- audiences for the numbers
- 4
- SWC agreements for an INGO
- 2
- ledger per project
- 1
The legal frame
NGOs register at the district administration office under the Association Registration Act, 2034, which requires a minimum number of founding citizens. Those that receive foreign funds or work in welfare activities generally affiliate with the Social Welfare Council under the Social Welfare Act, 2049.
INGOs must sign a general agreement and then a project agreement for each project with the Council before starting work. Funding must come from abroad.
Registration needs renewal, and the Council needs annual reports and audited statements.
Confirm the current thresholds, fees and forms with the Council, because secondary sources often disagree.
Four audiences, four sets of numbers
| Audience | What it wants | Typical failure |
|---|---|---|
| Registering office and the Council | Annual report, audited statements, renewal | Late filing |
| Tax office | Tax deducted at source on payments, returns and, where applicable, VAT | TDS missed on rent, fees and contracts |
| Donors | Budget against actual by project, receipts, procurement trail | Expenses with no support, or charged to the wrong grant |
| The board or members | Plain-language results and use of funds | Reports written for the donor, not the board |
Where NGO accounts go wrong
One ledger for every grant. Each project needs its own cost centre and bank trail, or a donor audit will disallow costs that cannot be traced.
Shared costs without an allocation rule. Rent, staff and vehicles shared across projects need a written, consistent basis.
TDS ignored. An NGO's own income may be exempt, but it still withholds on payments, as any payer does. See TDS rates.
Advances never cleared, and cash payments above the limits the donor allows.
Reports that don't reconcile: the donor financial report, the audited statements and the Council report show three different figures.
What good looks like
A grant-level chart of accounts and monthly project reports.
A procurement and approval policy that a donor auditor can follow.
A close calendar: monthly reconciliation, quarterly donor report, annual audit, annual SWC report.
A document trail for each payment: approval, invoice, payment proof, tax deduction.
Pre-audit review a few weeks before the donor or statutory auditor arrives.
How we help
We set up the books and project accounting, prepare donor and Council reports, support the audit with the schedules and documents the auditors ask for, and run pre-audit reviews. We do not act as your statutory auditor. See audit support and bookkeeping. Registration thresholds and rules change, so check them with the registering office and the Council.
A worked example: one grant, three reports
A local NGO receives NPR 60 lakh from a foreign donor for a 12-month livelihood project, and NPR 15 lakh from another donor for a separate training programme. Illustrative.
At the start. The NGO opens a separate bank account for each grant, creates a cost centre for each in the accounts and agrees with each donor how overheads will be shared. It writes an allocation policy: office rent and the accountant's salary are split by the proportion of direct costs, and the split is applied every month.
During the year. Each purchase follows the procurement policy: three quotations above a set value, approval by the project manager and the finance lead, an invoice in the NGO's name with a PAN, and payment by bank transfer. Tax is deducted at source on rent, fees and contracts and deposited by the due date; see TDS rates. Staff costs go through payroll, with SSF where the staff are enrolled.
Each month. The accountant reconciles the bank, the cash and the project ledgers, and prepares a budget against actual for each grant. Variances above a set percentage are explained.
Each quarter. The NGO sends the donor's financial report, with supporting schedules.
At year end. The NGO prepares financial statements for the whole organisation, with a schedule that shows each grant's receipts and spending. Auditors test the transactions, the allocation and the tax deductions. The same figures feed the donor's final report and the report to the Council.
The three reports agree because they come from one ledger, built from the start by project. That design is what saves the organisation in an audit.
Policies every NGO should have in writing
Finance and accounting policy: who approves what, the limits, the books to be kept and the close timetable.
Procurement policy: quotation thresholds, vendor selection, conflict of interest and record keeping.
Travel and per diem policy: rates, approval, supporting documents and tax treatment.
Cash and bank policy: petty cash limits, signatories and reconciliations.
Asset policy: register, tagging, use and disposal, including assets bought with grants.
Staff and consultant policy: contracts, tax deduction, SSF and the difference between employees and consultants.
Anti-fraud and whistleblowing policy: how concerns are raised and investigated.
Donor compliance matrix: a table of each donor's rules, reports and dates.
Donors often ask for these before awarding a grant. Having them ready improves the chance of funding, and they give auditors a standard to test against.
Tax questions that come up
Is an NGO's income taxed? The treatment depends on the legal form, the activity and the Act's provisions for exempt organisations, with conditions. Do not assume exemption without checking the conditions and the approvals; take advice on your entity.
Does the NGO deduct TDS? Yes, on payments where the rules require it, whether or not its own income is exempt. See the TDS calculator.
What about VAT? If the NGO makes taxable supplies above the threshold, it may need to register. Grants themselves are generally not sales, but a project that sells goods or services needs a separate review.
Are consultants' fees taxable? Yes, in the hands of the consultant, and the NGO deducts at the applicable rate. Confirm whether the consultant is VAT-registered, since the rate depends on it.
How are foreign staff taxed? Depending on residence and the source of income, with treaty and donor agreement provisions in some cases. Seek advice for each case.
Preparing for a donor or statutory audit
Four weeks before: ask the auditor for the document request list and assign each item to a person.
Three weeks before: reconcile the bank accounts and the project ledgers, and clear old advances.
Two weeks before: prepare the schedules: fixed assets, receivables, payables, payroll, tax deducted and grants by project.
One week before: review a sample of transactions yourself for approvals, invoices and tax deductions.
During the audit: designate one contact, answer within a day and keep a log of requests.
After the audit: discuss the management letter, assign actions and track them to closure.
We do not act as statutory auditor, but we prepare the books and schedules, run a pre-audit review and support the team through the process. See audit support.
Questions people ask
Can one bank account serve several grants? Some donors allow it with strong controls, others require separate accounts. A separate account is cleaner and easier to audit.
What if a donor disallows a cost? The NGO may have to refund it from other funds. Prevent this with pre-approval of unusual items and with documents that show the cost was reasonable and for the project.
Do we need an audit if we are small? Statutory and donor requirements vary. Many donors require an audit for any grant above a threshold, and registration bodies require annual statements. Check each requirement.
How long should we keep records? At least as long as the law and each donor require, which can be many years after the project ends. Keep a retention schedule.
What should the board see? A simple monthly or quarterly report of income, spending against budget, cash and any risks. The board is responsible for the organisation's finances.
See also bookkeeping and internal audit for how we support non-profits. Rules and thresholds change, so confirm the current requirements with the registering office, the Council and each donor.
Governance and the role of the board
Finance problems in non-profits are rarely only accounting problems. They are usually governance problems that appear in the numbers. A board that asks the right questions prevents most of them.
What the board should see every quarter:
Income and spending by project against the approved budget, with explanations for large variances.
Cash and bank balances for each grant, and the forecast for the next quarter.
A list of overdue advances and unreconciled items.
A summary of tax deductions made and deposited, and any notices.
Donor reports submitted and due.
Audit and management letter points, and progress on closing them.
What the board should decide: the annual budget, the finance and procurement policies, the appointment of the auditor, major contracts and related-party transactions.
What the board should never do: approve payments in bulk without documents, allow officers to approve their own expenses or ignore a repeated audit finding.
Conflicts of interest need particular care in a small organisation where staff, board members and suppliers may be related. Require a written declaration each year and exclude conflicted people from the decision. Donors check for this, and so do auditors.
Fund accounting in plain terms
A non-profit's accounts need to show not only what it earned and spent, but for what purpose. Funds received for a particular project are restricted, and the organisation holds them on trust for that purpose.
Restricted funds are tracked by project, and any unspent balance remains a liability to the donor until it is used or returned under the agreement.
Unrestricted funds, such as general donations or overhead recoveries, can be used for any purpose within the organisation's objectives.
Transfers between funds need approval and a written reason.
Overhead recoveries are calculated as agreed with each donor and recorded consistently.
Mixing funds is the root of many donor disallowances. A simple test is: could you show a donor exactly where every rupee of its grant went? If not, strengthen the project ledger.
Red flags that auditors and donors look for
Payments split to avoid approval limits.
Round-sum invoices and suppliers with no history or address.
Per diem claims that exceed the rates or overlap with other travel.
Fixed assets bought with grants and not recorded in the register.
Cash withdrawals followed by expenses with weak support.
Consultants who are staff in all but name, with no tax deducted.
The same expense claimed from two donors.
Bank reconciliations with old unmatched items.
Reports submitted late, repeatedly.
Fixing one red flag in a year, and showing the trend, is better than hiding all of them.
