Accounting for Non-Profit Organizations in Pakistan

Introduction

Non-Profit Organizations (NPOs)—also referred to as Section 42 companies, trusts, welfare societies, or non-governmental organizations (NGOs)—play a crucial role in Pakistan’s social and economic development. However, even though these entities do not operate for profit, they are still subject to rigorous financial accounting, reporting, and compliance obligations.

Accounting for NPOs in Pakistan involves unique considerations such as fund accounting, donor restrictions, grant management, and regulatory compliance with SECP, FBR, and relevant donor agencies. This guide covers all you need to know about non-profit accounting in Pakistan—including legal requirements, chart of accounts, audit obligations, and best practices for transparency.

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1. Legal Framework for Non-Profit Accounting in Pakistan

Key laws and regulations include:

• Companies Act, 2017 (Section 42)

• Income Tax Ordinance, 2001 (Section 2(36), 100C)

• IFRS for NPOs / IPSAS / IFRS-SME guidelines

• SECP Circulars on Financial Reporting by NPOs

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2. Characteristics of NPO Accounting

NPOs operate on principles that distinguish them from for-profit businesses. Their accounting framework must:

✅ Track restricted vs. unrestricted funds
✅ Recognize donations, grants, and in-kind support
✅ Provide transparency in program spending
✅ Support tax-exempt status and donor compliance
✅ Maintain separate accounts for projects or donors

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3. Types of Non-Profit Entities in Pakistan

Among these, Section 42 companies are the most regulated and widely recognized for tax and donor benefits.

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4. Chart of Accounts for NPOs

A well-designed Chart of Accounts (COA) enables accurate fund tracking and accountability.

Key Accounts for NPOs:

Income Accounts:

• Donations (general)

• Donations (restricted)

• Grants (project-specific)

• Membership fees

• Government subsidies

• Fundraising event revenue

• In-kind contributions

Expense Accounts:

• Program expenses (by project or sector)

• Administrative expenses

• Fundraising expenses

• Salaries and stipends

• Office supplies and utilities

Balance Sheet Accounts:

• Bank accounts (per donor/project)

• Accounts receivable (pledged donations)

• Fixed assets and depreciation

• Deferred grants and unspent balances

• Accumulated surplus/deficit

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5. Fund Accounting in NPOs

NPOs must adopt fund accounting, where resources are grouped into funds based on restrictions or donor intent.

Each fund should be tracked separately, often with separate ledgers or sub-accounts.

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6. Donor Reporting and Grant Management

Donor-funded projects must meet:

✅ Budget vs. Actual comparisons
✅ Reporting on spending milestones
✅ Supporting documentation (receipts, invoices)
✅ Timely submission of financial reports (monthly/quarterly/annual)
✅ Refund or reclassification of unspent or misused funds

Foreign donors (e.g., USAID, DFID, EU) may require compliance with IFRS or IPSAS, procurement rules, and third-party audit reports.

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7. Accounting Standards for NPOs

While no dedicated Pakistani GAAP exists for NPOs, many apply:

• IFRS for SMEs (as permitted by SECP)

• IPSAS (International Public Sector Accounting Standards)

• Donor-mandated reporting frameworks

• Cash-basis accounting for small NGOs

Large NPOs or those operating under Section 42 must have audited financial statements prepared on accrual basis and often adopt IFRS/IPSAS hybrids.

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8. Financial Reporting Requirements

A. Section 42 Companies (SECP-Registered)

Must file annually with SECP:

• Audited financial statements

• Form A (Annual Return)

• Form 29 (Director updates)

• Form C (Special resolutions)

• Form 45 (UBO Declaration)

• Tax returns with FBR

B. Trusts and Societies

• Prepare financial statements for trustees or registrar

• Submit tax filings (for exemption or otherwise)

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9. Audit and Internal Control Obligations

A. Statutory Audit

Section 42 companies are mandated to appoint an external auditor, who issues an audit report on:

• Statement of Financial Position

• Income and Expenditure

• Cash Flow

• Statement of Changes in Fund Balances

• Notes to the Accounts

B. Donor or Project Audit

Many donors require:

• Project-specific audits

• Management letters

• Expenditure certification

• Special reports (e.g., compliance with grant terms)

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C. Internal Control Best Practices

• Segregation of duties

• Dual signatory for bank payments

• Monthly reconciliation of bank accounts

• Budget approvals and fund release checks

• Procurement policy compliance

• Inventory and fixed asset registers

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10. Taxation and Exemptions for NPOs

A. Tax-Exempt Status

To avail tax exemptions under Section 100C of the Income Tax Ordinance, 2001, the NPO must:

• Be registered with SECP / Registrar / Charity Commission

• File for Section 2(36) status with FBR

• Maintain 85% disbursement rule (i.e., at least 85% of income must be spent)

• Submit annual audited accounts and tax returns

B. Withholding and Sales Tax Implications

• NPOs may be subject to WHT on services and salaries unless exempt

• Some procurements may attract sales tax even if the NPO is exempt from income tax

• Donations may be tax deductible for donors if the NPO is FBR-approved

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11. Common Challenges in NPO Accounting

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12. Accounting Software Options for NPOs in Pakistan

To manage donor and fund-specific accounting:

Choose software that supports segment-wise or class-based reporting for projects or donor funds.

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13. Best Practices for Transparent Accounting in NPOs

✅ Set up a dedicated bank account for each major donor/project
✅ Develop and follow a chart of accounts with fund codes
✅ Perform monthly bank and grant reconciliations
✅ Train staff on basic financial procedures and documentation
✅ Adopt and document a clear procurement and expense policy
✅ Regularly present financial statements to the board and donors
✅ Ensure timely external audit and SECP/FBR filings

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14. Frequently Asked Questions (FAQs)

Q1: Is it mandatory for NPOs to be audited?
Yes, Section 42 companies and NPOs claiming tax exemption must submit audited accounts annually.

Q2: Can a non-profit earn revenue in Pakistan?
Yes, but it must be incidental to its mission, and the surplus cannot be distributed to members.

Q3: How are donations treated in accounting?
As income, either restricted or unrestricted depending on donor terms.

Q4: Do NPOs need to register for sales tax or withholding tax?
In some cases, yes. Especially if offering taxable services or acting as a withholding agent for salaries and vendor payments.

Q5: What happens if an NPO fails to comply with SECP or FBR rules?
It may lose its license, tax-exempt status, or face penalties and deregistration.

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15. How Sterling.pk Can Help

At Sterling.pk, we offer end-to-end accounting and compliance support for non-profit organizations:

✅ Setting up fund accounting and donor tracking systems
✅ Chart of accounts design specific to NGOs and Section 42 companies
✅ Monthly bookkeeping and financial reporting
✅ Donor report preparation and budgeting assistance
✅ Filing with SECP (Form A, Form C, Form 45, audit reports)
✅ FBR exemption application and tax return filing
✅ Internal audits and grant utilization verification

With our deep experience in non-profit financial management, we help you maintain credibility, accountability, and full legal compliance.

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Conclusion

Accounting for non-profit organizations in Pakistan is both a regulatory requirement and a hallmark of trustworthiness. By adhering to fund accounting principles, complying with SECP and FBR rules, and maintaining transparent records for donors and auditors, NPOs can ensure long-term sustainability and credibility.

With the right systems, people, and partners like Sterling.pk, your organization can focus on delivering social impact, while we help you stay financially compliant and audit-ready.