post (see ‘The Hard-working Postmen’).

l

If your transactions are very heavy, buy a cheque writing machine.

l

Get a bank reconciliation statement made every month.

149

Bank Reconciliation14
A Bank Reconciliation is somewhat like a routine medical check-up. If you do it regularly, you will never feel the need for it. If you don’t do it regularly, one day you will wish you had gone to the doctor every month.

What is a Bank Reconciliation?
Do a simple experiment to understand this. Take out one of the pass books which has frequent transactions. Note down the balance in the pass book on any date, say 31st July 1998. Open your cash book or ledger15. Check the bank balance on 31.7.98 shown in the cash book or ledger. Note it down in the second line:
Pass Book Balance on 31.7.1998

_____________________________

Ledger / Cash Book Balance

_____________________________

Difference
Compare the two balances. Chances are that the

two balances will be different 16.

Why a difference?
A difference may be simply due to some cheque which has not reached your bank for payment.
Or it may be due to normal clearing delay for some cheque which you deposited.
Sometimes the problem can be more serious. The difference may be due to a dishonoured cheque. Or the bank may not have credited some deposit to your account. In either case, the earlier you know, the better it is. You can then contact the bank and have the problem corrected.
Apart from this, small charges like collection charges, bank charges, etc. are levied on your account from time to time. Normally the bank does not send you any intimation. Also the bank credits interest to your account twice a year. You have to pass entries in your books for these transactions. Sometime the bank makes totaling errors. Also someone may alter a cheque and draw a large sum of money from your account.
When a difference appears between your ledger balance and the pass book, you have to prepare a Bank Reconciliation to understand the reasons.

Making a Bank Reconciliation
You need four things to prepare a bank reconciliation.
(i) Your Pass Book;
(ii) Your Cash Book or Ledger containing the Bank Account;
(iii) A color pencil or pen;
(iv) Previous reconciliation, if there was difference in opening balance.
After having armed yourselves with these, proceed as follows, with extreme caution:

14

Based on AccountAble 10: Bank Reconciliation
If the cash book is not updated, note the balance from your cheque book counterfoil.
16
If there is no difference, then it is only a temporary relief.
15

150

1. Ticking Off common items q First decide the period for which you want to reconcile. Let’s say you decided on 1.4.98 to

31.7.98. q Compare the opening balance (1.4.98) of the Pass book and the Ledger. q If there is a difference in the opening balances, locate the previous reconciliation17. Your

auditors will probably have a copy. q Now you have to start ticking off the common items in the pass book and the ledger. q For this see the first entry in the ledger18 on debit side. Locate this entry in the pass book

also (in Deposits column). q Compare both the entries – are the amounts same? If there is a small difference, it may be

due to collection charges. Note the difference separately. q Tick off both the entries if these match. q In this manner, tick off all matching entries on debit side right upto 31.7.98. q Now look at the Credit side of the ledger19. Compare these entries with those in Withdrawal

column of pass book. Match cheque numbers also if possible. q Tick off all common entries one by one.

2. Correcting Our Ledger Balance
Now we can prepare the first part of the Reconciliation: q Take a fresh sheet of paper and note down the closing balance as per ledger. q From this deduct any bank charges (or collection charges) or cheques that may have been

dishonoured. q This will give you the corrected ledger balance20.

3. Reconciling the Pass Book balance
Finally we reconcile the Pass Book balance: q Note down the balance as per pass book. q To this balance add those cheques which have been deposited but not yet cleared. You will

find these as unticked items on the Debit side of the ledger. q Then deduct the cheques which you have issued but which have not reached your bank.

These will appear as unticked items on the Credit side of the ledger. q The resulting balance should be the same as the corrected Ledger balance.

If a difference remains, scan the pass book and ledger for unticked items. Check the totaling and the manner in which you have added or deducted items. If the difference still remains, you will have to tick the items again. Use a different color pen this time. And be more careful!

17

The previous reconciliation shows the unticked items of the previous ledger. Compare these with the pass book and tick off all the items that match. Rest of the items will appear again in the new reconciliation.
18
In case of cash book, see entries on Receipts side
19
In case of cash book, see entries on Payments side.
20
Later on, you should pass entries for these in your ledger or cash book.

151

If the amount for any cheque which you issued is different from your records, approach the bank immediately. Find out the reason for the difference. If there is a mistake at the bank, have it corrected. If there is an unauthorized alteration, consult your auditors. They will be able to guide you. Follow-up Steps
After reconciling the bank, you must look into the items that appear on the list. Pass entries in the ledger for bank charges, interest etc. Pass entry for dishonored cheque also. Depending on reasons for dishonor, talk to the concerned party or your bank.
Figure 1: Bank Pass Book
Date

Particulars

Withdrawals

Deposits

B/F
12/4/95
29/4
4/5
12/5
15/5
20/5
20/5
25/6
1/7/95
4/7/95
30/7

ch. 470181
To cash: 470182
Clg. 470183
By Deposit
Ch. ret.
By clg.
Coll. fee
To cash
S. Das - 470186
Cash
Cash

Balance Initial
66,714 sn

6,000
1,000
4,500
23,150
23,150

55,214 ds
23,150

50
2,000
1,450
5,000
5,000
Total c/o

Figure 2: Bank Reconciliation - 31.7.95
Balance as per our Ledger

Collection charges of bank are not entered in our ledger. We should reduce this from our balance.

Contra items (items that appear on both sides of the same record) are marked with a ‘C’ like this.

64,864 s.n
64,864

For the second part of
Reconciliation, start with closing balance as per Pass book.

Dr.

66,914

Corrected Balance as per our Ledger

Dr.

66,864

Balance as per Bank Pass Book

Cr.

64,864

Deduct: Collection fees charged by bank on 20/5

-50

Add: Grant cheque deposited but not cleared (28.7.95)

10,000

Deduct: Cheque issued but not presented (470188 for
Rent Deposit: 27.7.95)
Corrected Balance as per Bank Pass Book

-8,000
Cr.

66,864

Figure 3: Bank Account in our ledger
Date
1.4.95
12.4.95
29.4
30.4
12.5
24.6
30.6
4.7
27.7
28.7.95
29.7.95

This cheque
Folio
has not been
Opening Balance collected yet.
By Ch. 470181: Mr. S. Das
When collected it
By cash: 470182 will increase the
By Ch 470183 balance. To Grant received
Particulars

By Cash drawn - 470184
By Mr. Das - 470186
By Cash 470187
By Rent deposit: 470188
To Grant cheque
By Cash - 470189

© AccountAid India 1995, 1997

Debit

Credit
6,000
1,000
4,500

23,150
2,000
1,450
5,000
8,000

Dr/ Cr

Balance

Dr.

66,714

66,714

Dr.

Start the first part of
Reconciliation by writing down the bank balance as per our ledger.

66,914

When this cheque is presented, bank balance will reduce.
Therefore, we deduct it
Dr.
78,364 from the Pass Book
Balance

10,000
5,000

10 - 1

Section VI: Form of Organisation
Non-profit organisations can have any number of forms: these may not even be formal organisations. Over the last couple of centuries, non-profit organisations have emerged as an important player in the society. Society now recognises the importance of such organisations and offers them special exemptions under existing laws or in many cases, has even designed statutes exclusively for non-profit organisations.
In this section, we discuss three main forms of non-profit organisation. Deciding on the form of organisation is now seen as important if you are starting a new organisation or are planning a substantial increase in activities of an existing organisation. We deal with this in ‘Society,
Trust or Company’.
We then go on to discuss law and procedures relating to registered societies. This is a state subject, so the law varies from state to state. An overview of important features of this law for each state has been given here.
There is no law for regulating public trusts in India, except for states of Maharashtra and
Gujarat. We therefore go on to dealing with non-profit companies. Many people are now interested in this form, which offers more stability and better control -- the price you pay is extra paperwork. The chapter explains how a non-profit company can be formed and gives an overview of the important provisions.

Society, Trust or Company

155

Registered Societies

158

Regulation of Societies

163

Non-profit Company

197

153

154

Society, Trust or Company1
If you want to form a voluntary organisation, there are three options:
1. A company;
2. A Registered Society;
3. A Registered Trust.
A brief discussion of important features of each of these forms follows:

1. Non-Profit Company
A company may be public or private. Further, a public company may be widely held or closely held. In normal circumstances, a company must append the words ‘Ltd.’ or ‘Pvt. Ltd.’ to its name. However, a charitable company, whether public or private, may obtain a license under section 25 of Companies Act, 1956 to drop the reference to limited liability as far as its name is concerned. Such a company is commonly known as a ‘Section 25 company’ and is eligible for certain exemptions from provisions of law and concessional rate of fees etc. A ‘Section 25
Company’ can be formed for any non-profit activity.

Characteristics of a company:
1. It is an artificial legal person created by law to achieve the objects for which it is formed. It has a nationality and domicile but cannot claim the fundamental rights expressly guaranteed to natural citizens and cannot do things that only a natural person can do. However, a company can challenge any law that violates the fundamental rights of citizens.
2. It has a distinct legal entity entirely independent of the members constituting it. No member can, either individually or jointly, claim any ownership rights in the assets of the company during its existence. In case of a section 25 company, this limitation is further extended and members do not receive any part of assets of the company even on its dissolution.
3. A company has perpetual succession and is not affected (in a legal sense) by changes in membership or employees, although such changes may affect its actual performance.
4. It also has the tremendous advantage of limited liability, which means that members and executives are not personally liable to settle company’s dues, unless they give their consent in writing for specific transactions.
5. Ownership and management are kept separate in a legal sense although in actual practice the two may be same.
6. Membership (ownership) rights are transferable. In case of a private company, certain restrictions are placed on this right to transfer membership.
7. A section 25 company cannot distribute profits or assets to its members.

2. Society
A society is essentially an association of persons united together to achieve some common purpose. Such objects are normally charitable, scientific, literary, etc. Theoretically, a society need not be registered but registration gives the society legal recognition and is essential for opening of bank accounts, filing of legal suits, obtaining Income Tax approvals, lawful vesting of properties, etc. Structurally, it is similar to a company.

1

Based on AccountAble 1: Society, Trust or Company

155

Characteristics of a society:
1. It is an artificial legal person created to achieve the objects for which it is formed.
2. It has a distinct legal entity entirely independent of the members constituting it. Thus, it can sue members and may be sued by its members as strangers. No member can, either individually or jointly, claim any ownership rights in the assets of the society during its existence. On dissolution the surplus assets of the society are given to some other society with similar objects.
3. A society also has perpetual succession and is not affected in a legal sense by changes in membership or employees.
4. It also has the advantage of limited liability, which means that members and executives are not personally liable to settle society’s dues, except in specific circumstances.
5. Membership rights are non-transferable.
Each state has formulated its own regulations for ensuring propriety in functioning of societies, including provision for compulsory division, amalgamation or dissolution (Andhra Pradesh). However, generally the regulations are enforced with extreme laxity.
A society as registered above is different from a co-operative society.

3. Trust
There are two statutes2 relevant to functioning of trusts in India: The Indian Trusts Act, 1882; and, The Charitable and Religious Trusts Act, 1920.
A trust is generally created by annexing an obligation to some property. This obligation, when accepted by the owner / trustee, results in the creation of a trust. The trust has primarily three parties: the donors, the trustees and the beneficiaries. It is usually created through a trust deed.
After creation of the trust, various registrations and exemptions under Income Tax Act may be sought. A trust may be private or public, fixed or discretionary (among others). For such activities as proposed, a public discretionary trust is suitable. Such a trust is usually unalterable, and the donor does not have any power to revoke it.

Characteristics of a trust:
1. The obligation (created for forming the trust) must relate exclusively to property, the ownership of which vests with the trustees. An obligation, not so related, cannot be a trust. Moreover, unlike English law, the Indian law does not recognise duplicate ownership.
2. The obligation must arise out of confidence that is reposed in the trustee. Such confidence, in turn, must be accepted for the benefit of the beneficiaries.
3. A trust must be created for a lawful purpose.
4. The author of the trust must indicate with reasonable certainty the following:






Intention to create trust.
Purpose of the trust.
Beneficiaries of the trust, and
The trust property.

Any uncertainty or vagueness concerning the above may invalidate the trust. Trustees are also subject to certain disabilities. Important amongst these are:

• Disability to renounce trust
2

Additionally, the Bombay Public Trust Act is applicable in Maharashtra and Gujarat

156

• Disability to delegate trust
• Disability to charge for services.

Comparison
A comparative chart of main features of these three organisational forms is given in the table below. COMPANY

SOCIETY

TRUST

Objects

Non profit Activities

Charitable, Literary,
Scientific, etc.

Charitable, Socially
Beneficial

Alteration of
Objects

Complex legal procedure Simple procedure

Bound by covenants of Trust Deed; Normally only Settlor can modify

Formation

Complex Procedures;
Three to six months required Simple and easy

Simple and easy

Name

Prior approval required;
Authorities have framed narrow Guidelines

Comparatively simple

Comparatively simple

Management

Formalities of company law to be observed

Few restrictions impo sed under the Act

Very few restrictions imposed under the Act

Meetings

To be held as per pro visions of law which are quite extensive

Annual Meeting according to provisions of law.
Governing body meetings as prescribed in
Rules of the Society

No provisions laid down

Penalties

Various offenses and lapses attract severe penalties in theory

Few offenses and penalties have been prescribed Very Negligible

Legal Status

Full legal status

Legal status with certain limitations

Legal status with certain limitations

Statutory
Regulation

Exhaustive but mature

Limited. Varies from state to state

None, except in Maharashtra and Gujarat

Transfer of membership Totally free or controlled, Not possible as desired

Not applicable

Admission of new members

Controlled by general body or Board through issue of capital

Controlled by
Governing Body

Not applicable

Removal of members

Not possible without consent Possible without consent Not applicable

Dissolution or takeover by state Very difficult

Possible in some states Possible

Payment to members As approved by company and state

Not restricted except in Tamil Nadu

As specified in Trust deed 157

Registered Societies3
Most needs of the human society mean an economic opportunity. Entrepreneurs rise to take these up. This makes life easier to live and contributes to strength of the society.
Some needs may not be urgent. Or there may not be enough people who will benefit directly from these. Or people may not be able or willing to pay for these. Naturally then, entrepreneurs will not take interest in these needs.
Non-profit organisations form to fill this gap. The most common form of non-profit organisations in India is a society.

What is a Society?
A society is formed when some people come together. They have some common purpose and want to do something. The purpose must be legal. Mostly the purpose should be to do something useful for others.
A society should generally not get into profit-making activities. But if it does, then the profit must be used for some charitable purpose.
What is a charitable purpose? Mostly it means helping the poor, sick or the helpless. Philanthropy, altruism, humanitarianism are similar concepts.
Charitable purpose4 of your work and charitable approach5 to the work can be two different things. Most laws are concerned with the purpose of your work. You are free to choose the approach – which may be charitable, developmental or some other.
A society must be registered6 for it to enjoy full legal status.

Registration
You are registered when your name is entered in a register7. The person who enters your name is called a Registrar. This sounds very simple. However, you must meet some requirements before you can be registered.
Requirements vary from state to state. Mostly, you must file a memorandum of association and your by-laws8. You must also deposit a fee.
Registration (as a concept) probably started thousands of years ago in ancient Egypt or Greece.
It is mostly done by Government agencies. Registration is sometimes viewed as a status symbol. The Society Registration Act was passed to improve the ‘legal condition’ of societies. How does this improvement occur?

Registered Society
A registered society is viewed as an independent ‘person’. It is different from the people who form it. This means:
1. It can purchase and hold property;

3

Based on AccountAble 62: Registered Society - 1
Objective
5
Method
6
This discussion is mainly based on Societies Registration Act, 1860.
7
The root of ‘register’ is the Latin word ‘registum’, which means a list.
8
Rules and Regulations
4

158

2. It can file legal cases;
3. It has perpetual succession9.
And even more important:
4. It can get exemption from income tax;
5. It has limited liability.

Unregistered Society
An unregistered society is not recognised as an independent person under law. Therefore, it does not enjoy the five benefits (listed above).

Limited Liability
A registered society has limited liability10. ‘Limited liability’ means that the liability of the society is limited to assets of the society. The liability does not extend to personal assets of its members or Governing Body. What does this lead to?
Well, suppose you organised a fund-raising event. You ordered furniture, food, arranged cultural programs, and printed pamphlets. The total expenditure came to Rs.8 lakhs. However, at the end of the event, your ticket income comes only to Rs.2 lakhs. You have lost Rs.6 lakhs. This money is payable to various persons.
You sell off all the assets of the society. This gets you Rs.1 lakh. After this, you still have to pay another 5 lakhs. What happens now?
It depends on whether your society was registered or not. If the society was registered, nothing much happens. The society simply goes bankrupt. But if the society was unregistered…
You will wake up one day to hear drums beating under your window. These drums will be announcing the auction of your personal assets, such as house, car, furniture…
The money raised this way will be used to pay off the creditors of your unregistered society.

Memorandum
Most people forget things as time passes. This means that after a few years, members of a society may also forget its original purpose.
To prevent this, we have a memorandum11 of association (MOA). It contains the conditions on which the members have come together (associated).
The MOA must have three very important things:
1. Name of the society
2. Objects of the society
3. Details of the Governing Body
The first two are discussed here:

9

It can continue even when the original members pass away.
Section 8 of Societies Registration Act, 1860; also K. C. Thomas v. R. L. Godeok AIR 1970 Pat 163
11
The word ‘memorandum’ comes from Latin word ‘memor’, which means ‘mindful’
10

159

Name
When a baby is born, the parents spend a lot of time deciding the name. It should be easy to pronounce. It should sound good. People should not be offended by it. Hopefully, it should also contain clues to the child’s character. If the name is long, then you also need a shorter name12. Similar ideas apply to selecting a society’s name. Additionally, the Registrar should not object to the name. The Registrar may object if the name misleads people. For example, names containing words like government, ministry, bank, etc. are not allowed.

Objects
Object clause is the most important in a Memorandum. But this sounds like a lot of legal words strung together. Therefore, no one ever reads the objects clause.
Objects define what the society can do or cannot do. If the objects were not clear, a problem may arise. The society could get into many things. It could keep changing the nature of its work.
This may lead to misunderstanding among the members. Some of them could become unhappy with the new activities. They may say: look here, this is not what we wanted to do. We don’t want to waste our time and money doing this.
To prevent this, the object clause lays down all the things the society plans to do. All the members agree to these and sign the Memorandum. New members who join are also clear about this. No one can then complain.
Apart from the above, the Object clause is also important for another reason. This is called the doctrine of ‘ultra vires13’. Ultra vires simply means ‘beyond the power’. Anything done by the society outside its Object clause could become ultra vires. This means the court will treat it as never having been done. Why? Because the society couldn’t have done it, as it was beyond its powers.
What does this mean in practical terms? Well, suppose your Memorandum does not allow you to build or run hospitals. Yet you14 spend 20 lakhs on constructing a 40-bed hospital. What happens now? You may have to repay the entire money to the society! Incidentally, you won’t get title to the hospital, either.
Such an action15 cannot be approved, even if all the members agree to it.

Rules and Regulations (Bylaws)
If Memorandum is like your character, Bylaws are like your manners. Memorandum defines the powers, and bylaws lay down ground rules for conduct of the society.
Good bylaws lay down clear rules. Clear rules do not have to be rigid. Most people adopt standard rules from an existing society. This is fine. But before doing this, you should read the rules carefully. Try to understand each rule. Change the ones you feel may not be suitable16.
Bylaws should also look forward in time. For example, in many societies, the rules say that cash in hand will not be more than 50 rupees; or that the Treasurer will authorise all payments.
This causes problems later when the Society becomes bigger.

12

Sometimes called a ‘pet name’. People often convert the long name of a society into a short name. To do this, they pick the first letter of each word. The new word formed this way (e.g. UNESCO) is known as an ‘acronym’.
13
Pronounced as ‘wyreez’. The latin word ‘vires’ means strength or force.
14
As a governing body member
15
Which is beyond the Memorandum
16
You may wish to consult a lawyer or CA later for suggesting suitable language.

160

Sometimes you may do something, which is not allowed by the bylaws. What happens then?
The members can ratify it.
But what happens if you don’t follow the rules quite often? Mostly it doesn’t affect your practical work. However, it can lead to serious problems. If you have intelligent ‘enemies’, they may argue that the society is mismanaged. Courts may also agree with them. In some states, this means that the government can appoint an administrator to look after the society.
There is also a hierarchy involved here. If there is a conflict between bylaws and the memorandum, then Memorandum will prevail. Similarly, if the Memorandum goes against the Society Registration
Act, then the Act will be followed.

General Body
Unlike natural people, a society is blessed with two bodies: one is the General Body; the other is the Governing Body.
All the members of the society are part of the General Body. Together, they form the supreme authority over the society. They elect Governing Body members. They decide on alteration of name, objects, rules and regulations. Their consent is necessary to dissolve the society.
In practice, many societies have only seven or eight members of the General Body. All these people also get elected to the Governing Body. Therefore, many people think both are the same.

Who can be a member?
Generally individuals who are competent to contract17 can become members. Some societies lay down additional qualifications (such as moral character) for members.
Foreigners can also become members of a society registered in India. In fact, it does not matter18 if all the members are foreigners. The society will still be known as an Indian society.
A limited company can become a member. A partnership firm can also become a member. Even a registered society can become member of another society!

Admitting new members
Most societies reserve the right to admit members. This means that you can’t just walk up and insist on being taken as a member. Generally, the Governing Body has the power to admit members. Admitting members can sometimes be a little dangerous.

Takeovers
If the new members have bad motives, they can try to take over the society. This is sometimes done by ‘packing19’ the membership.

Types of members
Some societies have three or four types of members. These could be founder members, associate members, honorary members, normal members, etc. The bylaws also define different rights and duties for these members.

17

Persons of unsound mind and minors are not competent to contract.
However, this may cause problems in getting FCRA registration.
19
The person starts bringing in members who are loyal to him or her. Then through a series of strategic changes in Governing Body, the society is taken over.
18

161

Voting Rights
Sometimes, one or other type of members is not given voting rights. However, the Society
Registration Act20 does not recognise21 this. According to the Act, a person is a member if he or she:
1. Has been admitted to membership;
2. Has paid the dues or signed the members’ register;
3. Has not resigned.
This means that all members have equal voting rights. They all have an equal say in elections, dissolution or other matters.

Disqualification
Disqualification means that the member cannot do a particular thing. This thing may be attending a meeting or voting or some similar thing.
If a member’s subscription is overdue for more than three months, the member is automatically disqualified21A. This means he or she cannot vote or be counted as a member.

Removing members
Disqualification does not automatically lead to removal. Procedure for removal of members is given in bylaws. This must be followed properly. Principles of natural justice should also be followed. Normally, this means that the member is given a show-cause notice. The member’s reply should also be considered. A decision about removal should be taken after this.
Members can be removed for not paying annual dues. Other grounds can be not attending
Annual General Meetings, conviction for a moral or criminal offence, or activities against the society. Membership fees
These can be of two types: admission fee and annual fee.
As discussed earlier, if membership fees are not paid, a member may be disqualified. You should therefore track fees carefully. Some societies maintain a register for this. Also, a receipt should always be issued when the dues are received.
In some cases, the annual fee is collected for several years at a time. Some bylaws also allow members to pay a lifetime’s membership fee at one go.

21A
Rules and regulations, which are inconsistent with the Act, are invalid. Filing these with the Registrar does not make these valid.
20
Section 15
21
Rules and regulations, which are inconsistent with the Act, are invalid. Filing these with the Registrar does not make these valid.

162

Regulation of Societies22
The British passed the Societies Registration Act in India in 1860. The Act was based on The
Literary and Scientific Institutions Act, which was passed in England in 1854.
The main Act is simple enough. However, the states have power23 to amend the main Act for their own state. Many states have amended24 the main Act. Others have passed their own independent Act. The results are naturally not very clear.
In this chapter, we have tried to give the key requirements for each state separately. This has resulted in some repetition. However, we hope this will make it simpler for an NGO to understand the requirements for their state.
It has proved very difficult to get the latest amendments for each state. Therefore, please reconfirm the information in this chapter before taking any important decisions.

Andhra Pradesh
Two Acts are applicable in Andhra Pradesh:
1. Telangana Area: A.P. (Telangana Area) Public Societies Registration Act, 1350-Fasli.
This Act was passed by the Nizam in 1940 and continues to apply today also.
2. Rest of the state25: Societies Registration Act, 1860, as amended by the state from time to time

Telangana Area
[A.P. (Telangana Area) Public Societies Registration Act, 1350 F]
Telangana Area includes the districts of Adilabad,
Hyderabad
and
Secunderabad, Ranga
Reddy,
Karimnagar,
Khammam, Mehbubnagar,
Medak,
Nalgonda,
Nizamabad, and Warangal.

Registration
By filing Memorandum of
Association and certified copy of Rules and
Regulations along with a fee of Rs.50/-. Any five persons can get a society registered under the
Act.
All documents to be filed with the Inspector General of
Registration and Stamps,
Andhra Pradesh (Sec. 3).

22

Some material taken from AccountAble 60: Regulation of Societies: Andhra – Delhi
Charitable and Religious institutions fall under state list.
24
These amendments cause confusion in section references. Section 4A for Bihar is different from section 4A for Goa!
25
Divided into Andhra Region and Rayalseema Region
23

163

Alteration
You can alter the objects of the society, or merge with another society. For this, you have to convene two special meetings of general body. Two-thirds of the members have to approve the change in both the meetings (Sec. 9). The time gap between the two meetings is not given.
However, this is generally one month. Any alteration should be reported to the Inspector General of Registration and Stamps, Andhra Pradesh.

List of Governing Body Members
File it every year within two weeks of annual general meeting. If general meetings are not held, file this in the month of Azur26 with the Inspector General of Registration and Stamps, Andhra
Pradesh (Sec. 5).

Accounts
No specific provisions.

Dissolution
At least two-thirds of the general body members27 have to vote for dissolution of the society at a special meeting. Government’s consent is also required, if the government is a member or a contributor or interested in the society (Sec. 10).
The Government can issue an order to merge two societies or divide or dissolve the society
(Sec. 18, 1928). However, in all the cases, the Government has to write to the society. In case of merger or division, the Government has to write about the proposal. In case of dissolution, the Government has to issue an order giving reasons for dissolving it.
In both the cases, the Government should also consider any arguments by the society against the proposed order within a reasonable time.

Disposal of Property upon dissolution
A society’s property cannot be distributed among its members. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 12).

Others
Any one can see the documents of the society on payment of Re.1. Copies can be taken and also can be certified by Inspector General of Registration and Stamps, Andhra Pradesh (Sec.
15).

Andhra and Rayalaseema Region
[Societies Registration Act, 1860 as amended by President’s Act No.10 of 1954]
Andhra region includes the districts of East / West Godavari, Guntur, Krishna, Machilipatnam
/ Nellore, Prakasam, Srikakulam, Viskhapatnam, Vijayanagaram.
Rayalaseema Region includes the districts of Anantapur, Chittoor, Cuddapah and Kurnool.

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Inspector General of Registration.

26

Azur (Iranian calendar) is a month of 30 days. It starts around 21st November.
Two-thirds of members present at the meeting
28
These two sections apply only to the societies financed mainly by State Government (Sec. 16).
27

164

Alteration
You can alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
File it every year within 14 days of annual general meeting. If general meetings are not held, file this in the month of January with the Inspector General of Registration (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members29 have to vote for dissolution of the society at a special meeting. Government’s consent is also required if the government is a member or a contributor or interested in the society (Sec. 13).
The Government can issue an order to merge two societies or divide or dissolve the society
(Sec. 23, 2430). However, in all the cases, the Government has to write to the society. In case of merger or division, the Government has to write about the proposal. In case of dissolution, the Government has to issue an order giving reasons for dissolving it.
In both the cases, the Government should also consider any arguments by the society against the proposed order within a reasonable time.

Disposal of Property upon dissolution
A society’s property cannot be distributed among its members. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
Any one can see the documents of the society on payment of Re.1. Copies can be taken and also can be certified by Inspector General of Registration (Sec. 19).

Arunachal Pradesh
[Societies Registration Act, 1860]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Joint Stock Companies31.

Alteration
You can alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings (at interval of one month).
29
30
31

60% of the total members and not just 60% of the members present at the meeting.
These two sections apply only to the societies financed mainly by State Government (Sec. 21).
Location not known to us.

165

Three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
File it every year within 14 days of annual general meeting. If general meetings are not held, file this in the month of January (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members32 have to vote for dissolution33 of the society at a special meeting. Government’s consent is also required if it is a member or a contributor or interested in the society (Sec. 13).

Disposal of Property upon dissolution
A society’s property cannot be distributed among its members. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14). However, this clause will not apply to any
Society, which has been established by the contributions of shareholders in the nature of a Joint
Stock Company.

Others
Any one can see the documents of the society on payment of Re.1. Copies can be taken and also can be certified by Registrar of Joint Stock Companies (Sec. 19).

Assam
[Societies Registration Act, 1860 as amended by State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec. 3) along with a fee of Rs.50/-. All documents to be filed with Registrar of Societies at Guwahati.
Name should not be similar to another Society. Name should not include words like Union, State, Land Mortgage, Gandhi,
Reserve Bank, etc. These words can be used only if the
State Government agrees in writing (Sec. 3A).

Alteration
You can alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12).
Society can also change its name with consent of two-thirds of its members (Sec. 12A). Seven members, including secretary, should sign notice of change. This notice should be sent to
Registrar. The change becomes effective on approval by the Registrar (Sec. 12B). The change in name will not affect any rights or obligations of the society. It will also not affect any legal proceedings by or against the society (Sec. 12C).

32

60% of the total members and not just 60% of the members present at the meeting
Special provisions apply to societies funded mainly by the State Government (Sec. 21). These give the state Government power to dissolve such societies (Sec. 23) and also to divide or merge these (Sec.
24).
33

166

List of Governing Body Members
File it every year within 14 days of annual general meeting. If general meetings are not held, file this in the month of January (Sec. 4). A list showing changes in Governing Body during the year should also be filed. Also file a corrected and certified34 copy of rules of the Society (Sec.
4A).
Any change in rules of the society should be filed within fifteen days of the change. This should also be certified by at least three governing body members (Sec. 4A).

Accounts
Books of accounts should be kept at registered office (Sec. 5A). Accounts should be audited every year. The auditors should certify three copies of balance sheet and auditors’ report (Sec.
5A). Also Report on exact state of financial affairs [Sec. 5A(2)].
Audited Balance Sheet and auditors’ report should be filed within thirty days of the annual general meeting (Sec. 4B).

Dissolution
At least three-fifths (60%) of the general body members35 have to vote for dissolution of the society at a meeting. Government’s consent is a must if it is a member or a contributor or interested in the society (Sec 13).

Disposal of Property upon dissolution
After dissolution, members will not receive any profits from the society. However, three-fifths of the members can decide to give the property left after settlement of all debts and liabilities to another society36 (Sec. 14).

Others
Any one can see the documents of the society on payment of Re.1. Copies (certified by
Registrar of Societies) can also be taken (Sec. 19).

Bihar
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.10/- (Sec. 3).
All documents to be filed with the
Inspector General of Registration,
Patna.
The Inspector General will issue a certificate of registration in Form ‘A’.
He / she will also send a certificate of acknowledgement in Form ‘B’ by post (rule 6).

34

By three members of the Governing body
60% of the total members and not just 60% of the members present at the meeting
36
The other Society can even be an unregistered society.
35

167

Alteration
You can alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12).
Society can also change its name with consent of three-fifths of its members (Sec. 12A). Seven members, including secretary, should sign notice of change. This notice should be sent to
Registrar. The change becomes effective when approved by the Registrar (Sec. 12B).

List of Governing Body Members
File it every year within 14 days of annual general meeting. If general meetings are not held, file this in the month of January (Sec. 4). A list showing changes in Governing Body during the year should also be filed. Also file a corrected and certified37 copy of rules of the Society (Sec.
4A).
Any change in rules of the society should be intimated within 15 days of the change. This should also be certified by at least three governing body members (Sec. 4A).

Accounts
Audited figures of Receipts and Expenditure for each financial year should be approved in a general meeting of the society. This should be filed within three months of end of the year. An activity report should also be filed along with this (rule 10).
Every society should also file a quarterly ‘Return on employment and employee compensation’ in Form - H. The return should be filed within fifteen days of end of each quarter38 (rule 11).

Dissolution
At least three-fifths (60%) of the general body members39 have to vote for dissolution of the society at a special meeting. Government’s consent is also required if it is a member or a contributor or interested in the society (Sec. 13).

Disposal of Property upon dissolution
After dissolution majority of members can decide to give the property (left after settlement of all debts and liabilities) to the Government (Sec. 14-A).

Cancellation
Inspector General of Registration can cancel the registration of a society. This can be done if the society moves its office to another state or its activities are against its own objects (Sec.
23).

Others
Any one can see the documents of the society on payment of Re.1. Copies can also be taken
(Sec. 19, rules 15 to 18).

37
38
39
40

By three members of the Governing body
Quarters ending March, June, September, December
60% of the total members and not just 60% of the members present at the meeting
The Registrar’s office is situated at Kashmiri Gate, behind Ritz cinema hall, Delhi.

168

Delhi
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/(Sec. 3). All documents to be filed with the Registrar40 of Societies.

Alteration
You can alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12). The change of name will become effective only when approved by the
Registrar (Sec. 12A). This change will not affect any rights or obligations of the society. It will also not affect any legal proceedings by or against the society
(Sec. 12B).

List of Governing Body Members
File this every year within 14 days of annual general meeting. If general meetings are not held, file it in the month of January (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members41 have to vote for dissolution of the society at a special meeting. Government’s consent is also required if it is a member or a contributor or interested in the society (Sec. 13).

Disposal of Property upon dissolution
A society’s property cannot be distributed among its members. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
Any one can see the documents of the society on payment of Re.1. Copies can be taken and also can be certified by Registrar of Societies (Sec. 19).

41
42
43

60% of the total members and not just 60% of the members present at the meeting.
Requirements of Bombay Public Trusts Act, 1950 also apply in addition to these.
Please confirm jurisdiction for your district / region.

169

Gujarat42
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Societies or
Assistant Registrar of Societies at
Ahmedabad, Nadiad or other regional centers43. Name should not be similar to another Society.
It should not suggest that the Government is involved with the Society (Sec. 3A).

Alteration
You can alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12).
Change of name becomes effective only when approved by the Registrar of Societies (Sec. 12A).
It does not affect any rights or obligations of the society. It also does not affect any legal proceedings by or against the society (Sec. 12B).

List of Governing Body Members
File it every year within 14 days of annual general meeting. If general meetings are not held, file this in January (Sec. 4). A list showing changes in Governing Body during the year should also be filed. If there is any change in the rules, a corrected and certified44 copy of rules of the society should also be filed (Sec. 4A). This should be done within 30 days of the change.
The Registrar can ask for additional information regarding persons employed, their emoluments, any contributions, concessions or other benefits and amenities provided for employees by the society [Sec. 4B(1)]. However, no such information can be published (or shown to others) without the previous written consent of the society [Sec. 4B (4)].

Accounts
The society should keep proper accounts. These should be closed on 31st March each year.
These should also be audited each year (Sec. 12D).
The auditor should prepare45 and send a copy of the Income and Expenditure Account and
Balance Sheet to the Registrar. He / she should report any irregularity46. The auditors should say whether this was due to breach of trust, misappropriation or misconduct of governing body or any other person (Sec. 12E).

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). However, Government’s consent is required for dissolving
44

Certification by three members of the Governing body.
Normally, accounts are not prepared by Auditors. However, the Act uses the word ‘prepare’ in this connection. 46
Defined as irregular, illegal or improper expenditure, failure to recover money or property.
47
Except documents with confidential information.
48
Location not known to us.
45

170

the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members. Further, after dissolution, the members cannot give away the property to another society. However, the majority of members present at the time of dissolution can give the property left after settlement of all debts and liabilities to the Government. The Government can utilise the property for any of the purposes mentioned in section 1 of the Act (Sec. 14 as amended by State Act).

Others
All documents47 of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar of Societies (Sec. 19).

Goa, Daman and Diu
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Inspector General of Registration48.

Alteration
You can alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 12).
Change of name becomes effective only when approved by the Inspector General of Registration
(Sec. 12A). It does not affect any rights or obligations of the society. It also does not affect any legal proceedings by or against the society (Sec. 12B).

List of Governing Body Members
You should file this every year within 14 days of annual general meeting. If general meetings are not held, file this in the month of January (Sec. 4).
The Inspector General can ask for additional information49 about employees, including their salary etc. (Sec. 4A).

Accounts
The society should keep proper accounts. These should be closed on 31st March each year.
These should also be audited each year (Sec. 12C).
The auditor should send a copy of the audit report to the Inspector General. He / she should report any irregularity50. The auditors should say whether this was due to breach of trust, misappropriation or misconduct of governing body or any other person (Sec. 12D).

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.
49

This information cannot be published without the Society’s consent. The Inspector General can even be fined (Sec. 11B) for improper disclosure of this information!
50
Defined as irregular, illegal or improper expenditure, failure to recover money or property.

171

Disposal of property upon dissolution
A society’s property cannot be distributed among its members. Further, after dissolution, the members cannot give away the property to another society. However, the majority of members present at the time of dissolution can give the property (left after settlement of all debts and liabilities) to the Government. The Government can utilise the property for any of the purposes mentioned in section 1-A of the Act (Sec. 14-A as introduced by the State).

Others
All documents51 of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Inspector General of Registration (Sec. 19).

Haryana
[Societies Registration Act, 1860. No state amendments]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec.
3). All documents to be filed with the Registrar of Joint Stock Companies.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings52 and three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members53. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).
51

Except documents with confidential information.
At an interval of one month
53
This clause will not apply to any society, which has been established by the contributions of shareholders in the nature of a Joint Stock Company.
52

172

Himachal Pradesh
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec 3). Fee of Rs.50 is to be paid for registration. However, the state government may exempt54 any particular society from the payment of registration fee. All documents to be filed with the Registrar of Societies in Solan District or Chamba District55.

Alteration
You are allowed to alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings56 and three-fifths of the members have to approve the change (Sec. 12).
Change of name becomes effective only when approved by the Registrar of Societies and the registrar issues a certificate with altered name. The Registrar can also direct a society to change its name. In such a case, the society has to change its name within a period of three months from the date of direction (Sec. 12A).

List of Governing Body Members
You should file this every year within fourteen days of annual general meeting. This should be filed in January, if general meetings are not held (Sec. 4). If a society fails to file this list, it is liable to a fine of Rs.5057.

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members. However, three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society.

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).
54

By notification in Official Gazette
The Registrar’s office may also exist in other districts.
56
At an interval of one month
57
As per amendment to Section 4 added by Punjab Act No. VI of 1949
55

173

Jammu & Kashmir
[Jammu and Kashmir Societies Registration Act, 1998 Vikram Samwat58]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec. 4). All documents to be filed with the Registrar of
Societies59.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings60 and three-fifths of the members have to approve the change (Sec. 10).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. If general meetings are not held, filing should be done in the month of Kartik61 (Sec. 5).

Accounts
No specific provisions

Dissolution
Three-fifths of the members or more may decide in a general meeting to dissolve the society
(Sec. 11). Government’s consent is a must, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
After dissolution, the members cannot receive any profits from the society. However, three-fifths of the members can decide to give the property (left after settlement of all debts and liabilities) either to another society or to the State Government (Sec. 12).

Others
All documents of the society are open to public for inspection on payment of fifty paise per hour of such inspection or a maximum of Re.1 for each inspection. Copies can be taken and can also be certified by the Registrar (Sec. 17).

Karnataka
[Karnataka Societies Registration Act, 196062]

Registration
By filing application for registration as given in schedule A [rule 3(1)] along with Memorandum of Association and certified copy of Rules and

58

Equivalent to 1941 C.E./A.D.
Location not known to us.
60
At an interval of one month
61
Eight months of the Indian calendar, around October - November.
62
Originally called Mysore Societies Registration Act, 1960
59

174

Regulations (Sec. 8). A copy of the relevant extracts from the minutes of the general meeting63
(at which the registration was resolved) should also be given with the memorandum.
All documents to be filed with the Registrar of Societies at Raichur, Bellary or Shimoga District64 with a fee of Rs.100.
Registrar will issue a certificate as prescribed in schedule B [rule 3(5)] on registering the society. If the registrar refuses65 to register a society, you can appeal to the Karnataka Appellate Tribunal within 60 days of the refusal.

Alteration
You are allowed to alter the objects of the society or change its name. For this, you have to convene a special general body meeting. A written notice of this meeting should be delivered to the members of the society 21 days before the meeting. Three-fourths (75%) of the members have to approve the change (Sec. 10).
Every change has to be filed with the Registrar within 30 days from its making.
The change will become effective only when approved by the Registrar of Societies [Sec. 10(2)].
If the registrar does not approve the change, you can appeal to Karnataka Appellate Tribunal within sixty days from the date of refusal to register amendment [Sec. 10(3)].
You can also amalgamate the society with another society either wholly or partly. For this, you have to convene two special general meetings66. A written notice of this meeting should be delivered to the members of the society 21 days before the first meeting. Three-fourths (75%) of the members have to approve the change at both the meetings (Sec. 21).

Annual General Meeting
A society registered under this act has to hold general meetings every year [Sec. 11(1)]. First annual general meeting is to be held within 18 months of registration. Subsequent meetings should be held within nine months of the end of the year [Sec. 11(2)].

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting (Sec. 13).

Accounts
The society should keep books of accounts at the registered office or at any other place67.
These books of accounts should include Income and Expenditure Account, Balance Sheet, and books of sale and purchase of goods by the society (Sec. 12).
File a copy of audited Balance Sheet and Income and Expenditure Account to the Registrar of
Societies along with list of governing body members.
Fee of Rs.100 is to be paid for every one lakh68 rupees of the total amounts of Income and
Expenditure or part thereof for filing69 (Sec. 13).

63

Of the unregistered society
Please confirm jurisdiction for your district.
65
Refusal is communicated by registered post [rule 3(4)]
66
At an interval of 30 days
67
Which the governing body thinks fit
68
Notification No. RD141MUNOMU 2002(I) dated 30.3.2002 (Karnataka Societies Registration
(Amendment) Rules, 2002
69
For example, if income is Rs.1 lakh, fee will be Rs.100; if it is Rs.3 lakhs, fee will be Rs.300. If it is
Rs.3.2 lakhs, fee will be Rs.400.
64

175

Enquiry by the Registrar
If one-third of the members of the society apply to the Registrar for holding an enquiry70, then the Registrar must hold the enquiry. The Registrar can initiate such an enquiry on his own also
(Sec. 25).
During the enquiry, the Registrar71 shall have free access to the books of accounts, documents, securities, cash and other properties belonging to the society. He can summon any person72 to produce relevant documents. He can also examine such a person under oath.

Dissolution
Three-fourths of the members or more may decide in a special general meeting to dissolve the society (Sec. 22). However, Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
After dissolution members will not receive any profits from the society. Three-fifths of the members can decide to give the property (left after settlement of all debts and liabilities) to another society. In case of default, the principal civil court73 can decide to give the property to any other society [Sec. 23 (1)].
Majority of members can also decide to give the property of the society to the state Government at the time of dissolution [Sec. 23(2)].

Others
All documents of the society are open to public for inspection on payment of fee of Rs.25.
Copies can be taken and can also be certified by the Registrar on payment of Rs.5 for every hundred words (Sec. 24).

Kerala
In the state of Kerala, two Acts are applicable:
1. Malabar Region: Societies Registration Act, 1860 as amended74 by the Madras Act No.
24 of 1954.
2. Rest of the state: The Travancore-Cochin Literary, Scientific and Charitable Societies
Registration Act, 195575.

Malabar Region
[Societies Registration Act, 1860 as amended by Madras Act No. 24 of 1954]
Malabar Region includes six districts of present Kerala state. These are Kasaragod, Kannur,
Wayanad, Kozhikode, Malappuram, and Palakkad.

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec. 3). All

70

Into the constitution, working and financial condition of a registered Society
Or the inspecting officer authorised by the registrar
72
Responsible for custody of books of accounts, documents, etc. of the Society
73
Of original jurisdiction of the district
74
Malabar Region was a part of Madras Presidency under the British Occupation. Later it was merged with the present state of Kerala hence the Act has been amended by the Madras Act.
75
w.e.f. 20th Aug, 1955 vide Notification No. Em. 8-4032/55/EHL
71

176

documents to be filed with the Inspector General of Registration76.

Alteration
You are allowed to alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings77 and three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).

Accounts
No specific provisions.

Dissolution
Three-fifths of the members or more may decide in a general meeting to dissolve the society
(Sec. 13). The Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members. However, three-fifths of the members present at the time of dissolution can give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1.
Copies can be taken and also can be certified by Inspector General of Registration (Sec.
19).

Rest of the State of Kerala
[The Travancore-Cochin Literary, Scientific and Charitable Societies Registration Act,
1955]
The remaining districts i.e. Thrissur,
Eranakulamm, Idukki, Kottayam, Alappuzha,
Pathanamititta,
Kollam and Thiruvananthapuram are covered under the
Travancore Act.

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations (Sec.
3). All documents to be filed with the Registrar of Societies along with a fee of Rs.100.

76
77

Locations not known to us.
At an interval of one month

177

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings78 and three-fifths of the members have to approve the change (Sec. 18).
For any change to memorandum or rules and regulations of a society, a resolution has to be passed at a general meeting. A certified79 copy of such resolution effecting the amendment has to be filed with the Registrar within 14 days of the meeting (Sec. 22). There is no special provision for change of name under the Act.

Annual General Meeting
The governing body of the society should hold the first general meeting of the society within 18 months from the date of registration. After that, the general meeting should be held in every calendar year within 15 months of the previous meeting [Sec. 7(1)].

List of Governing Body Members
The society should have a minimum of three persons in the governing body. The list is to be filed every year within fourteen days of annual general meeting [Sec. 7(3)].

Accounts
The governing body of the society has to maintain proper books of accounts (Sec. 12).
An audited Balance Sheet and Income and Expenditure Account signed by at least three members of the governing body should be filed every year with the registrar within 21 days of the general meeting (Sec. 13).
The state government has power to call upon the governing body to periodically submit Balance
Sheet and Income and Expenditure Account of the society.
The registrar80 can examine the book of the society periodically, and submit a report (of the inspection) to the government. It is the duty of the governing body81 to assist the inspecting officer [Sec. 19(1)].
Such Inspecting Officer can enter the premises of the society. He can also search any other place and may seize the account books or documents82 [Sec. 19(2)].
The State Government can pass any order that it deems fit after reviewing the report [Sec.
19(3)].

Dissolution
Three-fourths of the members or more may decide in a general meeting to dissolve the society
(Sec. 23). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society (Sec. 23).
Alternatively, 10% of members on the rolls of a society can apply to the District Court83 for dissolution of the society (Sec. 25). The State Government can also make this application to the District Court. However, it can neither dissolve a society on its own, nor can it take over a society.

78

At an interval of one month
Certified to be a correct copy by at least three members of the governing body.
80
Or any other officer authorised by the State Government
81
Or servants of the society
82
If he feels that the books and documents of the society are withheld without sufficient excuse
83
Where the society is registered
79

178

Disposal of property upon dissolution
A society’s property cannot be distributed among its members. However, three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) either to the State Government84 or to another society with similar objects (Sec. 24).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by the Registrar (Sec. 31).

Madhya Pradesh
[Madhya Pradesh Society Registrikaran Adhiniyam, 1973]

Registration
By filing Memorandum of Association (in Form
– I) and certified copy of Rules and Regulations along with a fee of Rs.1,000 (Sec. 7). The rules and regulations should be certified by at least three of the members of the governing body. All documents to be filed with the
Registrar of Societies, at Gwalior or Bhopal85.
A certificate of registration is issued by the
Registrar in Form – II (rule 6).

Alteration
You can alter the objects of the society or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of the members have to approve the change (Sec. 15).
You can also change the name of your society with the consent of at least two-thirds of the total members by a resolution at a general meeting (Sec. 12). A copy of this resolution should be sent to the Registrar. The change of name becomes effective when the Registrar issues a certificate in Form – V (rule 9) with necessary alterations (Sec. 13).
If the members wish to make any amendment to the memorandum or regulations or bylaws, they have to forward a proposal to the Registrar with a maximum fee of Rs.200. If the Registrar is satisfied that the proposal is not contrary to the Act, he can register the amendment (Sec.
10).
If the Registrar feels that an amendment of the memorandum or regulations or bylaws of a society is desirable in the interest of the society, he can order the society to make such an amendment (Sec. 11). If society does not make the amendment, the Registrar can make the amendment to the memorandum and bylaws on his own. He / she can then send a certified copy to the society. All such amendments are binding on the society.

List of Governing Body Members
File this every year within 45 days of annual general meeting. If general meetings are not held, file it within 45 days from 31st January along with a maximum fee of Rs.200 (Sec. 27).

84
85

On such terms as may be mutually agreed upon
Other locations not known to us.

179

Accounts
Audited statement of Income and Expenditure Account86 for each financial year should be sent to the Registrar within 90 days of AGM87 (Sec. 28) along with a fee of Rs.200. If the registrar finds it necessary he/ she might undertake a special audit. The Registrar can also send a person to inspect all the account books or other papers of any society.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a general meeting convened for this. Government’s consent is also required, if it is a member or a contributor or interested in the society [Sec. 34(1)].
If the Registrar thinks that a society has become defunct, he can cancel the registration of the society. This is done after issuing a show-cause notice to the society [Sec. 34 (2)].
If registration is cancelled by the Registrar, then the society shall be deemed to have been dissolved [Sec. 34(3)].

Disposal of property upon dissolution
At the time of dissolution, any property of the society shall not be given to the members of the society. However, three-fifths of members can decide to give such property (left after satisfaction of all debts and liabilities) to any other society or to the Government (Sec. 35 and 36).

Others
Documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar of Societies (Sec. 29).

Maharashtra87A
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and
Regulations (Sec. 3). All documents to be filed with the Registrar of
Societies88.
Name should not be similar to another Society. It should not suggest that the Government is involved with the Society (Sec. 3A).
Registration fee89 has to be paid in cash. Any society running an educational institution in an area in which the Central Provinces and
Berar Vidya Mandir Act, 1939 is applicable, need not pay any registration fee (state amendment to Sec. 3).

Alteration
You can alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings (at interval of one month). Three-fifths of

86

Along with Audit Report, Balance Sheet and details of all financial activities.
Or from 30th day of April
87A
Requirements of Bombay Public Trusts Act, 1950 also apply in addition to these.
88
At Greater Mumbai, Pune, Solapur, Kolhapur, Sangli, Satara, Ratnagiri, Thane, Nashik, Ahmednagar,
Jalgaon, Dhule, Aurangabad, Parbhani, Latur, Nagpur, Amravati, Chandrapur or Akola. The state government can also appoint ‘Assistant Registrar of Societies’ in some areas, who can exercise the powers of a Registrar (as per amendment to Sec. 1).
89
As fixed by state Government from time to time
87

180

the members have to approve the change (Sec. 12). The change of name will become effective only when approved by the Registrar of Societies and the Registrar issues a certificate with altered name (Sec. 12A).
The Registrar can also direct the society to change its name. In such a case, society has to change its name within a period of three months from the date of direction (Sec. 12A).

List of Governing Body Members
File this every year within 14 days of annual general meeting. If general meetings are not held, file it in the month of January (Sec. 4). This list is to be given as per the Form given in Schedule
I (rule 7).
The Registrar can ask for additional information regarding persons employed, their emoluments, any contributions, concessions or other benefits and amenities provided for employees by the
Society (Sec. 4A).
This information has to be sent by registered post as per the Form given in Schedule II (rule
8). No person, except the Registrar, can see the information provided by the society under section 4A. This information cannot be published without prior written consent of the society.

Accounts
The society should keep proper accounts. These should be closed on 31st March each year.
These should also be audited each year (Sec. 12D).
The governing body should get the accounts audited within 6 months of the date of balancing the accounts [Sec. 12D(3)].
The auditor should prepare the Income and Expenditure Account and Balance Sheet in the form given in Schedule III and IV [rule 11(2)]. These, along with the audit report, should be forwarded to the Registrar within a fortnight of the completion of the audit.
He/ she should report any irregularity90. The auditor should say whether this was due to breach of trust, misappropriation or misconduct of governing body or any other person (Sec. 12E).

Dissolution
Three-fifths of the members or more may decide in a general meeting to dissolve the society.
Government’s consent is a must, if it is a member or a contributor or interested in the society
(Sec. 13).

Disposal of property upon dissolution
After dissolution members will not receive any profits from the society. However, three-fifths of the members can decide to give the property (left after settlement of all debts and liabilities) either to another society or to the State Government (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar of Societies (Sec. 19).

90

Defined as irregular, illegal or improper expenditure, failure to recover money or property.

181

Manipur
[Manipur Societies Registration Act, 1989]
Text of the Act is not available.

Meghalaya
[Meghalaya Societies Registration Act,
198391]

Registration
By filing Memorandum of Association and copy of Rules and Regulations with the
Registrar of Societies for Meghalaya along with a fee of Rs.100 (Sec. 4). The Registrar has the right to refuse registration. In case of refusal, an appeal can be made to the
State Government. The decision of the State
Government on such appeal will be final (Sec. 5).

Alteration
Society can alter the memorandum and regulations with the prior permission of the Registrar in writing. The alteration should then be approved by at least three-fourths of its members
(Sec. 8). A copy of every alteration of memorandum and the regulations should be filed with the Registrar within 30 days of such alteration. The Registrar can raise objection on any such alteration (Sec. 9).
If two societies wish to amalgamate, the governing body of each society should submit the proposal in writing to the Registrar. After the proposal has been approved by the Registrar, it should be passed by at least three-fourths of the members of each Society. For this, two general meetings have to be held (Sec. 12).
The State Government has the authority to direct a Society to change its name92. The
Society has to change the name within three months from the date of the order (Sec. 11).

List of Governing Body Members
This should be filed every year within thirty days after the annual general meeting93. A report on the activities of the society in previous year should be filed along with this. These should be certified by President and Secretary of the society (Sec. 17). The Registrar should be notified regarding any change in the governing body94 within thirty days of the change.

Accounts
Every society should maintain books of accounts at its registered office. The books of accounts should be audited every year. Three copies of Balance Sheet and a financial report95 should be certified by the auditor (Sec. 15). A copy of the Balance Sheet and auditors’ report should be filed with the Registrar within 30 days of the annual general meeting [Sec. 17(1)(c)].

91

Published in the extraordinary Gazette of Meghalaya vide notification No. LL 291/79/36, dated 16tth
December 1983
92
If it feels that the name is identical or too nearly resembles any other existing society
93
Every Society has to hold the AGM at least once in every year.
94
Or in the office of the president or secretary
95
Showing state of financial affairs of the society.

182

Dissolution by Members
Three-fourths of the members or more may decide in a special general meeting to dissolve the society. Such resolution shall be reported to the Registrar who will publish in the Official
Gazette. If there is no objection from any claimant or creditor within three months of such notice, the Society would be dissolved (Sec. 24).
Government’s consent is a must, if it is a member or a contributor or interested in the society.

Dissolution by the Registrar
If the Registrar is of the opinion that the Society is not managing its affairs properly or is not functioning, he can send a show-cause notice to the Society (Sec. 26). If he is not satisfied with the response, he can apply to the court under section 25 for dissolving the society.

Dissolution by Court
The court can dissolve96 a Society in the following cases (Sec. 25):

• If there is any contravention of the Act;
• If number of members falls below seven;
• If the society has ceased to function for more than three years;
• If the society is unable to pay its debts or meet its liabilities; or,
• For any other reason, where it is considered proper that the Society should be dissolved.
Disposal of property upon dissolution
At the time of dissolution, any property (left after satisfaction of all debts and liabilities) of the society shall not be given to the members of the society. It shall be given to another Society to be determined as follows:

• In case of dissolution by members under sec. 24: to be decided by three-fourths of the members. • If members are unable to decide: to be decided by the Registrar (with the approval of the State Government).

• In case of dissolution by court under sec. 25: to be decided by the court.
Others
All documents of a society are open to public for inspection on payment of Rs.5. A certified copy may also be obtained.

Mizoram
[Societies Registration Act, 1860. The state has not made any amendments]

Registration
By filing Memorandum of Association and certified copy of
Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Joint Stock
Companies97.
96
97

Either on the application of the Registrar or on the application of one-tenth of the members
Location not known to us

183

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings98 and three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members99. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Nagaland
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Societies100.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings101 and three-fifths of the members have to approve the change (Sec. 12).
At least two-third of the total members of the Society can change its name by passing a resolution at a general meeting (Sec. 12-A). A notice of change of name, signed by the secretary and by seven members of the society should be given to the Registrar (Sec. 12-B).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4). Along with the list of members, a statement

98

At an interval of one month
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
100
Location not known to us
101
At an interval of one month
99

184

showing changes in the governing body102 is to be sent to the Registrar. A certified103 copy of the rules corrected up to date should also be sent to the Registrar (Sec. 4-A).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a general meeting (Sec. 13). Any matter decided by three-fifths of the members present at the meeting will not be a matter of dispute (first proviso to Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members104. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society, whether registered under this Act or not (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Orissa
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Societies105.

Alteration
You are allowed to alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings106 and three-fifths of the members have to approve the change (Sec.
12). A copy of the approved proposal for change of name should be forwarded to the Registrar.
If the Registrar is satisfied with the change of name, he would issue a certificate for the change of name (Sec. 12-A).
A certified107 copy of any alteration in the Rules and Regulations of the Society should also be sent to the Registrar within two months of the alteration [Sec. 4-A(2)].
102

Or any other body (such as council of directors, committee, etc.) to whom the management of the affairs of the society is entrusted.
103
To be certified by at least three members of the governing body
104
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
105
Location not known to us
106
At an interval of one month
107
Certified to be a correct copy by at least three of the Governors, Directors or Members of governing body 185

For merging two or more societies, a proposition regarding the merger should be considered, agreed to and confirmed by all the concerned societies.

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4). It is the duty of the Chairman, the President, or the Secretary108 to file the list of governing body members (Sec. 4-B).
Any change in personnel during the year should also be intimated to the Registrar within two months of the change [Sec. 4-A(1)].

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society.
However, the Government cannot dissolve a society on its own, neither can it take over the society. Disposal of property upon dissolution
A society’s property cannot be distributed among its members109. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and can also be certified by the Registrar (Sec. 19).

Pondicherry
[Societies Registration Act, 1860 as amended by Pondicherry Act]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Companies110.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings111 and three-fifths of the members have to approve the change (Sec. 12).
Three-fifths of the members of any Society can pass a resolution to changes its name (Sec.
12-A). A copy of the agreed proposition for change of name should be forwarded to the Registrar.
If the Registrar is satisfied with the change of name, he would issue a certificate for the change of name (Sec. 12-B).

108

Or any other person authorised to do so
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
110
Location not known to us
111
At an interval of one month
109

186

A certified copy of every alteration made in the rules and regulations of the Society is also to be filed with the Registrar within fifteen days of the such alterations [Sec. 4-A(6)].

List of Governing Body Members
The list to be filed every year within fourteen days of annual general meeting (Sec. 4). All societies have to hold a general meeting every year. In this meeting, a report112 of the management of the institution for the previous year should be submitted for approval of the members [Sec.
4-A(3)].

Accounts
A copy of the audited Balance Sheet with a Statement of Receipts and Expenditure113 should be filed with the Registrar along with the list of members [Sec. 4-A(1)].

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members114. Three-fifths of the members present at the time of dissolution shall decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Punjab
[Societies Registration Act, 1860 as amended by State Act]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/(Sec. 3). All documents to be filed with the Registrar115.
In case of a society registered by the Registrar of
Joint Stock Companies at Lahore116, the State
Government may grant exemption from payment of the whole or any part of the registration fee.

Alteration
You are allowed to alter the objects of the society, change its name or merge with another society. For this, you have to convene two general body meetings117 and three-fifths of the members have to approve the change (Sec. 12).
112

Along with the audited copy of the Balance Sheet, Receipts and Expenditure Statement and the auditor’s report
113
Certified by at least two members of the governing body
114
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
115
To be appointed by the State Government, by notification in the official Gazette
116
In undivided India prior to 15th Aug 1947
117
At an interval of one month

187

A copy of the agreed proposition for change of name should be forwarded to the Registrar. If the Registrar is satisfied with the change of name, he would issue a certificate for the change of name (Sec. 12-A).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members118. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Rajasthan
[Rajasthan Societies Registration Act, 1958]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of
Societies.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two special general body meetings119 and two-thirds of the members have to approve the change
(Sec. 12).
You can also change the name of the society with the consent of at least two-thirds of its members by a resolution passed at special general meeting (Sec. 12-A). Every change in name should be sent120 to the Registrar within 15 days of the passing of the resolution (Sec. 12-B).

118

This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
119
At an interval of one month
120
signed by the secretary and seven members of the society

188

A copy of the alteration made in the Rules and Regulations of the society should also be sent to the Registrar within 15 days of the making of such alteration (Sec. 4-A).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4). A statement showing changes in the governing body121 should be sent to the Registrar along with the above list (Sec. 4-A).

Accounts
No specific provisions.

Dissolution
At least two-thirds of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members122. Two-thirds of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society or to the State Government (Sec. 14 and 14-A).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Sikkim
[Societies Registration Act, 1860. Not amended by the State]

Registration
By filing Memorandum of
Association and certified copy of
Rules
and
Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Joint Stock
Companies123.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings124 and three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).
121

Called by any other name such as council of governors, directors, trustees, etc.
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
123
Location not known to us
124
At an interval of one month
122

189

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members125. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Tamil Nadu
[Tamil Nadu Societies Registration Act, 1975]

Registration
Registration is compulsory for societies which:

• have 20 or more members; or,
• whose annual gross income or expenditure is Rs.10,000 or more. Registration is optional for societies formed for promoting religion, athletics or sports.
Other societies, which do not meet above requirements, can be registered optionally, provided they have at least seven members
(Sec. 5).
For registration, societies have to file Form - I, Memorandum of Association, and certified copy of Rules and Regulations. Filing fee is Rs.100 (Sec. 6). A copy of the Register of Members should also be filed [rule 17(1)]. All documents to be filed with the Registrar of the District.
On registration, the Registrar issues a certificate in Form - II (Sec. 10, rule 8). If the Registrar cannot register a society, then the reasons must be disclosed to the society in writing (rule 11).

Alteration
You are allowed to change the name of a society, after passing a special resolution. An application should then be made to the registrar, along with the reasons for the change. A society also must change its name if it is similar to the name of another existing society. When a registered society changes its name, the registrar enters new name and issue a fresh certificate with necessary alteration (Sec. 11, rule 12).

125

This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.

190

List of Governing Body Members
Every society should have a committee126 to manage its affairs. Committee’s term should not be more than three years127. Any change in the committee should be intimated to the Registrar within three months in Form – VII [Sec. 15, rule 17(2)].

Accounts
Every society must maintain a cash book128, receipt book, vouchers129 file, ledgers, and a monthly register of receipts and disbursement (rule 18). Entries in the accounts must be made promptly (rule 19).
Accounts must be audited by a qualified Chartered Accountant. However, for smaller societies130, the accounts can be audited by two or more members appointed by the society.
A copy of Receipts and Expenditure Account, Balance Sheet, and Audit Report should be filed along with the list of general body members every year. Along with these a declaration should be filed that the society has been in operation during the financial year.

Dissolution
A society can be amalgamated with another society or it can be divided in to two or more societies. For this, a special resolution and approval of the Registrar is required (Sec. 30).
Dissolution can be done by the society or by the Registrar. If a society decides to dissolve itself, a special resolution is required (Sec. 41). Government’s consent is also required if it is a member, contributor or interested in the society.
The Registrar can also cancel131 the registration and dissolve the society in the following cases
(Sec. 36, 37, 38, 39, 41, 44):
1. Contravention of any provision of the Act or Rules
2. The society is insolvent
3. Business is conducted fraudulently
4. Violation of the by-laws or society’s objects
5. For carrying on un-lawful activities
6. Defunct society
7. For not filing annual accounts, etc. for three consecutive financial years.

Disposal of property upon dissolution
A society’s property cannot be distributed among its members132. A special resolution can be passed at the time of dissolution to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 42).

126

With at least three members
Members are eligible for re-appointment
128
To be balanced daily
129
Numbered serially and filed chronologically
130
The Income and Expenditure of each of the previous three years should have been less than
Rs.10,000.
131
After holding an enquiry / giving an opportunity to the society
132
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
127

191

Others
Any change of general body members should be intimated to the Registrar within three months in Form - VII [rule 17(2)]. A list of the names, addresses and occupation of general body members should be filed with the Registrar within six months of annual general meeting [Sec.
16(3), rule 22].
A copy of every special resolution133 should be filed with the Registrar within three months (Sec.
27, rule 26).
All documents of the society filed with the Registrar are open to public for inspection on payment of Rs.10 as fee. A separate application in writing should be made to the Registrar, if copy of any document is required (rule 42).
The society cannot make any payment as honorarium to the president or any other officer of the society for any services [Sec. 25(3)].

Tripura
[Societies Registration Act, 1860 as amended by the State]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.50/- (Sec. 3). All documents to be filed with the Registrar of Society.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings134 and three-fifths of the members have to approve the change (Sec. 12).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4).

Accounts
No specific provisions.

Dissolution
At least three-fifths (60%) of the general body members have to vote for dissolution of the society at a special meeting (Sec. 13). Government’s consent is required for dissolving the society, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

133

Signed by an authorised officer
At an interval of one month
135
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
134

192

Disposal of property upon dissolution
A society’s property cannot be distributed among its members135. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).

Others
All documents of the society are open to public for inspection on payment of Re.1. Copies can be taken and also can be certified by Registrar (Sec. 19).

Uttar Pradesh
[Societies Registration Act, 1860 as amended by The Societies Registration (Uttar Pradesh
Amendment) Act, 2000]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with the particulars of the address of the registered office of the Society and a fee of
Rs.1000/- (Sec. 3). All documents to be filed with the Registrar.

Renewal
The certificate of Registration issued under section 3 is valid for a period of 5 years.
The society can get its certificate renewed for another five years on payment of Rs.200 along with an application to the Registrar within one month of the expiry of the earlier certificate. If this is not done within one year of the expiry of previous certificate, the society shall become an unregistered society. The Registrar may however, allow for renewal in such a case136, on payment of Rs.400.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to convene two general body meetings137 and three-fifths of the members have to approve the change (Sec. 12).
Two-thirds of the total number of members can also change the name of the Society by passing a resolution at a general meeting, with the prior approval of the Registrar in writing (Sec. 12A).

List of Governing Body Members
To be filed every year within fourteen days of annual general meeting. This should be filed in
January, if general meetings are not held (Sec. 4). If the managing body is elected after the last submission of the list, the counter signatures of the old members should be obtained on the list. Along with the above list, a copy of the Memorandum of Association, including any alteration, and Rules138 of the society should be filed with the Registrar.

136

If sufficient cause is shown.
At an interval of one month
138
Corrected up to date and certified by at least three members of the governing body
137

193

Any change in the rules of Society or change of address should be sent139 to the Registrar within
30 days of the change (Sec. 4A).

Accounts
A copy of the Balance Sheet of the preceding year should be filed with the Registrar at the time of filing the list of governing body members [Sec. 4(2)].

Dissolution by Members
Three-fifths of the members or more may decide in a general meeting to dissolve the society
(Sec. 13). Government’s consent is a must, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Dissolution by the Registrar
If any of the grounds listed in section 13-B exists, then the Registrar can send a show cause notice to the society (Sec. 13-A). If he is not satisfied with the response, he can apply to the court under section 13-B for dissolving the society.

Dissolution by Court
The court can also dissolve140 a Society in the following cases (Sec. 13 B):

• If there is any contravention of the Act;
• If number of members falls below seven;
• If the society has ceased to function for more than three years;
• If the society is unable to pay its debts or meet its liabilities; or,
• For any other reason, where it is considered proper that the Society should be dissolved.
Disposal of property upon dissolution
A society’s property cannot be distributed among its members141. Three-fifths of the members present at the time of dissolution can decide to give the property (left after satisfaction of all debts and liabilities) to another society (Sec. 14).
Majority of members can also decide to give the property of the dissolved society remaining after the satisfaction of all the debts and liabilities to the Government (Sec. 14-A).

Others
All documents of the society are open to public for inspection on payment of Rs.50 for each inspection. Copies can be taken and can also be certified by Registrar (Sec. 19).

139

Certified by at least three members of the governing body
Either on the application of the Registrar or on the application of one-tenth of the members
141
This clause does not apply to any society established by the contributions of shareholders in the nature of a Joint Stock Company.
140

194

West Bengal
[The West Bengal Societies Registration Act, 1961]

Registration
By filing Memorandum of Association and certified copy of Rules and Regulations along with a fee of Rs.150/- (Sec. 4). All documents to be filed with the Registrar of Societies142. If the Registrar refuses registration of the Society, an appeal can be made to the State Government.

Alteration
You are allowed to alter the objects of the society, or merge with another society. For this, you have to take prior permission of the Registrar in writing.
Then you should convene two general body meetings. Three-fourths of the members have to approve the change (Sec. 8, 12). Every alteration in the memorandum and the regulations should be filed with the Registrar within thirty days of the alteration (Sec. 9).
State Government may direct change of name of the society, if it thinks that the name is identical with the name of any other society or body corporate already registered (Sec. 11).
Such change has to be incorporated within three months from the date of the order.

List of Governing Body Members
To be filed every year within thirty days of the annual general meeting143 (Sec. 17).
An annual report by the governing body on the working of the society for the pervious year should also be filed. The list and annual report should be certified by the President and the Secretary.
Any change in the governing body members should be notified to the Registrar within thirty days. Accounts
Every Society should maintain proper books of accounts at the registered office. These accounts should be audited once in a year by a qualified Chartered Accountant or a person approved by the Registrar in this behalf (Sec. 15). A copy of Balance Sheet and the auditor’s report should be filed with the Registrar at the time of filing the list of governing body members.

Dissolution by Members
Three-fourths of the members or more may decide in a special general meeting to dissolve the society (Sec. 24). Government’s consent is a must, if it is a member or a contributor or interested in the society. However, the government can neither dissolve a society on its own, nor can it take over the society.

Dissolution by the Registrar
If the Registrar is of the opinion that the Society is not managing its affairs properly or is not functioning, he can send a show cause notice to the Society (Sec. 26). If he is not satisfied with the response, he can apply to the court under section 25 for dissolving the society.

142

Location not known to us
Every Society has to hold an annual general meeting at least once in every year and the time gap between two successive AGMs should not be more than 15 months (Sec. 16).

143

195

Dissolution by Court
The court can also dissolve144 a Society in the following cases (Sec. 25):

• If there is any contravention of the Act;
• If number of members falls below seven;
• If the society has ceased to function for more than three years;
• If the society is unable to pay its debts or meet its liabilities; or,
• For any other reason, where it is considered proper that the Society should be dissolved.
Disposal of property upon dissolution
A society’s property cannot be distributed among its members. Three-fourths of the members present at the time of dissolution can decide to give the property to another society (Sec. 27). In case the dissolution is through the court, then the court can give the property to any other society.

Others
All documents of the society are open to public for inspection on payment of a fee of Rs.2 for the first year and one rupee for each additional year. Copies can be taken and also can be certified by Registrar (Sec. 29).

144

Either on the application of the Registrar or on the application of one-tenth of the members

196

Non-profit Company145
What is a non-profit Company?
A non-profit company is like any other Company. There is only one important difference. It is not supposed to make profits. In other words, it does not exist for commercial gain.

Is it relevant for voluntary work?
Non-profit company has been designed for voluntary work only. It provides all the advantages of a corporate form to a Development Organisation.

What are the advantages?
!

There is one uniform law across the country for companies (Companies Act, 1956). And this is a very robust law, protected by powerful commercial interests. So it is difficult for a state government to take over a company.

!

The corporate form also protects you better from those whisper-quiet internal takeovers that happen in a Trust or a Society.

!

Company form provides voting rights according to number of shares held. This feature allows you to increase membership without worrying about controlling votes.

!

No one else will be able to register a non-profit company anywhere in India with the same name and objectives as yours.

!

The company form is recognised across the world. It is more closely regulated and is more respected as a form of organisation.

Today India is looking wide-eyed at the world. Indian NGOs are testing international waters. In such a situation, the non-profit company may be the logical choice for voluntary work in the third millennium. Going back to basics, what is a Company?
A Company is very much like a society. In fact, both are corporate forms of organisation. A company has members (commonly called ‘shareholders’), a Governing Body (Board of Directors),
Memorandum and Articles.
A Company is different from a firm. Many firms are casually called ‘companies’. For example,
‘Amit and Company’ actually means a firm.
This firm may be a partnership firm or a proprietorship firm. A proprietorship firm is owned by one single person. In a partnership, there are several partners, who share profits.
A real Company will always have the word ‘Limited’ at the end of the name. Normally it is written as ‘Ltd.’. This means that the liability of its members is limited.

So we will be called ‘Lok Jagran Manch Limited’? That sounds funny…
Yes, it does. Therefore, non-profit companies enjoy a special facility. They are allowed to drop the word ‘Limited’ (or ‘Private Limited’) from their name.
So you can still call yourself as ‘Lok Jagran Manch’.

145

Based on AccountAble 48: Non-profit Company

197

Do we need to renew the registration after few years?
No. If you keep filing the annual returns etc., no renewal is ever required.
On the other hand, society registration has to be renewed every five years in Uttar Pradesh., and each year in West Bengal.

What about the Charity Commissioner?
All public Trusts and Societies in Maharashtra and Gujarat have to be registered with the Charity commissioner.
Apparently, this requirement does not apply to non-profit Companies.

Can a non-profit Company pay salary to its directors?
Yes. They can pay salary to any director or office bearer who is working actively in the company.
This applies across the country, including states like Tamil Nadu (where office bearers of society can not draw remuneration).
The catch is that if any of the directors is also a member (shareholder), then approval of the
Central Government is needed for paying any salary or fees to that director.

Can a non-profit Company get FCRA?
Yes. A non-profit company is treated in exactly the same way as a society, so far as FCRA is concerned.

Is it very difficult to register a non-profit company?
Yes and no. It is probably less difficult than registering a society in some states. The advantage of a company is that you escape the whims and fancies of the Registrar of Societies. But…
You fall into the clutches of Registrar of Companies (ROC). Only saving grace is that at the ROC everything works according to written rules. And your C.A.s know most of the rules.
The real problem is with getting a license under section 25. This is needed so you can drop the word ‘limited’. The license is issued by one of the four Regional Directors and is fairly difficult to get.

Are there many formalities later on?
Some of the formalities have been waived for non-profit companies. Still, the formalities are more than a society. And, most important, the ROC is pretty good at enforcing these formalities.

Who should go for a non-profit Company?
People who want to do things differently but want a rock-solid organisation structure. These people would probably be based in a state capital. They would be willing to invest a little extra time in paper work and reading the rule-book.
They may possibly like to call themselves ‘social entrepreneurs’. They would be thinking of unusual, untested strategies of working and raising funds. They would definitely be interested in taking their work across state boundaries. And they may also be tempted by what lies beyond India’s borders.
If you choose the company form, do it after careful thought. A non-profit company is not for the novice or the faint-hearted!

198

Registration Realities
Registering a non-profit company by yourself can be very frustrating. There are rules within rules. It would be best if you can get a CA firm or a lawyer
(who specialises in companies) to register the company for you. The broad procedure is outlined below:

Choosing a name
ROC is supposed to ensure that two different companies do not get the same name. Therefore, you have to apply for prior-approval of the name. You can suggest four names, using Form 1-A.
This may take a week or two. A fee of Rs.50 has to be paid
[Order u/s 613 dated 22-Dec-62]. For commercial companies the fee is Rs.500.

Memorandum and Articles
You then need to get your Memorandum and Articles approved by the Regional Director and the
ROC. Articles are similar to bylaws.
There are some standard requirements for inclusion in these. There are printers who specialise in this. It is cost-effective to ask the printer whether they have a standard typeset. On the other hand, it is also a good idea to go through the articles carefully. This will help protect your
Company later on from undesirable elements.
The printers normally agree to give you 4-8 copies initially. The ROC invariably asks for some changes in the Memorandum and Articles. The printer will deliver another 100-200 copies later after making these corrections or changes

License under section 25
You have to apply to the Regional Director (Department of Company Affairs) for the above license. This license allows you to drop the word ‘Limited’ or ‘Private Limited’ from your name.
The fee for this application is only Rs.60. There are four Regional Directors, at Mumbai, Kolkata,
Chennai and Kanpur.
You will also have to publish a small notice about your application in two newspapers (English and a regional language).
The Regional Director may ask for reports from the District Magistrate, ROC and the State
Government. However, in normal cases, ROC’s report is sufficient.
Some follow-up and a visit to Regional Director may be required for getting this license. This process may take up to 4-5 months.

Registration with ROC
Make the corrections suggested by the Regional Director and ROC in the Memorandum and
Articles. File these, along with section 25 license and other papers, at the ROC office in your state. The registration procedure varies a little from state to state. However, the registration certificate is normally granted within one month after filing section 25 license.
No stamp duty is required for filing Memorandum and Articles. But you will have to pay registration fees. This depends on your share capital. If your authorised share capital is less than Rs.20,000 then total registration and filing fees will come to about Rs.500. If the capital is five lakhs, then the fees will be around Rs.6,000. If you do not have a share capital, this may range from about Rs.200 to Rs.1,700.
199

ROC Offices
Office of the ROC is in the state capital in all states except the following:
!

At Shillong for Assam, Tripura, Manipur, Nagaland, Arunachal, Mizoram.

!

At Delhi for Delhi and Haryana

!

At Ahmedabad for Dadra and Nagar Haveli

!

At Gwalior for Madhya Pradesh

!

At Cuttack for Orissa

!

At Jullundhur for Punjab, Himachal and Chandigarh

!

At Kanpur for Uttar Pradesh

!

At Cochin for Kerala and for Lakshadweep, Minicoy, Amindivi Islands

!

Additional office in Tamil Nadu at Coimbatore for Districts of Coimbatore, Nilgiri, Periyar and Dharampuri

Costs of registration
Total costs of registering a non-profit company may range between Rs.8,000 to Rs.20,000. The total cost depends upon your share capital, ROC fees, fees of the CA or lawyer, printing, advertisement, and whether you have to travel to Regional Director’s office.

Converting to Company
You can also convert your existing Society to a company. The procedure for this is broadly similar to above.
This may, however, require that you reapply to FCRA for change in your FC registration.

Ambling along
After you are registered, you can start or carry on your work in the normal manner. Just keep the following in mind:

Board Meetings
A Company works through its Board of Directors. This is similar to a society, which works through the managing committee or Governing Body.
Board meetings must be held regularly, normally once each quarter. Proper minutes should be maintained.

Annual General Meetings
The shareholders or members of a company must meet each year. At these meetings, they review annual accounts, elect some of the Directors and also appoint the auditors.
It is compulsory for companies to give copies of audited accounts to members.
Proper notice and minutes of these meetings are required.
Members in a company enjoy much more real power than in a Society. Their rights are also better protected by the Law. A member who cannot attend personally can also vote by proxy.
Members in a Company cannot be removed so easily as in a society.
200

Auditors
Auditors are selected by the Board of Directors but appointed by the members. They also report to members.
Auditors of a society can be removed very easily. Removal is much more difficult in case of a company. This helps ensure independence of auditors.

Annual Returns
If there is any change in directors or office address, the ROC has to be informed. The audited accounts, annual report and an annual return have to be filed compulsorily with the ROC. Some important resolutions also have to be filed.
These requirements are enforced pretty strictly.

Annual Costs
The annual costs of running a company are not much more than in a society from the legal point of view. Only additional costs are for filing fees of documents, which averages between
Rs.100 to Rs.500 each year.
But there are additional costs to be paid to C.A.s or lawyers for their advice and help with paper work. These may average around Rs.5,000 to Rs.15,000 each year.

Daring Disclosures
The key strength of a Company lies in its disclosure requirements. This improves transparency and increases public trust.

Conflict of Interest
All directors and important shareholders have to disclose names of their relatives each year.
They also have to give names of other companies or concerns in which they are directors or shareholders. They can not vote on any contract in which they may be interested. All such contracts are entered in a register.

Disclosure of payments
If directors borrow money from the company, this has to be disclosed in the Balance Sheet.
If the account has been settled within the year itself, still disclosure of maximum amount due is required.
Any other payment to the directors, their relatives, or their firms, has to be disclosed. Similarly, payments to highly paid employees have to be disclosed. All payments to auditors have to be disclosed. Public access
Members of the public can get copies of audited accounts, annual report, Memorandum, etc. from the ROC. However, some portions of a private non-profit Company’s accounts are not open to public.
Audited accounts of a society are also open to public in the same manner. However, in practice, locating accounts of a Society in the Registrar’s office is very difficult.

201

Facts and Figures
How many?
How many non-profit companies are registered in India? The Registrar of Companies does not have clear statistics on this.
By 31st March 2000, a total of 5,53,468 companies had been registered. We do not know how many of these were exempted under section 25. However, we know that at least 20,732 companies of these are classified under ‘Community Social Services’.

What is the minimum number of members required for a non-profit company? Two, if the non-profit is a private company. But if the non-profit is a public
Company, then minimum of seven members are needed.
Both private and public forms are acceptable to the ROC and Regional Director.

202

Section VII: Income Tax
NGOs are not automatically exempt from tax. They have to apply for exemption. Once they receive exemption, they also have to follow certain guidelines so that they can retain the exemption. This section discusses these aspects. Knowing these will help you to make sure that 35% of the grant funds do not go the Government as income tax!
We also discuss another important facility which the Government extends to non-profit organisations: incentive for donors in the form of income tax deduction. Did you know that these donor-incentives costs the Government over a thousand crores in lost taxes? Or that the Indian tax-payers donated about Rs.6,600 crores to charities in financial year 99-00?
The section summarises all the important donor-incentives, and also explains how you can get approval under section 35AC. This allows you to offer 100% tax deductibility to donors, unlike 80G where most donations are eligible only for 50% deductibility.

Income Tax Registration

205

Income Tax Return

207

Key Person Transactions and Income Tax

210

Tax Relief on Donations

214

Raising Funds from Public

219

203

204

Income Tax Registration1
NGOs are exempt from Income Tax. However, this is not automatic. You need to apply to
Income Tax Office to get this exemption.
You can get exemption from tax on society’s income under various sections: here we deal with exemption under section 12A.
This exemption is available for all non-profit NGOs. Unfortunately, many NGOs have not applied for this even after 10-15 years of working. This delay can be forgiven if you apply with sufficient reasons. Necessary forms are given at the end.

What is Income Tax Registration?
Each and every society or trust has to be registered under section 12A [or another similar section such as section 10] of Income Tax Act, 1961. This registration is different from registration under section 80G. After this registration, society does not have to pay Income Tax. If the society is not registered, income tax is payable on surplus during the year.
All grants from donor agencies are treated as income under the Income Tax Act. However, deduction is available for grants earmarked for Corpus by the donor.

How to Apply
Application for registration should be made in form 10-A. Two sets of following documents should also be filed in the office of Income Tax Commissioner:
"

Attested copy of registration certificate issued by Registrar of Societies;

"

Attested copy of Memorandum of Association and Rules and Regulations of the society.
Original copy of these documents is also shown at the time of registration; and,

"

Copy of Final Accounts for last two to three years in case of old society.

Please forgive our Delay...
The society should apply for this registration in the first year. But in case society has not applied so far, then a separate letter (application) for excuse of delay should also be given to Income
Tax Officer or Commissioner [see Form 10A for Income Tax Registration on page 259]. These should be typed on separate sheets for filing with the Department.
Remember, if your society is not registered as above, Income Tax Department can raise a demand for Income Tax at any time. For recovering the tax dues, they can even auction the properties of the society.

Income Tax Return
When you apply for registration, it is granted after some time. In the meanwhile, you should start filing your return. You should file the return for earlier years also. In the column (in Income Tax
Return) where registration/ exemption details are required, you should say ‘Applied For’.

Refusal of Registration
From 1st April 1997, a new section (12AA) has been introduced. Your application for registration now must be decided within six months. However, now the Commissioner also has the power to refuse registration if the Income Tax Department is not satisfied about the genuineness of the
Society.
1

Based on AccountAble 15: Income Tax Registration

205

Conditions of Exemption
To remain exempt from Income Tax, it is necessary that:
!

Society should use most of its income in charity or public welfare work; and,

!

Should get audit report from a Chartered Accountant in form 10-B (if total income is more than Rs.50,000/- in the year).

Every year you should file Society’s Income Tax Return in Form 3-A before 31st August.
However:
!

If your society’s income is more than Rs.50,000/-; or,

!

If your society is registered under Co-operative Society Act; then, the last date for filing the
Return is 31st October.

Raising Donations
If you want to apply for registration under section 80G or 35AC, registration under section 12A
(or other specialised sections) is a pre-condition.

We are not sure...
If you are not sure whether you have applied already for registration, check with your CAs. They may be able to tell you. Also, if you have received 80G registration at any time, you can be sure that you would also have registration under section 12A.

206

Income Tax Return2
NGOs receive donations, grants and may also have some Income Generation activities. This is their income. From this income, they spend money on various activities. At the end of each year, an Income and Expenditure Account is made. This may show a surplus or a deficit. If there is a surplus, should the NGO pay tax? The answer is ‘no’ and ‘yes’.
If an NGO follows the conditions of Income Tax Act, it does not have to pay any tax. This is known as ‘exemption’. NGOs which are not exempt would have to pay tax. This applies to all
NGOs.
An NGO can get exemption from tax by registering under section 12A. From 1st April ’97, the
Commissioner has to decide on an application within 6 months and has the power to refuse registration if he is not satisfied about the genuineness of the Trust / society (Sec. 12AA).

Filing the return
After application for registration under section 12A has been filed, you should start filing the
Income Tax Return immediately. You do not have to wait for actual Registration.

Due date for filing
You do not have to file the income tax return, if your society’s income (without considering exemption under section 10, 11 or 12) is upto Rs.50,000. This means most of the smaller NGOs do not have to file a return.
However, if your society’s income is more than Rs.50,000/-, or it is registered under Co-operative
Society Act, then the last date for filing the Return is 31st October.

Which Form to use
Form III-A should be used for filing the return. This form is available from the Income Tax Office or any stationery shop selling government forms. Your auditors should be able to tell you where the form is available. If you cannot get it anywhere, you can xerox it from the Income Tax Rules.

How to fill up the return
An acknowledgment sheet is attached to the return. The return should be filled in duplicate.
When you deposit the return, one of these will be stamped and returned to you.

The main return has following sections:
Section

Purpose

Basic information

Name, address, registration details, etc.

Part I: Statement of Total

Total income is shown here – expenditure for running the NGO

Income

is claimed as a deduction

Part II: Deductions under chapter VI-A

Mostly inapplicable

Part III: Statement of Taxes

This shows calculation of tax payable – generally this would be nil. Part IV: Exempt Income

Any income totally exempt from tax should be listed here – this does not include normal donations or grants, etc.

2

Based on AccountAble 16: Income Tax Return

207

Section

Purpose

Verification

The Secretary or chief functionary has to sign this.

Annexure A: Profit and Gains

Inapplicable3

Annexure B: Deductions

Inapplicable

Annexure C: Capital Gains

If you have sold any assets for more than the purchase price, details would be given here.

Annexure D: Investments

Details of investments held on 31st March should be given. This

includes funds in a bank account. Part B of this Annexure tries to catch Trusts which are set up by businessmen to avoid tax.
Annexure E: Book Profits

Inapplicable

Annexure F: Particulars of
Trustees, etc.

These details are needed to know whether any amounts have been paid to trustees or their relatives.

Notes to help you fill up the return

Don’t read these – you may find yourself more confused than ever. The above table is meant for general knowledge only. You should not try to fill the return on this basis alone. It would be a good idea to seek your auditors’ advice in filling up the return.

What documents to attach
Make out two complete sets of the following documents (one set for Income Tax office, other for your files):

Assessment
Procedure
After you file your return, it will be sent to the circle or ward which looks after your case. Someone in the Department will go through the return to see that everything is in order. After this an intimation
[under section 143(1)(a)] will be sent to you. This tells you that the return filed by you is broadly acceptable.

Scrutiny
However, the Department will also pick up some cases for detailed scrutiny. These may be
NGOs which have large revenues or cases where problems have been noticed in earlier years.
These NGOs will be issued notice for hearing.
If you receive such a notice, consult your auditors or CAs. They will help you collect all the necessary papers. They will also attend the hearings on your behalf.

3

Unless you are also running an Income Generation Project

208

Assessment Order
After the hearings are completed, the Department will issue an assessment order. In some cases, you may also get a demand notice for paying income tax. If you feel the demand is unjustified, you can file an appeal against it.

Did you know that...
!

Since the beginning of Indian history, the state had relied on land revenue for its expenses.
Income Tax was introduced in India for the first time by the British in 1886.

!

The Indian legislation amended most often, is The Income Tax Act, 1961 – it has been changed 78 times in 34 years.

!

The Income Tax Rules, 1962 have been changed 287 times in 33 years: i.e. once every 42 days! !

Taxation is defined as the process by which money is collected from the people in order to pay the salaries of the people who do the collecting.

209

Key Person Transactions and Income Tax4
NGOs are exempt from paying income tax. This exemption recognises that NGOs do good work. They work for the benefit of the society. Therefore they need not pay income tax.
This is a very valuable and attractive concession. There are many business people and professionals who pay large amounts of income tax. Also, the content of their work is similar to that done by many NGOs.
For example, a doctor may run a clinic for personal income. An NGO may run a similar clinic for needy people. The doctor would have to pay income tax. The NGO will not have to pay taxes.
Most of us do not like to pay taxes. This applies to the doctor also. Is it possible for him / her to run the clinic disguised as an NGO?
Yes and no. This can be done and has been done in the past.

Transactions with key persons
Imagine that this doctor wanted to set up and use an NGO to avoid income tax. The first thing he or she will do is to ensure his or her control over the NGO. This will allow him or her to manipulate the transactions for personal gain.
Income Tax people, therefore, keep a close eye on payments to people who may be in a position to control the NGO. For convenience, we call them ‘Key Persons’.
The tax provisions are designed to catch the wicked. But to catch the wicked, innocent people will also have to be frisked. This causes misery but is probably unavoidable.
How to make sure that we do not end up looking like the wicked?
For this, we need to understand three things:
1. Who may be a key person?
2. What transactions are covered?
3. How use of assets is restricted?

1. Who is a key person?
According to the Act, following persons5 are treated as key persons:
Author of the Trust: the person who set up the Trust initially; also known as settler.
Founder(s) of the society: The persons who signed the Memorandum of the Society are normally known as founders.
Key Donors: Any person whose cumulative6 contribution to the trust or society exceeds
Rs.50,000.
Members of the HUF: If the Trust was set up by an HUF, then all members of the HUF.
Similarly, if the key donor is a HUF, then members of the HUF.
Trustees, Managers: This includes Chief Functionary, Executive Director, Director, Secretary, office bearers.
Close relatives: Any relative of any of the above five categories. ‘Relative’ means7:
4

Based on AccountAble 52: Key person Transactions and Income Tax
Section 13(3)
6
From the start-up of the NGO till end of current financial year.
7
Exact definition is given in explanation 1 to section 13(3)
5

210

"

Spouse (husband / wife)

"

Brother or sister, their children (nephew / niece)

"

Brother-in-law or sister-in-law, their children

"

Any lineal ascendants (parents, grandparents…) or descendants (children, grandchildren…)
– this includes stepchildren and parents-in-law.

Associated Concerns: Any company, business, or firm in which any of the above six categories have a ‘substantial interest’. Substantial interest means that they should be holding at least 20% shares or they should be entitled to at least 20% profits of the business. 2. What type of payments are covered
These payments are listed in section 13(2):
Type of payment

Yardstick

Money or property of NGO is lent to key person

Whether sufficient security has been taken?
Whether enough interest / compensation is being charged? Salary or allowances paid to key person by NGO

Whether these are reasonable8 or high?

Services of NGO provided to key person Whether enough remuneration was charged?

Purchase of property (or shares / investments) from key person

Whether amount paid was too high?

Sale of property (or shares / investments) to key person

Whether amount charged was too low?

Income or property of NGO to key person

Does not apply where the total value of property / diverted income is One thousand rupees or less.

3. Use of assets
Similar restrictions apply on use of NGO’s assets by key persons. Following cases are mentioned in section 13(2):
Nature of use
Land, building or other property of
NGO used by key person

9

Whether enough rent or compensation was charged? Funds of the NGO are invested in person’s concern (business or company)

8

Yardstick

Up to 5% of capital of key person’s concern can be key invested9 ‘Reasonable’ is not defined. Salary in an alternative job can be a benchmark.
But even this may attract disqualification under section 13(1)(d)

211

Penalty
What happens if the Department finds a payment or transaction objectionable? The NGO can lose its income tax exemption under section 11 for the year. This means that it will have to pay income tax.
Remember that section 13 does not prohibit payments to key persons. It comes into play only when these payments may be unreasonably high.
However, the restrictions under these clauses are very complex and open to dispute. It would be better to avoid such payments / transactions, except where clearly necessary or justifiable
(such as salary).
From 1st April 2000, there has been a small relaxation in case of hospitals and schools run by
NGOs. The key persons10 are allowed to use these facilities without affecting the exemption of the NGO.

Audit Report
All NGOs with income11 above Rs.50,000 in a year have to get an audit report for Income Tax.
This report is in form 10B. Parts II and III of the report deal with these questions. The auditor has to report if any of the above things has happened.
This is not an easy task for auditors. The following gems show the conflict between professional expectations and need to keep the client happy:
Question12

Audit Comment

Did the NGO lend any or property to a key person?

A secured loan of Rs.10,00,000 has been given by the Trust money the Trust to the treasurer for ten years. The loan is secured against an equitable mortgage of the Trust office building in
Pune. The rate of interest on this loan is 10% p.a. recoverable at the end of loan tenure along with the principal.

Are key persons
None. The Managing Trustee has also confirmed in writing that using any NGO’s assets the Trust ambulance is not being used everyday for ferrying f o r personal purpose? her children to and from school.
Further, the four- room apartment provided to her is meant for use as office after main office is closed in the evening.
In view of this, question of charging rent or compensation charged does not arise.
Has the NGO paid any
No payment has been made to any such person by way of salary salary or allowance, etc. or allowance. The Managing Trustee is being paid a token honoto a key person? rarium of Rs.3,000 only13.
Whether any services of the NGO have been provided to key persons?

None. As the Trust does not provide gardening services to its beneficiaries, it cannot be said that using the Trust staff to maintain
Chief Functionary’s lawn falls within this clause.

Has the NGO purchased any property / shares or investments from a key person? The trust has purchased 500 square yards of prime quality scrubland at Lonavala from the Secretary at a very low price of
Rs.15,00,000. This is only 50% of the price for a similar piece of land in Vashi.

10

Associated concerns are still not allowed to use these facilities
Income includes grants
12
Reworded in simple English. Check part II of form 10B for exact requirements
13
Per day?
11

212

Question

Audit Comment

Has the NGO sold any property / shares or inve to a key person?

During the year 97-98, the Trust has sold one of its very old vehicles (Tata Safari) as its warranty period had expired. The stments
Trust has already received a post-dated14 cheque for
Rs.4,00,000 as full and final payment.

Was any income or
None, so far appears from explanations given to us. property of the NGO diverted to key persons?
Whether the income or property of the NGO was used for the benefit of key persons in any other way?

None. The Treasurer has also explained that the refrigerator is moved to his house during summers only in view of power cuts in the area where Trust office is situated. The same is moved back to main office during winters when the power situation improves. The unfortunate ones…
Has anyone lost tax exemption due to this? Yes, two examples from Current Tax Reporter are:
! Chandrika Educational Trust, Kerala lost its exemption for assessment years (a.y.) 73-74 and 74-75 because it had invested Rs.5,000 in Chandrika Enterprises. Some of the Trustees and their relatives had substantial interest in Chandrika Enterprises. Incidentally, the auditors had failed to bring this out in the audit report.
!

Agappa Child Centre, Kerala purchased a refrigerator for Rs.5,445. This was kept at the residence of its Managing Trustee at Kottayam. The NGO explained that the refrigerator was kept there for use of its Swedish donors. They also said that the office of the NGO functioned for some time from the Trustee’s residence. Therefore the refrigerator was kept there. Later when the building was completed, the refrigerator was shifted to office. The Department rejected both the arguments. It said that the refrigerator appeared to be purchased for use of the Trustee. Later the Kerala High court confirmed this. As a result, the NGO lost its exemption for a.y. 1980-81.

Precautions…
It seems most NGOs get into trouble due to lack of knowledge. If you don’t want to create legal history, think of the following steps:
!
!

Track contributions of regular donors, especially if they work with you in other ways.

!

Check the register yourself periodically. Does it include all your large donors (above Rs.50,000 in total, till date)? Think about your relatives, associates. Should any of them be listed here?

!

Make sure that your accounts people understand section 13.

!

If you want to pay any person who is associated with the Trust, consult your auditors before you do it.

!

For transactions with key persons, take extra care about paper work. Make sure that the payment / charges are reasonable.

!

14

Start a register of key-persons. The register should be available to your accounts people.

Request your auditors to be tough when they look at section 13 payments. This can serve as an early warning system. Remember: it is easier to face the auditors rather than the Income
Tax department.

Dated 31st December 2005

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Tax Relief on Donations15
Non-profit or charitable organisations (NGOs) do not have to pay income tax on their own income. For getting this advantage, they have to register under section 12A or under section
10(23)(C). Some other conditions also apply.
On the other side, people who donate money to NGOs can also claim some tax deductions.
Why? Because the Government recognises that these organisations perform a useful function.
These deductions are useful for individuals, companies and other tax-paying organisations.
Obviously, these are not relevant for grant-making Agencies, which are exempt from Income Tax.
What are these deductions? We discuss here the law in India.

Donations in kind
Many people donate things other than money. Land is a common example. Other examples are buildings, clothes, used equipment, food items, shares, employee stock options, jewellery, etc.
The donor in India cannot claim any of these as a tax deduction.

Money Donations
But donations of money to NGOs can be claimed as deduction from income. This means that the donor’s total income is reduced. So he or she pays tax on a lower amount. The donor can claim 50% to 125% of the donation. The percentage depends on the approval for the NGO.
Most of the NGOs are approved under section 80G or under 35AC. Apart from these two, there are three other possible sections16. If the NGO is not approved under any of the five sections, you cannot claim a deduction.

Section 80-G
Who can be approved
Almost any NGO can be approved under section 80G(2)(iv). Important conditions for this are:
!

The NGO’s income should be exempt from income tax;

!

Its income and assets are used for charitable purpose only. Also the benefits should not be limited to a religious community or caste17.

!

It should maintain proper accounts.

!

It should be a public trust, registered society or a non-profit company.

!

If the NGO is running some business, then it should keep separate books for the business.
The donations should not be used for the business. Also the NGO should certify both these conditions to the donor.

!

Finally, the Commissioner of Income Tax (CIT) should approve18 the NGO for this purpose.

50% deduction for donor
For NGOs approved under section 80G, donor can claim 50% deduction. What does this mean to the tax-paying donor?
15

Based on AccountAble 61: Tax Relief on Donations
35(1) (iii), 35CCA, 35CCB. Of these, section 35CCA is more or less irrelevant as no new programs are being approved under this section since 1-Mar-1983.
17
This condition does not apply if the community or caste is a scheduled tribe/ caste / backward class or women or children.
18
This condition was introduced in 1992
16

214

Shanta lives in Chennai. She is working in a software design firm and gets a salary of
Rs.20,000 per month. Income Tax on this came to Rs.24,200. Then she remembered she had given Rs.6,000 to an NGO. The
NGO was approved under section 80G. How much benefit will she get? Will her tax be reduced by Rs.3,00019 ?
No. We have to deduct 3,000 from her taxable income. Then we recalculate her tax. Salary income

2,40,000

Various deductions

-80,000

Gross Total income

160,000

Less: deduction under section 80G

-3,000

Net income

1,57,000

Tax on this

23,210

So how much tax did she save on her donation of Rs.6,000? Just Rs.990.

The 10% Limit
Apart from this, there is a restriction on total donations under section 80G20. If you give away more than 10% of your gross income21, the excess is ignored. What does this mean?
Suppose Shanta had given a donation of Rs.25,000 instead of Rs.6,000. How much deduction would she get?
Well, her gross total income is Rs.160,000. And 10% of this comes to Rs.16,000. So her donation would be eligible only up to 16,000. The deduction would be 50% of this 16,000, which comes to Rs.8,000.
How much tax would she save? Tax on balance income would be Rs.21,560. Savings come to
Rs.2,640.

Receipt
For claiming this deduction, the donor needs a receipt. This is issued by the receiving NGO.
The receipt should also give the number and period of CIT’s approval22.

Section 35AC
The main difference between 80G and 35AC is the percentage of deduction. Under 35AC, the donor gets 100% deduction from their income.
Secondly, you can donate upto 100% of your income also. The limitation of 10% for 80G donations does not apply here.

Who can be approved
These extra benefits come with a string attached. The donation must be made for a project, which is approved under section 35AC.
Approval is given only to priority projects. In the case of section 80G approval, there are no priority requirements. In this way, the Government has tried to channelise charity funds into certain directions.
This project is normally run by an NGO. For this, the NGO has to write a project proposal. A budget is also prepared. The application is sent to the National Committee at Delhi.

19

50% of Rs.6000
Some special donations under section 80G (Prime Minister’s Funds, etc.) are not covered by this limit. 21
This means taxable income before allowing deductions under chapter VI-A (sections 80A to 80U)
22
The CIT issues a letter granting approval under section 80G.
20

215

Approval is normally given within six months. A notification is issued. Approval is generally given for 2-3 years at a time.

The 100% deduction
How much does the donor save on taxes? Let’s go back to Shanta’s case. She saved Rs.990 in taxes by giving Rs.6,000. This NGO was approved under section 80G.

Salary income

What if she had donated money to a project approved under section 35AC?

Less: deduction under section 80GGA

Clearly she gets more benefit here.
She would save Rs.1,980 in taxes.

2,40,000

Various deductions

-80,000

Gross Total income

160,000
-6,000

Net income

1,54,000

Tax on this

22,220

35AC or 80GGA?
Both these sections are broadly similar in nature. People who have business or professional income should claim the deduction under section 35AC. People who do not have any such income should claim it under section 80GGA23.

No 10% Limit
The 10% limitation does not apply under 35AC or 80GGA. We saw that more generous donors lose out under section 80G. For example, Shanta’s donation of Rs.25,000 was partially ignored.
She got only Rs.8,000 as a deduction. And she saved just Rs.2,640.
What if the donation had been made to a project approved under section 35AC? She will then claim the deduction under section 80GGA. The deduction will be the entire Rs.25,000. Her taxable income will come down to Rs.135,000. And she will pay a tax of Rs.17,600. Her tax benefit will now amount to Rs.6,600.

Form 58A
For claiming this deduction, the donor needs a certificate. This certificate is in Form 58A. It is issued by the receiving NGO.

Section 35(1)(iii)
If you get 100% deduction under section 35AC, this goes one step further. You get 125% deduction for donations made after 1-April-1999.
Secondly, you can donate up to 100% of your income also. The limitation of 10% for 80G donations does not apply here either.

Who can be approved
The donation must be made to an institution, which is approved under section 3524. The organisation must be doing research in social sciences25. Or it should be doing statistical research. For this approval, the NGO has to apply in form 3CF. The form has to be sent to CBDT26, through your CIT.

23
24
25
26

section 80GGA(2)(bb) section 35(1)(iii)
Psychology, sociology, history, anthropology, economics, geography, civics, etc.
Central Board of Direct Taxes

216

The approval is not given for more than three years at a time. It can be renewed.
The NGO should maintain separate account27 for money received in this way. An annual return
(with audit certificate, Income and Expenditure Account and Balance Sheet) should also be filed.

The 125% deduction
How much does the donor save on taxes? What if Shanta had donated her Rs.6,000 to a project approved under section 35?
If Shanta had business income, then she would have got a deduction of Rs.7,500 from her income. Her tax saving would be Rs.2,475. This deduction would come under section 35.
What if she did not have business income? She would get a deduction of only 100% under section 80GGA28. Her tax saving would be only Rs.1,980.
Why this discrimination? We don’t know. May be it’s just an oversight.

Section 35 or 80GGA?
People who have business or professional income should claim 125% deduction under section
35. People who do not have any such income can claim only 100% under section 80GGA.

Proof of donation
The donor has to prove the donation to Income Tax Department. For this a certificate or a receipt from the NGO is needed. The certificate or receipt should mention date and number of notification under section 35.

Section 35CCB
This section is similar to 35AC. Donors can claim 100% deduction for donations made for certain projects.

Who can be approved
The project must be for conservation of natural resources or afforestation29.
The NGO30 has to write a project proposal. A budget is also prepared. The application is sent to the Secretary, Department of Environment at Delhi. No special form is required for this.
On approval, a notification is issued. Approval is generally given for 2-3 years at a time.

The 100% deduction
Deduction is calculated in exactly the same way as 35AC. Also the 10% limit for 80G does not apply to these donations either.

35CCB or 80GGA?
People who have business or professional income should claim the deduction under section
35CCB. People who do not have any such income should claim it under section 80GGA31.

27

Separate account does not mean a separate cash book or bank account. It merely means a separate account or accounts in the ledger.
28
Section 80GGA(2)(aa)
29

This deduction has been withdrawn now. However, you can get approavl for such projects under section 35AC.

30

The NGO itself should also be approved by the Department of Environment.
Section 80GGA(2)(c)

31

217

Proof of donation
The donor should ask for a certificate or a receipt from the NGO. The certificate / receipt should mention date and number of notification under section 35CCB.

All good things come to an end…
This deduction has been withdrawn in 2002. This means that you won’t get any benefit for donations made after 31-March-2002.

Cash or cheque?
Giving in cash may be convenient. It is seldom safe. Avoid giving to people who solicit cash donations32. All reputed NGOs have bank accounts and are perfectly willing to accept cheques.
Giving through cheque33 protects both the donor and the NGO. A cheque donation is not likely to be challenged by the Income Tax people. You can also be sure that the money will reach the NGO.
The NGO is also protected, as unauthorised people cannot collect money in its name.

Misusing tax benefits
Evading taxes is second nature to most people. This is all the more true when tax rates are high and implementation is relatively ineffective. Charitable donations have also not been able to escape from this.
Some people set up fictitious charitable trusts or societies. These organisations obtain income tax exemption and also tax approval under section 80G. Tax paying individuals then make fake donations to these and claim deduction from tax. By and large, such fake organisations cause the biggest leakage of revenue.
However, some of the normal NGOs are also not free from blame:
!

A friendly NGO may give receipt for a bigger donation. A person pays Rs.1,000 but takes a receipt for Rs.10,000. The donor gets a tax relief of Rs.1,650 – by paying just Rs.1,000.

!

Often, however, the NGO does not even get the small donation – they end up issuing a receipt for nothing to oblige an important and influential person.

This also creates problems for the NGO. The NGO has to ‘adjust’ the donation in accounts by showing fictitious expenditure.

Penalties
This kind of misuse can attract severe penalties for all concerned (donor, NGO, adviser). These penalties are imposed under section 276C: Willful attempt to evade tax etc. and section 278:
Abetment of false return etc. Penalties include fine and/ or prison ranging from three months to seven years.
These penalties have proved to be a great deterrent. As a result, no one has gone to prison for this in the last 25 years!

32

Of course, this does not apply to small contributions made trough collection boxes.
Crossed as ‘Account Payee Only, Not Negotiable’. A bearer or uncrossed cheque can be more dangerous than cash. If sending by mail, use registered post or reliable courier.

33

218

Raising Funds from Public34
What is 35AC? How can it help you raise funds from public? If you think you can raise funds from the people in your area, how can you get 35AC approval?

Double Benefit
Under section 35AC (or 80GGA), 100% deduction from income is allowed to tax payers (individuals, companies, business persons, etc.), who donate any sum to NGOs for eligible projects. This helps the donors get double the tax benefit as compared to ordinary (50%) deduction for donations under section 80G.

Eligible projects
The Central Government notifies these in the official gazette. This is done on the recommendation of National Committee (for Promotion of Social and Economic Welfare). The National Committee recommends projects related to certain type of work.

Approval Process
An application should be made to the Secretary of the National Committee. The Secretariat checks the application. After this it is circulated to the members of the National Committee. The
Committee generally meets once in three to six months. The Committee makes a recommendation if the project is considered suitable.
Please note that:
!

The Committee may ask for any further explanation before taking its decision on an application. !

It will give its approval only for upto three years at a time.

!

If the project goes on for more than three years, then before giving further approval, the
Committee will examine the progress of the project.

Based on the Committee’s recommendation, the Government grants approval. After approval, the project is notified in the Official Gazette.

Time Period
The projects are normally approved for a period of 2-3 years. Extension is allowed at the end if the project is satisfactorily implemented. The amount of approval may range from less than a Lakh to several crores.
If you give all the required information in the application, then it will generally take about six months for the approval to be granted. You can start raising funds as soon as the notification is published.

Some Organisations
Some organisations, which have received approval for projects under section 35AC include:
1. Banwasi Sewa Ashram, Uttar Pradesh
2. CRY (Child Relief and You), Mumbai
3. Deepalaya Education Society, New Delhi
4. Gandhigram Trust, Tamil Nadu
5. Helpage (India), New Delhi

34

Based on AccountAble 17: Raising Funds from Public

219

6. Legal Aid Services, West Bengal
7. Manovikas Kendra, Kolkata
8. Nav Bharat Jagriti Kendra, Hazaribagh
9. Palli Vikash Kendra (REWARD), Orissa
10.Ramakrishna Mission, Belur Math, Howrah
11.Sahyog Kushtayagna Trust, Gujarat
12.SAMPARC, Pune
13.SEWA - Rural, Bharuch
14.SOS Children’s Village, New Delhi
15.Tarun Sangha, Midnapore

Getting Funds
The Government will not give you any money under section 35AC. After the approval, you have to raise funds yourselves from the public.
Therefore, you should carefully assess your capacity to raise funds before applying for 35AC.
It is better to make a conservative estimate — you can apply for additional approval if your fundraising is successful.

National Committee
The National Committee for Promotion of Social and Economic Welfare consists of 14 members appointed by the Central Government. These members are appointed for a term of three years.
(List of members is given at the end of this chapter).

Examples of Approved Projects
!

Animal Husbandry

!

Backward class and Tribal Welfare

!

Construction of a Tamil Nadu development center for training women, providing family education and technological training

!

Poultry raising and garment making for rural women

!

Construction of low cost pour flush sanitary latrines for rural poor

!

Forest and Environment

!

Legal Aid Camp

!

Leprosy welfare works

!

Training and Self employment for handicapped poor

!

Rural housing

!

Mahatma Gandhi Mission for Swarajya

!

Vocational Training

!

Construction of the building of the Institution and development of training, research and demonstration in land and water resources for tribal communities

!

Total literacy among nomadic Gujjars living in Western Uttar Pradesh

!

Recurring expenses for running a primary school and two homeopathic clinics

!

School building reconstruction

220

!

Soil and drinking water analysis

!

Rehabilitation center for handicapped

!

Village Health Workers’ Training

Filling the Application
Fill the application form35 (35AC) completely (in Hindi or in English). The following documents should be attached with the Application form:
1. Certified true copy of the Resolution of the Society for taking up the project.
2. Certified copy of Certificate of Registration under the Societies Registration Act.
3. Certified copies of Rules and Regulations of the Society/ copy of the trust deed.
4. Certified copies of Audited accounts for three latest years.
5. Short note on the last three years’ activities of your organisation. (If your organisation is less than three years old then particulars of activities for the period of existence should be sent). 6. List of agencies who have been funding your organisation. Also mention the activities for which they had provided the funds.
7. Detailed Project Report of the proposed project.
8. Cost breakup of the project as certified by a professional.

Sending the form
Make two36 complete sets of the form along with other documents. Send both the sets by
Registered Post to the following address:
The Secretary,
National Committee for Promotion of Social and Economic Welfare,
Department of Revenue, Ministry of Finance,
Room No. 149, North Block,
New Delhi - 110 001

Form 58A
Donors get income tax deduction only when they attach donation certificate in form 58A. You must issue this certificate on receiving the donation.
In many cases, donors have lost income tax benefit because they did not attach 58A to their
Income Tax return. You should also educate the donors on this as this will affect your fundraising capacity adversely.

Eligible Projects
Projects related to the following are eligible for approval under 35AC.
1.
2.

Social Forestry

4.

Development of Irrigation Resources

5.

36

Tree plantation

3.

35

Family Welfare and immunization

Rural Sanitation - Construction of low cost latrines

For application Form, refer to the ‘35AC Application Form’ on page 266.
Make one extra copy for office record

221

6.

Medical camps in rural areas

7.

Rural Health Programs

8.

Land development and recovering of waste land with special concern on ecological improvement 9.

Soil and water conservation including harvesting of run off water

10.

Non-formal education and literacy, especially for children and women

11.

Rural and non farm activities

12.

Creation of employment opportunities for urban and rural population living below the poverty line 13.

Supportive services for women to engage in productive work (e.g.: care of children of working women by establishing Crèches / Balwadis, etc.)

14.

Leprosy eradication

15.

Promotion of sports

16.

Construction of dwelling units for the economically weaker sections

17.

Construction of school building for children belonging to the economically weaker sections of the society

18.

Establishment and running of non-conventional and renewable sources of energy systems

19.

Any other program for uplift of the rural poor or the urban slum dwellers, as the National
Committee may consider fit for support

The National Committee Members
(For three years, with effect from 21st May 2001)
1.

Justice R. S. Pathak, Former Chief Justice of India,
(Chairman)

2.

Shri Arun P. Sathe, Advocate, Supreme Court

3.

Dr. R. T. Sabapathy Mohan, Professor of Chemistry,
Annamalai University

4.

Shri T. S. Srinivasan, Retired Chairman, CBDT

5.

Dr. R. Masilamani, Eminent Doctor, Chennai

6.

Shri V. V. Bapat, Chartered Accountant

7.

Prof. K. Kasim, Former D.I.G., Police

8.

Prof. S. C. Dutta Roy, Emeritus Professor, Electrical
Engineering Deptt., IIT, Delhi

9.

Prof. Suresh Tendulkar, Professor, Delhi School of
Economics

10.

Dr. Shashanka Bhide, Chief Economist, NCAER

11.

Shri Ajay Mehta, Social Worker, Seva Mandir,
Udaipur

12.

Shri S. N. L. Agarwala, Former Chief Commissioner of Income Tax

13.

Mrs. Jarjum Ete, President, Arunachal Pradesh
Women’s Welfare Society

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NGO grapevine
Some NGOs have started misusing 35AC in the same way as they were misusing 80G — by giving ‘fake’ donation receipts. They are advised to refer to section 276C: Wilful attempt to evade tax etc. and section 278:
Abetment of false return etc.
Both sections prescribe imprisonment ranging from three months to seven years.
The section applies to both the
‘donor’ and the NGO (i.e. the chief functionary and other officers). Though these days, a vacation in Tihar means you are probably a V.I.P. — it can also be very good for building up influential contacts! Section VIII: Others
This section discusses an important aspect of organisational governance: conflict of interest.
The chapter explains what conflict of interest is and how one can ensure that the organisation is not adversely affected by such conflicts.
We also briefly discuss the law related to two important benefits for employees: provident fund and gratuity. Gratuity is now compulsory for all non-profit organisations with 10 or more employees. However, applicability of provident fund to non-profit organisations is not as clear.
Still if you have provident fund or are planning to introduce it, this chapter will provide you an overview. Conflict of Interest

225

Provident Fund

229

Gratuity

233

223

224

Conflict of Interest1
In the movie ‘Aakhri Rasta2’ Amitabh Bacchan plays a double role: he is the father and he is also the son. The father comes out of jail after 20 years and is all set to take revenge on a few people, including a minister.
In the meanwhile, the son has grown up to be a police officer. He is responsible for security of the Minister. He then comes to know that the criminal hunting the Minister is his own father!
He is now torn between his sworn duty and love for his father. With some help from the storywriter, he is able to balance the two and comes out with a clean conscience.
Similar conflicts of interest exist in our day-to-day work. Fortunately, for most of us, they do not require Amitabh’s daring stunts.

What is conflict of Interest
A conflict of interest occurs when you are torn between two loyalties. It is a peculiar situation to be in. A very honest person will wonder whether he / she helped one party at the expense of the other. He / she will also worry whether others will think bad things about him / her. On the other hand, a dishonest person is more fortunate – he / she doesn’t ever have to worry about conflict of interest!
Many professions have well-defined policies to handle this. For example, an auditor can not take up an audit where he or she owes more than Rs.1,000 to the client. Similarly, a judge can not give judgment in a case where one of his / her relatives is involved.
No similar procedures exist in the NGO sector. NGOs are today assuming an increasingly important role in the society. This will eventually bring media attention to how they work themselves. Conflict of interest is an area where much can be done.
Some of the provisions related to conflict of interest already exist in the Income Tax Act. These have been discussed under ‘Key Person Transactions and Income Tax’ on page 210.

Examples
Conflict of interest can occur at any level and at any time. Some examples from the NGO sector will help us understand this better:

At Board Level
!

The NGO purchases a piece of land from a trustee or his / her relative.

!

The NGO appoints the Chief Functionary’s spouse as a consultant.

At Operating Level
!

Taxis are regularly hired from a firm owned by the Administrator’s brother-in-law.

!

Agency’s Program staff accepts consulting assignment from one of the grantee NGOs.

In Grant making
!

!

1
2
3

The Program Officer makes a grant to an NGO just before end of his / her tenure and then joins the NGO as director.
Grants are made to NGOs where the Agency’s Director or staff or their relatives hold positions3. Based on AccountAble 53: Conflict of Interest
Hindi phrase, meaning ‘The Last Option’
This problem does not arise if the position is held ex-officio

225

Implications
Conflict of interest is not bad in itself. In today’s society when people have multiple responsibilities, this is natural. Things like networking and working together on issues also increase chances of a person occupying two positions.
However, if conflict of interest is not handled properly, it can lead to loss of money, image or reputation. In some cases, it may also result in civil or criminal proceedings.

Managing Conflict of Interest
In the normal course of work, all decisions are properly scrutinised. Also most such decisions help the organisation move forward at an optimum cost. Later, the implementation of the decision is also monitored quite carefully.
However, this process may be short-circuited in some situations. This is more likely when a conflict of interest exists. The person who is interested in the transaction may influence the decision-making or monitoring.
It is not necessary that this will always happen. Also in some cases, the interested person might help in getting a better deal or service.
Even so, having a proper conflict of interest policy will help manage the problem. This policy could be built around the following two principles:

1. Disclosure of Interest
In the Corporate world, all directors have to give a list annually. This list includes names of all their relatives and concerns in which they or their relatives are interested.
In the NGO world, this can be extended a little. All persons in key positions could disclose their interest in other organisations / concerns. In some cases, their close relatives may be running an organisation. The name of such organisation should also be included.
The concept of key positions covers all people who are involved in the decision-making and monitoring process. Examples include trustees, directors, managers, senior executives, etc.

2. Role in decision-making and monitoring
Once the disclosure of interest is on record, we can take the next step. This is to make sure that the interested person does not go through the Amitabh syndrome! How to do this?
Normally, such persons should not involve themselves in the particular decision. They should also avoid getting involved in the subsequent monitoring process. Obviously, they would also avoid informal lobbying for or against the decision.
Mark R. Simmons4 offers a five-point solution to managing conflict of interest:
1. Establish a clear tone at the top that conflicts of interest should be avoided, if possible.
2. Identify those areas of work which have high risk for conflict of interest.
3. Establish an organisation-wide policy (see below) on how conflicts of interest should be identified and handled.
4. Educate directors, officers and employees on the subject.
5. Perform periodic reviews to evaluate effectiveness of established policies.

4

Internal Auditor at Rensselaer Polytechnic Institute, e-mail: mrsciacfe@aol.com

226

Registers and Records
No such discussion can be complete without a register popping up on the scene. Here we need at least two:
1. Disclosure Register: Contains listing of relatives, concerns, etc. for each key person.
Each key person’s listing is started on a new page and is dated.
2. Transaction Register: Contains listing of all transactions valued5 at (say) Rs.20,000 or more. It also shows which key person was interested.
Additional information on these transactions can be kept in the Minutes’ Book. Another useful place is the approval letter. The letter can summarise the conflict of interest and summarise how it was tackled.

Designing a Conflict of Interest Policy
How to design a suitable policy for yourself. Firstly, we should recognise that conflict of interest can not be eliminated. It can only be discouraged or managed. Herrington J. Bryce6 offers an interesting structure in five parts: commitment, prohibition, money value, transparency, and corrective action.
Bryce’s suggestions are made in the US context where Boards are relatively strong. Further,
NGOs’ work is regulated more effectively than in India. Therefore, some of this may not be directly applicable to the Indian situation.

1. Commitment to duties:
!

The duty of undivided loyalty to the NGO / Agency

!

The duty of care

!

Prohibition against self-dealing

!

Need for accountability and stewardship

2. Prohibitions:
!

The NGO / Agency will not loan money or property to a board member.

!

The NGO / Agency will not sell or buy or lease land or buildings from a board member without court approval.

!

The NGO / Agency will not do business with a board member in a way that is unfair to itself. 3. Transparency:
!

Each trustee must disclose possible points of conflict.

!

Such trustees should not be present when the matter is discussed.

4. Money Value:
Also consider the amount involved. For example, if the total value of all such transactions with a board member in a year exceeds Rs.20,000, then:
!

The goods or services must be provided to the NGO at actual, reasonable or discounted value. 5

Cumulative value for each key person in a year
Financial and Strategic Management for Nonprofit Organisations, 3rd edition. Jossey-Bass Publishers,
San Francisco, USA
6

227

!

Details of the transaction must be disclosed to the Board. The concerned member can not participate in discussion or voting.

!

Detailed minutes of the transaction must be kept.

!

The transaction must be authorised by 2/3 of the voting board. Persons who have themselves sold services or goods to the NGO in last one year, can not vote on this transaction.

!

The attorney general (similar to Charities Commissioner in Mumbai) must be notified in advance. !

If the transaction exceeds Rs.2 lakhs, then it must be published in a local newspaper.

5. Corrective Action:
The policy should also provide for corrective action, when unfair transactions are discovered later: !

A transaction showing conflict of interest can be voided later if it is seen to be in bad faith.

As discussed earlier, this coverage can be extended to other key persons.
In practice, many key persons have found this sort of policy useful in another way. It offers them a readymade excuse to say ‘no’ to their friends, relatives and associates!

Moonlighting
Moonlighting is an American term. It may sound very romantic but it simply means holding two jobs. One job is done during the day and the second is done in the night.
Moonlighting is not very common in a job-market like India. However, things are changing, especially in the metros. There are people who take up a part-time job or do some extra consultancy assignments. How to deal with these?
As always, there are at least two ways. One is to simply prohibit all employees from having other jobs. If you can do this, there is no need to read further.
In principle, a second job should be discouraged for full-time employees. Sometimes, however, there may be a situation where you can not meet the employee’s financial or intellectual needs.
In such cases, you may want to allow people to take up other jobs. For this you will need a
‘moonlighting policy’. This should address four basic issues:
1. Disclosure: All employees must be willing to disclose necessary details of the secondary assignment / job.
2. Approval: The employee should discuss the second job with his / her supervisor before accepting it. Secondly, written permission must be taken for all such jobs / assignments.
3. Interference: The second job / assignment should not mean that you have to change work hours for the person. Also you should not have to change work schedules to accommodate the second job.
4. Conflict of interest: The employee should be able to maintain confidentiality at both places. Further, the employee should not promote the work of second employer / client at your cost.
Additionally, the employee must agree to always disclose any ‘moonlighting’ that they do.

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Provident Fund7
As NGOs grow larger and more formally organised, questions such as minimum wages, provident fund, gratuity start coming up. What are the legal requirements and pitfalls in these matters?

What is Provident Fund?
The word Provident is closely related to the word Prudent. Both have been in use since the 14th
- 15th century. Both can be traced back to the Latin word Providere. The Latin Providere originally meant foresee. Later on, it was used to mean exercise foresight by making preparations.
‘Provident Fund’ thus means: saving some funds for the future.
Provident Fund has been compulsory for most organisations in India since 1952. It was meant as a social security measure for workers in the organized sector. It is also available on optional basis to other organisations and individuals. The PF scheme covers more than 1.85 crore employees in over 140,000 establishments. The corpus of the PF Trust is about Rs.55,000 crores. It is controlled by the 50 Trustees who form the Central Board of Trustees. Most of the investments are in Government bonds and securities.
Obviously, the Provident Fund pie has become very large and very sweet — everyone wants a piece. Proposals to release this money into private investments and other similar bright ideas have been floating around for some time now. In the present scamage, it is difficult to say how long this money will remain safe.

Does it apply to you?
PF Act applies only to organisations (including NGOs) which have more than 19 employees.
Also they should be producing some specific items. Or they should be involved in some specified activity. Some of these (relevant for NGOs) are given in the list.

Who are employees
Employees include teachers in NFE schools also. All schools run by an NGO would be taken together.
It does not matter whether payment to employees is made as salary or as honorarium. Part-time or temporary employees also have to be counted. Casual labour need not be counted as employees.

Exemption for
!

Cooperative Societies, with less than 50 employees.
They should not be using power to run the machines;

!

NGOs which run mainly on Government Grants;

!

New organisations — for the first three years.

Deductions and Deposits
Monthly Deductions
Once PF becomes applicable, you have to deposit some amount each month. This amount comes both from employee and the employer (NGO).
!

7

10% of employee’s monthly salary is deducted.

Based on AccountAble 32: Provident Fund

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Some of the covered items / activity
1. Paper, stationery
2. Printing (including screen printing)
3. Herbal / Ayurvedic medicines 4. Cane, bamboo, coir or leather items
5. Canned items (sauce, pickles, etc.)
6. Hospitals
7. Textile, garment factories
8. Credit-based NGOs
(NBFCs)
9. Schools / NFE centers, etc. !

Additional 1.67% is contributed by the employer (NGO).

!

The NGO also has to deposit 8.33% for the Pension Fund.

!

For certain cases the employee’s and employer’s contribution is as much as 12%.

!

Calculate contribution on the basis of actual salary drawn during a month. Salary means basic wages, dearness allowance (including food concession allowed) and retaining allowance (if any).

!

Round it off to the nearest rupee.

!

Generally, employees drawing monthly salary of Rs.6,500 or more are not covered under this EPF scheme.

The NGO also has to deposit additional amounts as ‘Employee’s Deposit Linked Insurance’ and as ‘administrative charges’.

Depositing the amount
After deducting the PF amount, you have to deposit it within 15 days:
!

Prepare separate cheques or bank drafts for contribution and administrative charges. Pension Fund amount should also be paid by separate cheque.

Provident Fund

Cheque / draft should be in the name of P. F.
Commissioner.

10% from employee

!

Use separate PF challans for depositing each type of contribution. Pension Fund

!

Deposit the cheques in State Bank of India or Reserve
Bank of India.

1.16% from Government

!

1.67% from employer

8.33% from employer

Filing Returns
PF involves a lot of paperwork. Some organisations tie up with a retired employee from PF
Department to complete this. Some of the forms are:
1. Monthly Return of contributions should be filed in Form No. 6. Give names of members, their P. F. account number and contributions made both by employer and employee.
2. Annual Return of contributions should be filed in Form No. 6-A.
3. Renewal of contribution card of members should be done in Form No. 3.
4. If an employee leaves, inform the PF Department in Form No. 3-A.
5. Form No. 2 should be filled by the members for nomination.
6. When a new employee joins, file Form No. 5.

Penalties
Some of the penalties for violating PF Act are:
Offense

Prison

Not depositing employee’s contribution

One year - three years

Not paying inspection fees or administration charges Six months - three years

Rs.5,000

False statement to avoid PF payments

Up to one year

Rs.5,000

230

Fine
Rs.10,000

Getting Your Money Back
Getting your money back from the PF commissioner can be a problem. There are various forms, procedures, and conditions. Broadly, money can be withdrawn in following ways:
!

By applying for a loan or advance

!

By paying LIC premiums through PF Department

!

By leaving India permanently

!

By getting retrenched

!

By retiring from service

!

By dying...

Advances
Advances may be refundable or non-refundable. These can be taken only for listed purposes. There are many conditions attached to each of these (para 62-72 of the
EPF Scheme). The advance can be taken by filing
Form No. 31 with the Regional Provident Fund
Commissioner.. Various certificates / documents are also required, depending on the purpose.

The Pension Scream...
In 1995, the Government introduced a revised Pension
Scheme. Under the scheme, the following happens:
!

Most of the employer’s PF contribution (8.33% out of 10%) will now go to the Pension Fund.

!

The Government will contribute additional 1.16% to the fund.

!

The employee will get a monthly pension on retirement. On the employee’s death, the spouse or children will also get a somewhat reduced pension. !

The employee can commute up to one-third of the pension. The employee can also choose to get the capital amount refunded after death.

Advance is allowed for

1. Purchase of a plot / Flat
2. Construction of House
3. Additions, alteration or improvement to own house
4. Repayment of Housing Loan to
Government bodies
5. Closure / lock-out
6. Non receipt of wages for two months 7. Illness of self / Family
8. Marriage of self / son / daughter
/ sister / brother
9. Post-matric education of son / daughter 10. Damage to the property due to natural calamity
11. Loss of wages due to powercut

12. Equipment for physically handicapped members
The scheme was not appreciated by the Unions and employees. The matter has gone to court. A lot has been written about the rate of return, choice to withdraw and the way employees are being ‘short-changed’ by the Government.
One key feature of the scheme has not been talked about much. The employer’s contribution was earlier going into the Provident Fund. The accumulated balance in Provident fund is withdrawable. Now most of the employer’s contribution will go into the Pension Fund. For all practical purposes, the balance in Pension Fund is not withdrawable.
Thus with one stroke, the Government has indefinitely postponed the refund of half the PF balances. The amount coming into the Pension Fund can now happily be used to finance the
Government’s debts!
231

Your own PF Trust
Many people do not feel happy with the way the PF Department is run. Larger organisations sometimes set up their own PF Trust. This helps in speedy settlement of claims for the employee. This is also more beneficial in the sense that the trust is run by your own colleagues.
However, it also involves a lot of paperwork.

Registration
To set up your own Trust, you should have at least 100 employees. Then you have to apply to the Regional P. F. Commissioner for permission. The Commissioner may grant you permission if: !

There are more than 99 employees in your organisation;

!

The rate of contributions provided in the Trust is at least equal to the PF Act rates;

!

Employees will get at least as much benefit as under the PF Act;

!

The benefits will be mainly provident fund, pension or gratuity.

You will also need to get the PF Trust approved under the Income Tax Act. Both these procedures can be time-consuming, lengthy and tiring. NGOs with weak hearts should consult their doctors before setting up a PF Trust.

Running the Trust
Setting up the Trust is only the beginning of your problems:
!

Provisions of the Act remain applicable to the trust;

!

The PF Department may lay down additional conditions;

!

You have to establish a Board of Trustees for the provident fund;

!

Terms and conditions of service of members of the Board of Trustees should be clear;

!

Detailed accounts for each employee’s Provident Fund should be kept;

!

Various returns, including Income and Expenditure Account and Balance Sheet have to be filed regularly;

!

Trust accounts have to be audited each year;

!

Provident Fund moneys can be invested only according to Government rules;

!

Administration expenses of the Trust have to be borne by the NGO.

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Gratuity
What is Gratuity?
‘Gratuity’ has been derived from Latin word ‘gratus’. It means pleasing or thankful. English word
‘congratulate’ has also been derived from this only. Here Gratuity means acknowledgment and positive recognition of services rendered by the employees. Earlier Kings and Knights used to give rewards to their courtiers and general people of the state. The awards were given to them to recognise their valor and good deeds. The same was also aimed at retaining them in the
State. The kings or employers were under no compulsion to give these prizes or rewards to their employees or slaves.
This tradition continued for many generations up to 6th decade of Twentieth Century. Till then employees were not sure whether they will get the benefits from their employers. They started feeling insecure about their future as they had a little amount left with them at the time of their retirement. The legal bodies started feeling need to regularise benefits to the employees. They considered the fact that the human resource needs to be recognised in better perspective. Only
Provident Fund will not suffice the requirements of employees in future when he / she retires and becomes incapable of earning their bread and butter. The Government thus decided to introduce some provision to regulate such payments. “The Payment of Gratuity Act, 1972” was introduced and published in gazette of India on 21.8.1972.

Applicability
The Gratuity is mainly applicable to industries or establishments for business purpose. But in
19978, the Government has come out with the provision that Gratuity will be applicable to the
Societies and Trusts also:
The provisions are as under:
1. You are employing 10 or more employees;
2. It is applicable for all the employees who are employed on wages in your organisation.
There is no limit on wages.
An employee becomes eligible for gratuity when he or she completes five years in service. The employee should be treated in the continuous service if he fulfills following requirements:
1. He has worked for minimum 240 days9 in a year;
2. If your organisation is seasonal or works for less than 6 days in a week, number of days for calculation will be 190 days in a year.
To determine continuous service for half year, Number of days explained above will be half.

Nomination
Each employee should make nomination after he / she has completed one year of service. The nomination can be made in any of the following manners:
1. If the employee does not have any family, he can nominate any person for the benefits of the gratuity. He can do so in the name of more than one person;
2. If the employee has a family, nomination can be made in the name (s) of family member only; 8

Notification reproduced at the end of this chapter
The absence on account of sickness, paid leave, maternity leave lay-off, strike, etc. should be included as number of days served.

9

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3. The employee can alter the name of nominee on his / her discretion. He should give one written application to his employer.

Compulsory Insurance
You should also take insurance for your liability for payment towards the gratuity. This insurance should be taken from the Life Insurance Corporation of India. The appropriate Government may exempt the organisation from this provision if it has more than 500 employees and established its own Gratuity fund.

Payment of Gratuity
An employee becomes eligible for gratuity on termination of the employment. He is entitled for the payment of Gratuity within 30 days of the termination of employment. The Gratuity should be paid to the employees even if the employee has not filed any application on his retirement.
The application given in the plain paper is also valid claim. The termination of employment is caused on account of followings:
1. Superannuation - retirement on account of attaining maximum age (as fixed at the time of employment); 2. Retirement or resignation;
3. Death or disablement due to accident or disease.
If the termination of employment is because of death or disablement, the clause of “continuous service for minimum five years” will not apply.
The gratuity is paid by any of the following ways:

Normal Retirement
1.

To the employee if the employee is retiring on account of superannuation, retirement or resignation or disablement.

In case of death
1. To employee’s nominee; or
2. To the heir(s) if no nomination was made;
3. If the nominee or heir(s) is minor – to the controlling authority. The authority shall invest the
Gratuity amount for the benefit of such minor. This is done till the time nominee attains the age of maturity.

Calculation of Gratuity Amount
Amount of Gratuity to be paid to the employees is determined as follows:
1. Calculate number of years served by the employee. Period served in excess of six months should be treated as one year;
2. Determine the rate of wages10 last drawn by the employee;
3. Multiply rate of wages with No. of years served;
4. Now calculate 15 days salary by multiplying the quotient by 15 and dividing by 2611.

10
Wages means Basic Salary and Dearness Allowance. It does not include any other allowance or payments. 11
Determined on the basis of 30 working days reduced by 4 Sundays.

234

In brief the formula for calculation of Gratuity may be outlined as follows:
Rate of Wages X Number of years served X 15
26
Example: Assume that one of your employees has retired after serving you for 13 years. He was withdrawing at the time of retirement Rs.4,500 as monthly wages. His Gratuity amount will be calculated as follows:
4,500 X 13 X 15

= Rs.33,750

26
5. The maximum amount of Gratuity payment to an employee is limited to Rs.3.50 lakhs.

Penalties
Gratuity Act has levied some penalties in case of non-compliance with the provisions of the Act.
The Penalties are as under:
1. Any employer who does not comply with the provisions of the Act may be punishable with
Rs.10,000 as fine ( it may extend to Rs.20,000 also) or at least three months imprisonment
(this may extend to one year also) or both;
2. Any other person who avoids any payment to be made by himself or helps somebody to avoid such payment, may be punishable with a maximum imprisonment of six months and maximum penalty of Rs.10,000.
If the offence relates to non-payment of any Gratuity amount by the employer, the imprisonment may extend to two years.

Notification
Notification published in Gazette of India, Part II, Section 3, Sub-section (ii), dated 6th September
1997
New Delhi, the 20th August, 1997
S. O. 2218. – In exercise of the powers conferred by clause (c) of sub-sections 3 of section
1 of the Payment of Gratuity Act, 1972 (39 of 1972), the Central Government hereby specifies the trusts or societies, registered under the Societies Registration Act, 1860 (21 of 1860), or under any other law with respect to societies for the time being in force in any State, in which ten or more persons are employed or were employed for wages on any day of the proceeding
12 months as a class of establishments to which the said Act shall apply with effect from the date of publication of this notification in the official Gazette.
[F. No. S-42011/3/95-SS.II]

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236

Section IX: Financial Reporting
Grants and reports are inseparable and are probably like two sides of a coin. Reports form an important part of accountability mechanism. There are two aspects to a report from the grantee or implementing organisation: (i) it reassures the donor Agency that money has been used properly; and, (ii) it also shows to the Agency’s donors (or Board) that the Agency is managing their contributions properly.
The number of financial reporting formats in use today are probably only a little less than the number of Agencies! This is partly due to the fact that every Agency is different in some ways, and they also do not want to burden themselves with extra information. This leads to a situation where each of them devises a different format.
Same is true of the general-purpose financial reports by non-profits to general public. There is no standard format or agreement on what information is required. This makes it difficult to understand or analyse the information.
As non-profits grow and become complex from a financial point of view, this pattern will change.
The formats presented in this section try to address some of these issues. These have been tested extensively in the field and have evolved over a decade. We expect that gradually these and other formats will converge to a common format by usage and consensus.
We start with a presentation of some useful formats and structure of common financial reports required by donors. This is followed by a discussion on public disclosure and formats that can possibly be used for this.
Reporting to Donor Agencies

239

Public Disclsoure

246

237

238

Reporting to Donor Agencies1
What kind of financial reports do donors require? These may be specialised reports, covering the use of their funds, or may be copies of general purpose reports which you prepare for filing with the Government etc. These are discussed in more detail in the following paragraphs.

A. Specialised Reports
Generally, most donors ask for two types of specialised reports: (i) a periodic financial report, certified by the organisation, and, (ii) a final report, certified by an auditor. The format varies from agency to agency. We give below suggested formats for these reports. These are being used successfully by several donor agencies in India for the last several years.

1.

Budget and Balance Report

The Budget and Balance Report is a periodic financial report prepared by the NGO. It compares the actual expenses incurred with the sanctioned budget. It also helps the Donor Agency in disbursing the next instalment. This report can be prepared by your accounts person. No audit is required for the Budget and Balance Report.
Format
The Budget & Balance Report is useful for all grants. It has three main sections:
1. A budget comparison of expenses;
2. Status of the Revolving fund (if you are operating a Revolving Fund);
3. Unutilised Balance.
Additionally, there is a memorandum section on fixed assets. The structure of the report is explained below. The actual format is given on page 271.

1

Based partly on ‘Accounting Manual for Sida supported NGOs in India; Nov. 2001; www.ngoAccounting.net

239

240

241

How to prepare the Budget & Balance Report
Each report is for a particular period. This is called the 'Current Reporting Period'. This may be a year or less2. Most of the information given is for the current reporting period. At some places, information for the entire grant period is also given.
Opening balance normally means the balance on the first day of the current reporting period.
For example, if the current reporting period is from 1st July 2002 to 30th June 2003, then opening balances would mean balances on 1st July 2002. Closing balances would mean balances on 30th
June 2003.
For preparing the report, you need the earlier period's report as well. Pick up the opening balances from that report. Figures for the current reporting period will be available from the trial balance or the ledger. Some figures may be in your loan registers. Details of fixed assets will be in the Fixed Assets Register.
Other sections of the Budget & Balance Report have been explained in the charts earlier.

2

Some donors ask for monthly, quarterly or six-monthly reports. Others are satisfied with annual reports.
This format can be adjusted for any of these periods.

242

Variances
Agencies normally recognise that a budget is a forecast. It can not be accurate. Variances in particular budget heads are, therefore, natural. These variances can help us understand whether there were budgeting errors or ground realities (prices, operations) changed.
Variances up to 10% under any head are quite normal. Normally, no special reason is needed for these. However, you need to analyse the reasons for variances more than 10% of budgeted amount. You can give these reasons as an Annexure to the Budget & Balance Report.
The above rule varies from agency to to agency. Also, most agencies are concerned about overexpenditure in some heads, such as fixed assets. You should budget and monitor these more carefully. A few agencies, however, are quite particular about variances. You need to understand your donor’s position regarding variances before you start spending money. If your donor is very strict regarding variances, make sure that expenditure is stopped whenever it reaches the budgeted limit. How often
The Budget & Balance Report should be prepared according to the terms of your agreement.
If the agreement does not specify this, then prepare the report at least once a year. You may want to prepare this more often for internal use and better financial management.
Some agencies specify the project period and start-dates for the projects in the grant agreement.
If this is not available then the following thumb-rules may be useful:
"

In case of new projects, the period of one year is normally calculated from the date of release of first instalment.

"

For a continuing project, the end-date of the last grant may be the start-date for the renewed grant. "

In other cases, it may be calculated from an earlier date (for example: from the date of agreement). If there is any doubt, it would be best to consult your Agency representative for clarity on this.
Due dates
The Budget & Balance Report should normally reach the donor Agency within one month of the last date of reporting period. This may sound confusing, so let us see an example:
Suppose, Agency has released the first instalment of a grant to you on 10th
November 2001. Let us also assume that on this basis, the starting date of the grant is 1st December 2001. Also suppose that Agency agreement does not specify reporting dates.
In this case, the first Budget and Balance Report will be for the period 1st December
2001 till 30th November 2002. This report will be due within one month of 30th
November. This means the report should reach Agency office by 31st December
2002.
Due dates vary from agency to agency. Therefore, the above should be seen only as a general guide. Your reporting period would most likely be specified in the agreement. If not, please speak to your Agency program representative.

243

Delays
Timely reporting reinforces an NGO’s credibility with the Agency as a responsible and accountable partner. Further, as this is not an audited report, it would be possible in most cases, to send the report within one month or according to the schedule given in the agreement. In some cases, there may be unavoidable delays in preparing the report. For example, you may be tied up in an audit. Or your Chief Funcationary may be in travel.
In such a case, it is best to inform the Agency in writing / through e-mail before the due date and give reasons for the delay. Also mention the likely date when the report will reach Agency.
This helps reassure the Agency that you take your reporting obligations seriously.

2. Audited Utilisation Certificate
There are various formats for audit reports and certificates. Some of these also use wordings that are not clear. With these factors in mind, a standard format for Audited Utilisation Certificate is being presented here. This is similar to the Budget and Balance Report in structure. The main difference is that a practising Chartered Accountant certifies it.
Format of the audited utilisation certificate is given on page 273. Clarifications given for the
Budget and Balance Report apply to this certificate also, so far as filling up the same is concerned. The Audit Certificate should preferably be typed on the letterhead of the Chartered Accountant
(CA) or firm, who do your Society's normal audit. Phone number of the CA should be given, if it is not mentioned on the letterhead. All the pages of the certificate should be stamped and signed by the CA.
The audit certificate should normally be prepared once annually. In some cases, the Agency might ask for it only at the end of the grant period (which may be two years or more). If all goes well. the certificate can be ready within two months from the end of each reporting period. That means that if the reporting period ends on 30th June, the Audit Certificate can be ready by 31st
August. However, depending on the size and complexity of the grant, number of your locations, and other commitments of the CA firm, the time taken may be more. It may even take upto six months.
Agencies normally require that the above audit certificate should be sent for each reporting period, within two to six months from end of the reporting period. If a delay is expected for some reason, it would be good to inform the Agency in writing, along with likely date of despatch.

B. General Purpose Reports
1. Consolidated Accounts
Each year you get your accounts audited by a Chartered Accountant. They may audit several types of Balance Sheets for you. These normally include:
Type

Period

Purpose

1. Project-wise Accounts

D e p e n d s o n t h e Some Agencies use this instead of the Audited
Agency
Utilisation Certiifcate discussed above

2. FCRA Accounts

1-Apr to 31-Mar

FCRA requirement

3. Indian Accounts

1-Apr to 31-Mar

Internal requirement

4. Consolidated Accounts

1-Apr to 31-Mar

Income Tax Act / Socities Act requirement

244

The fourth item (consolidated accounts) in the table shows all income and expenditure, grants, assets, liabilities of the NGO (both Indian and FCRA). This is an essential requirement under the law. This includes three items: a Balance Sheet, an Income & Expenditure Account, and the Receipts & Payments Account. A fourth item is the audit report on these accounts.
These accounts often include schedules. All these four things, along with schedules are called
'Consolidated Accounts'. These accounts are an important link in the chain of accountability.
A copy of the consolidated accounts (as discussed above) can also be sent to the donor
Agency as soon as the audit is completed. Normally the audit is completed by end of October
(or earlier), in time for filing of the return with Income Tax authorities. some Agencies now lay this down as one of the reporting requirements in the grant agreement.

2. Copy of FC-3
Each year you are also required to file form FC-3 with the Ministry of Home Affairs. This form should reach FCRA Department by 31st July. Along with this you also have to file your FCRA
Balance Sheet and FCRA Receipts & Payments Account. Sometimes, some of the information in FC-3 is given as Annexures. This is an important control for foreign contribution.
A copy of the FC-3 (along with all Annexures, Balance sheet and Receipts & Payments
Account) can also be sent to the donor Agency for information. This helps reassure them that their contribution has been accounted and reported properly.

245

Public Disclosure
Introduction
In 2001, the Government introduced a transparency requirement in the Income Tax Act. According to this, all non-profit organisations with gross income exceeding Rs. 1 crore were asked to publish their accounts in a local newspaper. If this was not done, the income tax exemption would be withdrawn for the year. The Government felt that this would help enhance the credibility of the non-profit sector among the general public and would serve as a useful measure of public accountability. Some non-profits groups protested against this to the Government. They felt that this would result in wasteful expenditure and may also lead to extrortion demands from groups working in disturbed areas. As a result, the provision was withdrawn in 2002.
Before we disucss this further, let us look at how some other countries deal with the issue of transparency and publication of accounts:
Australia3
Non-profit companies must file annual reports and audited financial documents with Australian
Securities Commission. This information is available for public scrutiny. Other types of organizations are not covered by this.
China4
NPOs are divided into social organizations and foundations. Foundations are required by law to
'…make their income and expenditure accounts public on a regular basis.' However, the method for this is not laid down.
Indonesia5
No requirement for making any documents public.
Japan6
Financial Reports of specified non-profit corporations are filed with Government Agencies. The concerned agency can allow a person to see the report.
Singapore7
A person can ask the Trustees for a copy of a charity's most recent accounts. The trustees must comply within two months. They can charge reasonable fees for this.
USA
USA has the most extensive public disclosure requirements8. NPOs must provide a copy of the entire income tax return (form 990) on request. They must also announce in all their appeals
3

Page 70. Philanthropy and Law in Asia, Ed. Thomas Silk, ISBN 0-7879-4510-2
Page 118. Ibid. Provided in Article 5, Regulations on the Management of Foundations. Promulgated by
Premier Li. Peng on 27-Sep-88
5
Page 129. Ibid. Thomas Silk.
6
Pages 186-187. Ibid. Provided in Article 29. Law to Promote Specified Non-profit Activities. Promulgated
25-Mar-1988
7
Page 310. Ibid. Provided in the Charities Act.
8
It is interesting to note that these provisions came in very recently (in June 99) after a series of high profile financial scandals involving several respected non-profit organisations. Robert O. Bothwell writes in The International Journal of Not-for-Profit Law - Volume 2, Issue 3 as follows:
“... THe 1990s have been a great trial for U.S. charities: the conviction of Jim and Tammy Faye Bakker for illegal activities connected with their televangelism; the forced resignation of the founder of Covenant
4

246

how one can obtain a copy of their income tax return. They are allowed to publish their accounts on the Internet as an alternative. The income tax return includes detailed information on expenditure, salaries to top five employees, payments to trustees, payments to auditors, etc.

Voluntary Publication
Though the Government requirement has been withdrawn, several non-profit groups in India feel that publication of accounts is a healthy practice. They are, therefore, encouraging voluntary publication. This may happen in many ways: you may publish the accounts in a newspaper, you can print and mail these to a selected group of people, you can put these up on your website, and you can also make these available on request.

Format for Publishing Accounts
Should you also decide to publish your accounts, what kind of a format can be used? Should you publish the full accounts? This may not be practical or cost-effective. It can also confuse the readers. You should instead use a format which gives relevant information, and helps people understand your finances. Two such formats are presented below. Either can be used as per your convenience.

a) Brief Format
A brief format is given below for publishing the minimum amount of information. While the format is extremely condensed, yet it is structurally complete in itself.
This needs about 12 column centimeters. The structure can be used for inclusion in your annual report or for putting up information on your web-site as well. You may need to add or reduce lines. Balance Sheet
Liabilities

Amount

Trust Funds

Assets

50,00,000 Assets & Building

Other Funds

1,30,00,000 Investments

Amount
50,00,000
1,01,00,000

Other Liabilities

7,00,000 Loans

26,00,000

Surplus

6,50,000 Cash and Bank

16,50,000

1,93,50,000

1,93,50,000

Income and Expenditure Account
Expenditure

Amount

Income

Amount

Program Exp.

85,00,000 Grants

80,00,000

Institutional Exp.

25,00,000 Donations

15,00,000

Surplus

3,50,000 Investment & other Income
1,13,50,000

18,50,000
1,13,50,000

House...; the conviction of Bill Aramony, CEO of the United Way of America, for misuse of funds; the conviction of the founder/CEO of the Foundation for New Era Philanthropy for a pyramid scam; the forced resignation of the President of Adelphi University for lavish spending; the forced resignation of the trustees of the Hawaiian Bishop Estate for paying themselves $1 million each in trustee fees and other improper financial behaviour; the forced resignation of the President of Feed the Children in Oklahoma for misuse of funds...”

247

b) Detailed Format
If you would like to share more information, you can use the detailed format given below. This needs 30 column centimeters. You may need to add or reduce lines.
B alance Sheet
Liabilities

Amount

Assets

Trust Funds
C api tal Fund
42,00,000
C orpus Fund
5,00,000
General Fund
3,00,000
Other Funds
Endowment Fund
1,00,00,000
Staff benefi t Fund
2,50,000
Fi xed Assets Fund
2,50,000
Revolvi ng Fund
25,00,000
Other Liabilites
C redi tors
4,25,000
Expense Payable
2,75,000
Surplus
6,50,000

Amount

A ssets & Buildings
Land & Bui ldi ngs
Vehi cles
Furni ture and
Equi pments
I nvestments
Endowmnet
Investments
Other Investments
L o an s
Wi th Benefi ci ari es
Other Loans
C ash and Bank
C ash at Bank
C ash i n Hand

1,93,50,000

15,00,000
20,50,000
14,50,000

80,00,000
21,00,000
22,00,000
4,00,000
16,00,000
50,000

1,93,50,000

Income and Expenditure Account
Expenditure

Amount

Income

Program Expenses

Amount

Grants

Watershed Prog.

30,00,000 Indi an Grants

10,00,000

Educati onal Prog.

16,00,000 Forei gn Grants

70,00,000

9,00,000 D onations

Mi cro-credi t Prog.
Emergency Reli ef

18,00,000 C orporate D onati ons

7,00,000

Rural D evelop.

12,00,000 Publi c D onati ons

5,00,000

Institutional Expenses
Salary

Local C ontri buti ons

3,00,000

12,00,000 Investment Income

Professi onal Fees

2,50,000 UTI

2,50,000

Fuel & C onvey.

2,75,000 LIC D eposi ts

3,00,000

Travel

75,000 Bharat Petroleum

2,50,000

Audi t Fees

50,000 IC IC I Flexi Bonds

5,00,000

Pri nti ng & Stati onery

2,25,000 Bank Interest

3,50,000

Other Expenses

3,00,000 Other Income

2,00,000

Repai rs & Mai nten.

1,25,000

Surplus

3,50,000
1,13,50,000

248

1,13,50,000

How much it cost?
You can publish your accounts (Balance Sheet, Income and Expenditure Account) in a local, regional (state-level) or national newspaper. Alternatively, you can also publish these in non-profit newletters / magazines, which accept advertisements. The cost would be lower for these. We have already discussed how the accounts can be published as part of the annual report or on the internet. For these two options, the cost of publication is negligible.
The cost of publication in a newspaper increases as you move up the ladder. The cost of publishing may also vary from place to place. It would be ranging from Rs.100 to Rs.2,500 per column centimeter9. If you want to publish your accounts in brief, it may need six centimeters of two columns10. If you want to publish your accounts in detail, it may need fifteen centimeters of two columns11. Given below are indicative costs12 of publication:

P ap er

Rate per column-centimeter (in Rs.)

Total Cost in Rupees
Brief 12 column cm

Detailed 30 column cm

Veer Arjun, New Delhi

3,000

7,500

400

4,800

12,000

450

5,400

13,500

Times of India, New Delhi

2,050

24,600

61,500

The Hindustan Times, New Delhi

12

250

Punjab Kesari, New Delhi

11

3,000

Dainik Jagaran, New Delhi

9

1,200

Statesman, New Delhi

10

100

2,500

30,000

75,000

Per column centimeter means one centimeter height and one column wide of a newspaper
That means 12 columns centimeters
That means 30 columns centimeters
As on June 2002

249

250

Section X: Income Tax and other Forms
Form 3CF: Approval u/s 35 (1)(iii)

253

Form 10A: Income Tax Registration u/s 12A

257

Application: Condoning delay for Registration u/s 12A

258

Form 10G: Approval u/s 80G

259

Form 56: Approval u/s 10(23)(C)

262

Application: Approval u/s 35AC

265

Form 58A: Donation Certificate u/s 35AC

268

Form: Budget and Balance Report

269

Form: Audited Utilisation Certificate

271

251

252

Form 3CF: Approval u/s 35(1)(iii)
1

FORM No. 3CF
[See rule 6]

Application form from scientific and industrial research organisations for approval under section 35 of the Income Tax Act
1.

(i) Name and registered address of the organisation

(ii) In case of renewal of approval under section 35, give details of earlier approval

2.

(i) Address of the research laboratory (indicate the year of establishment)

(ii) Name and address of the Officer in-charge of the laboratory

3.

4.

Legal status of the organisation, whether registered society / company / others. Please enclose a copy of certificate of registration.

(i) Sources of income of the organisation (for the last three years)

(ii) Indicate assessment particulars, if any (permanent account number / GIR number, name of the Ward / Circle)

(iii)Last assessed and returned income

1

Inserted by the Income Tax (Eighth Amendment) Rules, 1989, w.e.f. 23-8-1989.

253

5. Details of current receipts of expenditure incurred on research and development during the last three years.
Year

Donations

Grants

Research and Development Expenditure

6. Investment made so far
(i) Fixed deposits with bank
(ii) Fixed deposits with companies
(iii) Securities
(iv) In shares, debentures
(v) Cash in hand
(vi) Others, if any, not covered above
7. Whether accounts of the organisation are audited (enclose an audited statement of accounts of the organisation for the relevant year).

8. Research subjects and projects undertaken by the organisation (enclose details)

9. Facilities available for research
(i) Land / building
(ii) Equipment (indicating items of value) (enclose details)

10. Research achievements during the last three years (enclose details).

11. Enclose details of seminars, conferences, workshops, training courses, etc., conducted during the year.

12. Enclose details of future programme of the research, indicating the financial implications.

Certified that the above information is true and to the best of my knowledge and belief.
Place__________

Signature_____________

Date__________

Designation___________
Full Address__________
254

Notes
1.

For availing of exemption under section 35 the sole object of the organisation should be to undertake scientific research.

2.

The organisation which has been approved under sections 35(1)(ii) and 35(1)(iii) will maintain a separate account of the sums received by it for scientific research and will submit to the
2
[Central Government] each year a copy of the audited annual return showing the total
Income and Expenditure and Balance Sheet showing its assets and liabilities. The auditors should certify that the amounts incurred are for scientific research. If the organisation is to avail of exemption under section 10(21) of the Income-tax Act, the annexure to this form should also be filled in and the conditions therein should be satisfied.

3

[3. This application form (in triplicate) should be sent to the Central Board of Direct Taxes through the Commissioner of Income-tax having the jurisdiction over the applicant.]

4

[4. The applicant is also required to furnish any other particulars or details required by the Central
Government.]
ANNEXURE
Applicable for scientific research associations approved under section 35(1)(ii), claiming exemption under section 10(21) for the year ………………….

1.

Total income of the association including voluntary contributions for the relevant year.

2.

Amount of income referred to above that has been or deemed to have been utilised wholly and exclusively for the objects of the association.

3.

Amount accumulated for the purpose mentioned in column (2) above.

4.

(i) Details of modes in which the funds of the association are invested or deposited showing nature, value and income from the investment.

(ii) Details of funds not invested in modes specified in section 11(5).
Sl.
No
(1)

Name and Address
In the case of of the Concern company, number and class of share held
(2)

2

Income from the
Investment

(4)

(3)

Nominal value of the Investment

(5)

Substituted for “prescribed authority” by the Income-tax (Twenty-second Amendment) Rules, 1999,
w.e.f. 25-6-1999
3
Substituted, ibid. Prior to the substitution, note 3 read as under:“ 3. All applications will be made to the
Director General (Income-tax Exemptions), in triplicate, through the commissioner of Income-tax having jurisdiction over the applicant. Six copies of the application with enclosure shall also be sent to the
Department of Scientific and Industrial Research, New Delhi.”
4
Substituted, ibid. Prior to the substitution, note 4 read as under:“ 4. The applicant is also required to furnish any other particulars or details required by the competent authority or the DSIR.”

255

5.

(i) Is the association carrying on any business? (give details)

(ii) Is the business incidental to the attainment of its objectives?

6.

Details of nature, quantity and value of contributions (other than cash) and the manner in which such Contribution has been utilised.

7.

Details of shares, security or other property purchased by or on behalf of the association from any interested person.

8.

Whether any part of the income or any property of the association was used or applied in a manner which results directly or indirectly in conferring any benefit, amenity or perquisite
(whether converted into money or not), on any interested person. If so, details thereof.

9.

Amount deemed to be income of the association by virtue of sub-section (3) of section 11, as applicable by the proviso to section 10(21).

Certified that the above information is true and to the best of my knowledge and belief.

Place__________

Signature_____________

Date__________

Designation___________
Full Address__________

256

Form 10A: Income Tax Registration u/s 12A
FORM NO. 10 A
[See rule 17A]
Application for registration of charitable or religious trust or institution under section 12A(a) of the Income Tax Act, 1961
To,
The Chief Commissioner of Income Tax,
.................................
Sir,
I, ___________ , on behalf of ___________ hereby apply for the registration of the said trust
/ institution under section 12A of the Income Tax Act, 1961. The following particulars are furnished herewith:
1. Name of the trust / institution in full [in block letters]:
2. Address:

3. Name(s) and address(es) of author(s) / founder(s):

4. Date of creation of the trust or establishment of the institution:

5. Name(s) and address(es) of trustee(s) / manager(s):
I also enclose the following documents:
1.

(a) *Original / Certified copy of the instrument under which the trust / institution was created
/ established, together with a copy thereof.
(b) *Original / Certified copy of document evidencing the creation of the trust or the establishment of the institution, together with a copy thereof (The originals, if enclosed, will be returned).

2.

Two copies of the accounts of the *trust / institution for the latest *one / two / three years.

I undertake to communicate forthwith any alteration in the terms of the trust, or in the rules governing the institution, made at any time hereafter.

Date:__________

Signature____________
Designation__________

* Strike out whichever is not applicable.

Address_____________

257

Application: Condoning delay in applying for Income Tax
Registration u/s 12A
Sample Application
(Please type on your letterhead or plain paper.)

To,
The Chief Commissioner/ Commissioner of Income Tax/ Director of Income Tax (Exemption),
___________________
___________________
___________________

Re: Condonation of delay in filing application for registration under section 12A (a) of the Income Tax Act, 1961
Sir,
Enclosed please find the application for registration under section 12A (a) of the Income Tax Act,
1961 of the applicant institution. Although the said application should have been filed on or before the __________ 19______, it could not be so filed because _________________________ (here state the cause of the delay).
It is therefore, requested that the delay in filing of the said application may please be condoned and the applicant be granted registration under section 12A (a) of the Act.

Thanking You, we are
Yours faithfully,
For ___________________
(Sd.)__________________
(Designation)

258

Form 10G: Approval u/s 80G
FORM No. 10G
(See rule 11AA)
Application for grant of approval or continuance thereof to institution or fund under section
80G(5)(vi) of the Income-tax Act, 1961
1.

Name of the institution / fund in full (in
Block Letters)

2.

Address of the registered office of the institution / fund

3.

Legal status:
[Please specify whether the institution / fund is –
(i) constituted a public charitable trust;
(ii) registered under the Societies
Registration Act, 1860 (21 of 1860) or under any law corresponding to that
Act in force in any part of India;
(iii) registered under section 25 of the
Companies Act, 1956 (1 of 1956)
(iv) a University established by law;
(v) any other educational institution recognised by the Government or by any
University established by law or affiliated to any University established by law;
(vi) an institution wholly or partly financed by the Government or a local authority;
(vii) an institution established with the object of controlling, supervising, regulating or encouraging games or sports and is approved for this purpose under section
10(23), or;
(viii) a Regimental Fund or Non-Public Fund established by the armed forces of the
Union for the welfare of past or present members of such forces or their dependants.] 259

4.

Objects of the institution / fund and geographical area over which its activities are undertaken:

5.

Names and addresses of trustees / office-bearers of the institution or fund:

6.

(i) If registered under section 12A(a) of the Income tax Act, the registration number and date of registration.
(ii) If notified under section 10(23) or under section 10(23C) of the Income tax Act, the details thereof. (iii) If responses to (i) and (ii) are negative, whether any application for the same has been filed? If yes, enclose a copy of the same.

7.

(a) Period of last approval, if any, please enclose a copy of the approval.
(b) If any change in the aims and objects and the rules and regulations have been made since the last approval, the details thereof.

8.

Assessment Particulars:(a) Ward / Circle where assessed and permanent account number / GIR number

(b) Is the income exempt under sections 10(22), 10(22A), 10(23), 10(23AA), 10(23C) or 11?

(c) Whether any arrears of taxes are outstanding? If so give reasons.

9.

Amount accumulated for the purposes mentioned in item (4) above.

10. (i) Details of modes in which the funds are invested or deposited, showing the nature, value and income from the investment.
(ii) Whether any funds have not been invested in the modes specified in section 11(5)?

11. (i) Is the institution / fund carrying on any business? If yes, give details.

260

(ii) Is the business incidental to the attainment of its objects?

12.

Details of nature, quantity and value of contributions (other than cash) and the manner in which such contributions have been utilised.

13.

Details of shares, security or other property purchased by or on behalf of the trust from any interested person as specified in sub-section (3) of section 13.

14.

Whether any part of the income or any property of the association was used or applied in a manner which results directly or indirectly in conferring any benefit, amenity or perquisite
(whether converted into money or not), on any interested person as specified in sub-section
(3) of section 13? If so, details thereof.

I certify that the information furnished above is true to the best of my knowledge and belief.
I undertake to communicate forthwith any alteration in terms or in the rules governing the institution
/ fund made at any time hereafter.

Place_________

Signature_____________

Date__________

Designation___________
Address______________

Notes:
The application form (in triplicate) should be sent to the Commissioner of Income Tax having jurisdiction over the institution or fund along with the following documents:
i. Copy of registration granted under section 12 A or copy of notification issued under section
10(23) or section 10(23C); ii. Notes on activities of institution or fund since its inception or during the last three years, whichever is less; iii. Copies of accounts of the institution or fund since its inception or during the last three years, whichever is less.

261

Form 56: Approval u/s 10(23)(c)
5

FORM NO. 56
[See rule 2C]

Application for grant of exemption or continuance thereof under section 10(23C)(iv) and (v) for the year....................
1.

Name and address of registered office of the trust/ institution

2.

Legal status, whether trust or registered society/ others.
Please enclose a copy of certificate of registration

3.

Objects of the trust

4.

Names and addresses of the trustees/ office bearers

5.

Geographic area over which the activities of the trust are performed. Enclose details of work done in different places with addresses of branch offices and names and addresses of office bearers in these places.

6.

Enclose copies of memorandum of association, articles of association, trust deed, rules/ regulations of the trust or institution and those of other institutions like schools, hospitals, etc., managed by the trust/ institution.

7.

Enclose copies of audited accounts and balance sheet for the last three years along with a note on the examination of accounts and on the activities as reflected in the accounts and in the annual reports 6[with special reference to the appropriation of income towards objects of the trust].

8.

Has the trust received any donations from a foreign country to which the provisions of Foreign
Contribution (Regulations) Act, 1976, applies? Give details

9.

Give assessment particulars:(i) Ward / Circle of jurisdiction and the last income returned and assessed with permanent account number / GIR number
(ii) Is the income exempt under section 11?

5

Inserted by the Income-tax (Ninth Amendment) Rules, 1989, w.e.f. 28-8-1989 and corrected by the
Income-tax (Fourth Amendment) Rules 1990, w.e.f. 8-3-1990
6
Substituted by the Income-tax (Fourth Amendment) Rules, 1990, w.e.f. 8-3-1990

262

(iii) Is any recovery of tax, etc., outstanding against the trust?

(iv) Whether any penalties have been initiated / levied?

7

[10. Total income of the trust (including voluntary contributions) for the previous year relevant to the assessment year for or from which the exemption is sought.]

11.

Amount of income referred to above that has been or deemed to have been utilised wholly and exclusively for the objects of the trust. 8[Income deemed to have been utilised shall have the meaning assigned to it in sub-sections (1) and (1A) of section 11].

12.

Amount accumulated for the 9[purposes] mentioned in column 10[(3)] above.

13. (i) Details of modes in which the funds of the trust are invested or deposited showing the nature, value and income from the investment:
(ii) Details of funds not invested in the modes specified in section 11(5):
Sl.
No.

Name and address of the concern

In the case of a company, number and class of shares held

Nominal value of the investment

Income from the investment (1)

(2)

(3)

(4)

(5)

14, (i)

Is the trust carrying on any business (give details)?

(ii) Is the business incidental to the attainment of its objects?

15.

Details of nature, quantity and value of contributions (other than cash) and the manner in which such contributions have been utilized.

7

Substituted, ibid.
Inserted, ibid.
9
Substituted for “purpose”, ibid.
10
Substituted for “2”, ibid.
8

263

16.

Details of shares, security or other property purchased by or on behalf of the trust from any interested person as specified in sub-section (2) of section 13.

17.

Whether any part of the income or any property of the association was used or applied, in a manner· which results directly or indirectly in conferring any benefit, amenity or perquisite
(whether converted into money or not), on any interested person as specified in sub-section
(3) of section 13? If so, details thereof.

18.

Amount deemed to be income of the trust if sub-section (3) of section 11, is made applicable.

19.

The income that would have been assessable if the trust had not enjoyed the benefit of section 10(23C)(iv) or (v)

Certified that the above information is true to the best of my knowledge and belief.

Place...........................

Signature......................................

Date............................

Designation...................................
Full Address..................................

Notes:
1. In this form, the term “trust” also includes a fund or institution or any other legal obligation.
2. The application form should be sent to the Director General (Income Tax, Exemptions) through the Commissioner of Income Tax having jurisdiction over the trust or institution.
Four copies of the application form along with the enclosures should be sent.
3. Copies of the following documents should be annexed:–
(i)

Deed of trust / Memorandum and Articles of Association.

(ii)

A list of trustees enclosing settlor/ members of the Governing Council.

(iii) A photocopy of the latest certificate under section 80G issued by the Commissioner of
Income Tax.
(iv)

True copies of the assessment orders passed for the last three years.

(v)

Photocopy of communication from the Commissioner of Income-tax with reference to the application of the trust/institution for a registration under section 12A.

4. The applicant shall furnish any other documents or information as required by the DirectorGeneral (Income Tax, Exemptions) or any authority authorised by the Director-General
(Income Tax, Exemptions).

264

Application: Approval u/s 35AC
(To be filled in duplicate for each project in Hindi or English)

Application under Section 35AC of the Income Tax Act, 1961 and Rules 11F to 11O of the Income-tax Rules, 1962 before the National Committee for
Promotion of Social and Economic Welfare, Department of Revenue, North Block,
New Delhi – 110 001.
1. Name of the applicant organisation:
2. Address and phone number:

3. Applicant is a:
(a) Public Sector Company

(

)

(b) Company other than (a) above

(

)

(c) Local Authority

(

)

(d) Other Institution

(

)

i) Registered Society

(

)

ii) Public Charitable Trust

(

)

iii) Registered u/s 25 of the Companies Act, 1956

(

)

(e) Association constituted as a

iv) Else please specify what:
4.

Is the applicant assessed to Income Tax? If so, please give particulars of:
(a)

Permanent Account No. / GIR No.

(b)

Designation and address of the Assessing Officer

(c)

Latest year for which a return of tax has been filed

5. (a) Does the applicant maintain regular accounts ?

Yes/No

(b) Years for which copies of audited accounts have been annexed (three latest years):
Year ending
(i)

Name of the Auditor

(ii)
(iii)
265

6.

In case the applicant is an Association or Institution:
(a) Certified copies of documents like the Trust Deed, Rules and Regulations, Certificates of
Registration, etc. enclosed with this application (please list).
(i)
(ii)
(iii)
(iv)
(b) Particulars of approval under Section 10(23) / 80G of the Income Tax Act, 1961, if any:

(c) Names, addresses and designation of person(s) managing the organisation:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(d) What have been its activities during the past three years / the track record
(Attach a brief note, if necessary):
(e) What have been the sources of funding of the past activities of the organisation?
(f) The activities are for the benefit of:
(i)

Any individual

(ii)

Specific Community

(iii) General Public
(g) Is there any provision in the constitution, rules, regulations, etc. under which the income or corpus of the organisation can be put to use for a non- charitable purpose?
7.

Yes/ No

Particulars of the Project or Scheme indicating location (copy of project report to be attached):
(a)

Title

(b)

Location (Indicate village, district and state)

(c)

Date of commencement

(d)

Likely date of completion

(e)

Estimated cost:

(Break-up of cost and copy of resolution for undertaking the project or scheme to be attached)

266

(f)

(g)

Would project benefit flow to the manager, trustees, etc. other than employees of the Institution:
Yes / No

(h)

8.

Persons likely to benefit from it
(Please give details of benefit to economically weaker sections)

How is the applicant equipped with the manpower, expertise, infrastructure, etc. to execute the project?

In case the applicant is a company:
(a)

(b)

In case any capital asset is to come into existence under the project or scheme, what arrangements have been made to divest the company of the ownership of such asset?

(i)

Has the applicant been penalized under the Income Tax Act for concealment of income during the three years immediately preceding the date of application and if yes, the details thereof ?

(ii)

9.

Is it bound to undertake the project or scheme applied for under any law or as a result of any agreement with its employees?
Yes / No

Has any of its present trustees, principal officers, etc. been convicted of any offense during the last three financial years and if yes, the details thereof ?

10.

Please give particulars of earlier projects or schemes of the organisation which have been considered by the National Committee and specify the details of acceptance or rejection.

11.

(i)

The Applicant verifies that the particulars contained in this application and its annexures are correct.

(ii)

The Applicant undertakes that:

(a)

Separate account will be maintained for each project or scheme, which will be open to inspection by the National Committee;

(b)

The National Committee for Promotion of Social and Economic Welfare will be informed six monthly of the amount of contributions raised, the total amount spent and the progress / achievement made in respect of the project or scheme approved by it; and

(c)

Audited Annual Accounts along with the Audit Report will be furnished.

Date:___________
Place:__________

(Signature)*
(Name and Designation of the signatory in
Block Letters)

(Seal / Stamp of the organisation)
* Note: The application/ verification/ undertaking has to be signed by the Chief Executive of the applicant organisation, i.e. the Managing Director or the authorised officers of a company or the
Administrator of a Local Authority or the Managing Trustees of a Trust or the President or Secretary or the authorised functionary of a Society.

267

Form 58A: Donation Certificate u/s 35AC
Form No. 58A
[See Rule 11–O(1)]
Certificate of expenditure by way of payment in respect of eligible projects or schemes notified under section 35AC
1. Certified that……………………………………………………………………………………(name and address of donor)………………....................……..……..(P.A. No……..………...................) has paid a sum of Rs…………….…….(in figures)………………..………………..………….….(in words)…………….……on ............................................. in cash/ by cheque No./ Demand
Draft No…….................................…..in respect of……………….………………..(name of project or scheme)……………………………………….project or Scheme which has been notified under section 35AC vide notification SO .....................…………….......at an estimated cost of Rs. ................................. For Assessment Year(s) .................…………......
2. It is further certified that the amount received from the donor is within the amount of the project/ scheme approved by the National Committee under section 35AC of the Income Tax
Act as may be seen from the following:
Amount in Rs.
Amount received till date as donations from others prior to this donation:

............................................

Amount received from donor named in paragraph 1

............................................

Total amount received for the project/ scheme including the amount covered under this certificate

............................................

Total cost of the project/ scheme approved by the National Committee under section 35AC

............................................

3. An annual statement of donations received and the details of the project will be sent to the
National Committee and the donor by 30th June following the financial year in which the amounts are received.
Name: ..............................……….…………..

Signature .........................................

Address: ....................................……………

Name ..............................................

Permanent Account No. ..............................of organisation Designation of the person managing donee the affairs of the donee
........................................................

Date ...................................

268

Form: Budget and Balance Report
Budget and Balance Report
Budget & Balance Report by ___________________________________ for .............. (Agency)
Funds
For period from ____________ to ___________

Agreement Reference & Date ___________

Project Name: __________________________________ Project Area: _________________
A: Expenditure (All amounts in Indian Rupees)
Total
Sanctioned
B u d g et

B udget Line Item11

For this reporting period
Actual
S p en t

B u d g et

Variance

C umulative

B u d g et

Actual
S p en t

Grand Total

Note: Reasons for variances exceeding 10% of the budgeted items are attached on a separate sheet.
B. Revolving Fund Status

Amount

1. Revolving Fund Available
Previous Revolving Fund Grant from ............. (Agency)
Add: Revolving Grant received

12

during this period

Less: Adjustments (bad debts, etc. - please specify) during this period Total .............. (Agancy) Revolving Fund (RF)
2. Status of Revolving Fund Utilisation (in case of l oans)
Opening balance of loans recoverable from beneficiaries/ groups as on________
Add: Loans given out during this period
Add: Interest / service charges (if applicable) debited to beneficiaries / groups during this period
Sub Total

11
12

Please add more lines if required.
This amount is transferred from total grant and should tie up with figure in c.1.

269

Less: Recoveries made during this period from beneficiaries / groups -T wards principal of the loan o -T wards interest / service charges o Total Recoveries from beneficiaries / group during this period
L e s s : A d j u s t m e n t s ( b a d d e b t s , e t c . - p l e a s e s p e c i f y) d u r i n g this period
Closing Balance of Beneficiairy / group loans (CBL)
Percentage of Revolving Fund deployed [(CBL / RF) X 100]
Note: List of loans outstanding from beneficiaries / groups should be given as an Annexure once annually. Please include the following columns in your listing:

Details of the originala loan
Beneficiary's
Name

Name of spouse/ parent Village
Purpose

Month, year when given

Original amount Balance outstanding C: Un-utilised Balance of .............. (Agency) Funds (amounts in Rupees)
1. Agreement and D isbursal
Total amount sancti oned so far
Total amount di sbursed so far
2. U nutilised balance
Openi ng balance of unuti li sed .......... (Agency) funds
Add: Total grant recei ved duri ng thi s peri od
Total funds available
Less: Amount transferred to Revolvi ng Fund (B.1), i f any duri ng thi s peri od
Less: Amount spent duri ng thi s peri od (Grand Total of A)
C losing balance of ............. (Agency) grant Funds

D: FIxed Assets acquired with ............. (Agency) Funds
Assets

Date

When acqui red

(Accountant)

Locati on

Bei ng used for (purpose)

(Project In-charge)

Note: Please sign and stamp other pages of this report as well.

270

Amount (Rs.)

(NGO Chief)

Form: Audited Utilisation Certificate
Audited Utilisation Certificate
To,
Agency,
New Delhi
a. We, ..........(name of the Firm)............, the Auditors of ............(name of Society / Trust) have examined the books of Account and other records, including vouchers and supporting documents, of ................... (name of Society / Trust)......... . We have also carefully examined the agreement / agreement letter containing terms & conditions for support, dated
(date of the letter)..........., signed between……….. (Agency) and ...........(name of Society
/ Trust) ...........for the grant of funds covered by this certificate and the budget approved by
.................. (Agency). We have also obtained such explanations and clarifications from the
Secretary/ Chief Functionary, as we considered necessary for the purpose of this certificate.
b. On the basis of the above examination, we certify that ...............(name of Society / Trust) has incurred the following expenditure during the period ............(date)..... till ............ (date).
Project Name: ________________________________
A: Expenditure (All amounts in Indian Rupees)

Budget Line Item

11

Total
Sanctioned
B u d g et

For this reporting period

B u d g et

Actual
S p en t

Variance

Cumulative

B u d g et

Grand Total

B. Revolving Fund Status
Amount

1. Revolving Fund Available
Previous Revolving Fund Grant from ............. (Agency)
Add: Revolving Grant received

12

during this period

Less: Adjustments (bad debts, etc. - please specify) during this period Total .............. (Agancy) Revolving Fund (RF)

11
12

Please add more lines if required.
This amount is transferred from total grant and should tie up with figure in c.1

271

Actual
S p en t

2. Status of Revolving Fund Utilisation (in case of l oans)
Opening balance of loans recoverable from beneficiaries/ groups as on________
Add: Loans given out during this period
Add: Interest / service charges (if applicable) debited to beneficiaries / groups during this period
Sub Total

Less: Recoveries made during this period from beneficiaries / groups -T wards principal of the loan o -T wards interest / service charges o Total Recoveries from beneficiaries / group during this period
L e s s : A d j u s t m e n t s ( b a d d e b t s , e t c . - p l e a s e s p e c i f y) d u r i n g this period
Closing Balance of Beneficiairy / group loans (CBL)
Percentage of Revolving Fund deployed [(CBL / RF) X 100]

c: Unutilised Balance of .............. (Agency) Funds (amounts in Rupees)
1. Agreement and D isbursal
Total amount sancti oned so far
Total amount di sbursed so far
2. U nutilised balance
Openi ng balance of unuti li sed .......... (Agency) funds
Add: Total grant recei ved duri ng thi s peri od
Total funds available
Less: Amount transferred to Revolvi ng Fund (B.1), i f any duri ng thi s peri od
Less: Amount spent duri ng thi s peri od (Grand Total of A)
C losing balance of ............. (Agency) grant Funds

272

d. We also certify that the above expenditure has been truly and properly incurred in accordance with the Budget referred to above, except for the following items13:

Item

Amounts (Rs.)

Comments

e. We further confirm the following:
1. We have carried out the above examination according to Standard Auditing Practices.
2. We are adequately satisfied about the reliability, authenticity and genuineness of the records and supporting documents produced before us.
3. ............... (name of Society / Trust) ................ has maintained the books of Account properly, in accordance with the law and Generally Accepted Accounting Principles.
4. ............... (name of Society / Trust) ................. has complied with all the essential
.................... (Agency) requirements laid down in the concerned letter of agreement for
.................... (Agency) supported Projects, except for the following14:
#
#
#
#
5. To the best of our knowledge and belief, and according to the examination of accounts carried out by us, ..............(name of Society / Trust) .............. has not received / has received other funds for purposes similar to the above grant.

Yours faithfully for ................name of CA Firm..........
Chartered Accountants

(...........Name of CA.............) Membership No.

Date:

Partner / Proprietor

Note: Please put your seal on all pages. Please sign other pages as well.

13
14

Please write ‘Not applicable’ in the table if there are no such items.
Please write ‘Not applicable’, if all the requirements have been compiled with.

273

Phone:

About AccountAid India
(Back inside cover)
AccountAid™ India is a private consulting organisation, which was set up 1992 with encouragement by Oxfam America. It works with
Agencies and NGOs on accounting and related issues. These issues include accounting structure, compliance with FCRA, Income Tax, Societies Act, budgeting, donor reporting.
AccountAid India works only through Agencies and does not accept fees or fee-based assignments from implementing NGOs.
AccountAid persons have participated as key resource persons in workshops organised by various agencies including Actionaid, CAPART,
CARE, CRS, CRY, Diakonia, EZE, Ford Foundation, Oxfam America, Oxfam India Trust,
Swissaid as also various network groups.
AccountAid India has also contributed as a member of the Task Force set up by the Planning Commission on Laws affecting Voluntary
Sector.
AccountAid develops its own training material based on needs felt during the field visit to the
NGOs and provides training related to basic accounting, FCRA, Income Tax, other legal requirement for NGOs, project monitoring etc. Our training material is sometimes published or used by others during workshops (such as Bombay
Chartered Accountants Society, Christian Manager) or for development of other material (such as Accounting Manual for NGOs by Sida).
Some of the reference material, including earlier issues of AccountAble and FCRA forms, are available on our web site at http:// www.accountaid.net. The web-site also provides a facility for answering NGO questions, in confidence and on a complimentary basis.
AccountAid staff includes persons with diverse backgrounds such as education, cost accounting and rural banking. It also draws on the experience of professional accountants on a regular basis, who also visit the field.
You can reach us (Monday-Friday; 9:30 5:30) at:
AccountAid India,
55-B, Pocket C, Sidharth Extension,
New Delhi – 110 014
Phone: 011-2634 3128, 2634 6111
Fax: 011-2634 3852 e-mail: accountaid@vsnl.com web site: http://www.accountaid.net
(ii)

Reserve Fund Mesopotamia

Provident Fund Depreciati

Income & Expenditure Credit

Luca Pacioli

Budget & Balance Report

Corpus
Voucher

Accounting

vFkZ'kkL=

The AccountAble Handbook is a compilation of the individual issues of ‘AccountAble’, released by AccountAid India since 1994. These issues have been designed and circulated on a monthly basis primarily for the partners of our client Agencies.

Standards

Revolving Funds

Narration Receipts Fixed Assets Register Grants

The Trial compilation brings all Computerized Accounts
Multiple Cash Books present Balance Auditors issues of
AccountAble related to accounting and regulation of non-profit organisations together at one place. Revenue Stamps

Benedetto Cotrugli

Ledgers

The topics covered in this handbook include:

Cash Box Journal Honorarium
Form IIIA Bank Reconciliation Blank Cheque
• Financial statements
Deficit Endowments Investments
• Book-keeping
• Banking

Account Payee, Not of organisation
Negotiable
• Form

vkpk;Z dkSfVY; Key Persons

• Income tax

ction 10(23C)(iv)


Tax Exemption

Financial reporting

• Other
ACCOUNTABILITYtopics such as revolving funds, corContribution in Kind pus, contribution in kind, gratuity, etc.

INCOME

Transparency
Public Disclosure Auditors’ Certificate Debit

AccountAble issues related to FCRA
Stock Register Receiptsin&separate handbook. been compiled a Payments

have

An electronic copy of this book is available on our web-site.

Societies Registration Act, 1860 Public Trust
Section 25 Non-profit Company Section 80G www.AccountAid.net Donation Ear-marked Funds izfrxzkgdSÜpk;a Gratuity

Salary Register

Conflict of Interest

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