accounting of not for profit organisation

Accounts of Non-Profit Organisation (An Overview)

The Final Accounts of non-trading concerns consists of:

1. Receipts and Payments Account

2. Income and Expenditure Account, and

3. Balance Sheet.

1. Receipts and Payments Account:

It is a Real Account. It is a consolidated summary of Cash Book. It is prepared at the end of the accounting period. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.

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Cash Book consisting of entries of receipts and payments in a chronological order while the Receipts and payments is a summary of total cash receipts and cash payments.

It starts with opening balance of Cash and Bank and ends with closing balance of Cash and Bank. It does not take into account outstanding amounts of receipts and payments. Receipts and Payments may be of Capi­tal or Revenue nature; they may relate to the current or previous year or subsequent year; so long as they are actually received or paid, they must appear in this account.

Features of Receipts and Payment Account, In Brief:

1. It starts with opening balance and ends with closing balance

2. It is the summary of cash and bank transactions.

3. Actual cash transactions are entered.

4. It includes capital as well as revenue items.

5. It follows cash system of accounting

6. It shows cash position and excludes all non-cash items.

7. It is a real account.

8. It does not take any income/expense outstanding at the beginning or at the end.

2. Income and Expenditure Account:

It is a Nominal Account. It is in the form of Profit and Loss Account. It is concerned with only revenue items—expenses and incomes. It records all losses and expenses on its debit side and all incomes and gains on its credit side.

ADVERTISEMENTS:

Of the incomes and expenses of revenue nature, only the portion pertaining to the current year is shown in the Income and Expenditure Account i.e. amount relating to the previous year or future year are excluded. Again, the incomes and expenses of current year, whether received or not, must be shown.

In other words, incomes and expenses have to be adjusted for both out-standing and pre-payments. All non-cash items, Depreciation, Bad Debts, Provision for Doubtful Debts etc. are taken into account.

The difference between the debit side and the credit side is either surplus or deficit for the year concerned and the difference will be transferred to the Capital Fund (also called General Fund or Accumulated Fund) appearing in Balance Sheet.

Features of Income and Expenditure Account, In Brief:

1. It is prepared in lieu of Profit and Loss Account.

2. It is a nominal account.

3. It is based on mercantile system of accounting.

4. There is no opening balance.

5. It ends with Surplus or Deficit.

6. It excludes all capital income and capital expenses.

7. It includes only revenue items.

8. It records all expenses whether paid or not, and all incomes whether received or not.

3. Balance Sheet:

Balance Sheet in case of non-trading concern is prepared in the usual manner and consists of all liabilities and assets on the date on which it is prepared. The excess of assets over liabilities is termed Capital Fund or General Fund.

Again, The Capital Fund are accumulated with Capital Receipts, Receipts that are capitalized and further increased by surplus or decreased by deficit, during the year. At the inception of a non-trading concern, there will be no formal Capital Fund and in such case, the Surplus, if any, earned during the year constitute the Capital Fund at the end of the year.

Treatment of Special Items:

Subscriptions from members are collected periodically. These are regular revenue incomes and cred­ited to Income and Expenditure Account. These are the major source of income for the non-trading concern. However, special subscriptions, if collected are kept separately from the General Fund for the specific purpose.

There are certain items which are peculiar to non-trading concerns and they need special treatment and are: 

1. Donations:

Charitable institution may receive donations from time to time. If the amount is small and if such collections are frequent, then they may be treated as an income. Donations may also be of two types— General Donations and Specific Donations. Any donations received, not for a specific purpose, are treated as General Donations.

The General Donations of comparatively small amount may be taken to Income and Expenditure Account. General Donations of comparatively huge amount, which are of non-recurring nature, may be added to the Capital Fund. The nature and size of the organisation decide about the amount of donation being small or big.

In case of donations received for any specific purpose then it is termed Specific Donations. Such amount cannot be used for any other purpose, except the purpose of donor. Therefore, such amount may be shown in Balance Sheet (liability side).

All the Donations debited to Receipts and Payments Account and these amounts may be credited to Income and Expenditure Account or Liability side of the Balance Sheet, if it is for a specific purpose.

2. Legacy:

It is like donation. It is the amount given to a non-trading concern as per the will of deceased person. It is taken to the Receipts and Payments Account as Capital Receipts. These are not income but may appear in Balance Sheet. These types of receipts are of non-recurring nature.

3. Life Members Fee:

Non-trading concerns usually collect subscriptions every month from their ordinary members. There are another category of members called “Life Members”, from whom the subscriptions are collected as a lump sum.

Such subscriptions are called life subscription and are capital receipts. This can also be kept in a separate account and an amount equal to annual subscription can be transferred to subscription account. The balance in such account, on the death of the member must be transferred to Capital Fund.

4. Entrance Fee (Admission Fee):

These are the fees collected from every member at the time of his admission into membership. It is paid only once by the new entrants on becoming a member of a society or a club. Generally, there may be bye-laws as regards the accounting treatment of such amount. In the absence of any bye-laws, it is taken as an item for income.

Against treating it as an income, there are arguments favouring it as a capital receipt as the members pay such fees only once and therefore treat it as a capital receipt. In the absence of any instruction, it may be treated as an income and is credited to Income and Expendi­ture Account.

5. Sale of Old Sports Materials and Old Newspapers:

The amount received on account of sale of old sports materials and old newspapers are recurring incomes to a concern and therefore, treated them as revenue incomes. The purchases of balls, nets, etc. are revenue expenditure.

6. Purchase of Equipment:

The price paid for acquiring any equipment is a Capital Expenditure.

7. Honorarium Paid:

It is a payment of remuneration to a person who is not an employee of the organisation. Such as any special performance is done, by an outsider, at the organisation, then the payment is honorarium and is taken to Income and Expenditure Account as it is a revenue expenditure.

8. Subscription:

It is a primary source of income of a non-profit organisation. It is usually collected every month from all the ordinary members. Subscription is the amount paid by the members to keep their mem­bership alive.

The subscription amounts are treated as revenue receipts. Subscription received from members is credited to Income and Expenditure Account on accrual basis i.e. total amount receivable from all the members as subscription should be considered as income for the year.

9. Special Fund:

If there is any specific fund, such as Prize Distribution Fund, the expenses or incomes relating to the fund may be adjusted to the fund itself (on the liability side of the Balance Sheet). Such expenses or incomes may not be taken to Income and Expenditure Account.

10. Sale of Old Assets:

If any asset is sold, the amount is debited to Receipts and Payments Accounts. It is not taken to Income and Expenditure Account. The profit or loss made on sale of old asset is recorded in Income and Expenditure Account.

Some Important Adjustments:

(A) Subscription:

Subscription received from members is treated as revenue income. In income and Expenditure Account, subscription for current year will be shown. If total subscription received as per Receipts and Payments Account during the year is given, adjustments will be made for outstanding subscription in the beginning and at the end of the year; and advance subscription in the beginning and at the end of the year.

(B) Expenses:

Total expenses paid during the year are shown in Receipts and Payments Account. These expenses may include outstanding of previous year and advance for next year. Similarly, some account may still be outstanding. Therefore, to calculate correct figure of expenses to be shown in Income and Expenditure Account, adjustments will have to be made.

(C) Consumable Items:

If institution consumes certain items such as medicines by hospital or sports items by clubs, relevant figures for Receipts and Payments Account and Income and Expenditure Account will be calculated. The value of goods consumed is shown in Income and Expenditure Account and the amount paid to creditors is shown in Receipts and Payments Account.

Illustration 1:

Calculate the amount to be posted to Income and Expenditure Account for the year ended 2004:

Receipts and Payments Account show that subscriptions received Rs 9,000. This account of subscriptions includes Rs 800 outstanding in the previous year and Rs 1,000 for the next year. Rs 2,000 is still outstanding for current year.

Solution:

Illustration 2:

In 2004, the subscriptions received were Rs 17,500 which includes Rs 400 for 2003 and Rs 600 for 2005. At the end of 2004 subscriptions outstanding were Rs 500. The subscriptions due but not received at the end of the previous year i.e., 2003 were Rs 600. What amount should be credited to Income and Expenditure Account as subscriptions?

Solution:

Illustration 3:

During the year 2004, the expenses actually paid were Rs 3,250.

Find out the actual expenses chargeable to Income and Expenditure Account for the year ended 2004, if prepaid and outstanding are as follows:

Prepaid Expenses on 31.12.2003 Rs 300

Prepaid Expenses on 31.12.2004 Rs 400

Outstanding Expenses on 31.12.2003 Rs 450

Outstanding Expense on 31.12.2004 Rs 500

Illustration 4:

Illustration 5:

Illustration 6:

Calculate the amount to be shown in Receipts and Payments Account for the year ended 31st Dec. 2004

1. Income and Expenditure Account shows a sum of Rs 7,500 against subscription during 2004.

2. Subscriptions outstanding at Dec. 2003—Rs 600.

3. Subscriptions received in advance in Dec. 2003—Rs 450

4. Subscriptions received in advance in Dec. 2004—Rs 270

5. Subscriptions outstanding at Dec. 2004—Rs 750

Solution:

Illustration 7:

From the following, find out the amount of subscriptions to be credited to Income and Expenditure Account for the year 2006.

Subscriptions received in 2006 – Rs. 48,000 which include Rs. 4,000 for 2005 and Rs. 8,000 for 2007.

Subscriptions due but not received at the end of the year 2006 were Rs. 20,000.

Subscriptions received in 2005 in advance for 2006 were Rs. 12,000

Solution:

Types of Accounting Problems:

1. Preparation of Income and Expenditure Account and Balance Sheet from a given Receipts and Payment Account with additional information.

2. Preparation of Opening Balance Sheet and Closing Balance Sheet from a given Receipt and Payment Account and Income and Expenditure Account.

3. Preparation of Receipt and Payment account from a given income and Expenditure Account and other information given.

4. Income and Expenditure Account and Balance Sheet from a given Trial Balance with addi­tional information.

1. Preparation of Income and Expenditure Account and Balance Sheet from a given Receipts and Payment Account with additional information:

The Income and Expenditure Account is simply another name for the Profit and Loss Account drawn up for a non-profit organisation. In this account, all losses and expenses relating to the period are debited and all gains and incomes relating to the same period are credited. It must be remembered that only the revenue items relating to the period are dealt within this Account. 

In examinations, sometimes, Receipts and Payments Account is given and the students are required to prepare Income and Expenditure Account and in such situation, the following steps are to be followed:

1. Do not take the opening balance and closing balance of Cash in hand and at Bank.

2. Do not take Capital Receipts and Capital Expenditure.

3. Pick up only the revenue receipts and revenue payments and exclude the portions relating to previous and subsequent years.

4. Add the portions of incomes and expenses prepaid in the previous year on account of current year.

5. Add also the portions of incomes and expenses of the current year due but remaining unpaid.

6. Provide for depreciation, Reserve for doubtful debts etc. as needed in the problems.

7. Surplus or Deficit will be transferred to Capital Fund.

Illustration 1:

The Calcutta Cricket Club gives you the following information:

Solution:

Illustration 2:

Calicut Sports Association extracts the following Receipts and Payments Account for the year ended 31st December 2004. From the particulars given, prepare Income and Expenditure Account for the year ended 31st December 2004.

Subscriptions outstanding on 31st December 2003 Rs 450 and on 31st December 2004 Rs 400. A subscription received includes Rs 100 on account of the year 2005.

Sports equipment was valued on 31st December 2003 at Rs 550 and on 31st December 2004 at Rs 1,090.

Office expenses include Rs 150 for 2003 whereas Rs 200 is still payable on this account for 2004.

Tournament Fund is treated as Capital Receipt. (B.Com., Calicut)

Solution:

Illustration 3:

Lockers rent Rs. 120 refers to 2005 and Rs. 180 still owes; Rent Rs. 2,600 pertaining to 2005 and Rs. 2,600 still owes; stationery expenses etc. Rs. 624 related to 2005; Still owing Rs. 728; Subscription unpaid for 2006 Rs. 1,736; Special subscriptions for Governor’s party outstanding Rs. 1,100.

The club owned sports materials of the value Rs. 32,000 on 1-1-2006. This was valued at Rs. 27,000 on 31 – 12-2006. The Club took a loan of Rs. 40,000 in 2005.

Prepare the Income and Expenditure A/c for 2006 and Balance sheet as at 31st December 2006.  

Solution:

Illustration 3:

Prepare Income and Expenditure Account and Balance Sheet from Receipts and Payment Account and Balance Sheet as on 31st December 2004:

Illustration 4:

Following is the Receipt and Payment Account of Delhi Club for the year ended 31st December 2004:

With the additional information given below, prepare the Income and Expenditure Account for the year ended 31st December 2004 and the Balance Sheet as on that date.

Illustration 5:

From the following information relating to Cricket Club, prepare Income and Expenditure Account for the year ended 31st March 2004, Balance Sheet as at 31st March 2004 and Balance Sheet as at 31 March 2003:

Donations received and surplus on account of V.J. Tournament should be kept in Reserve for a permanent Pavilion. Subscriptions due at 31st March 2004 were Rs 7,500. Write off 50% of Bats, Balls Account and 25% of Printing and Stationery Account.  

Solution:

Illustration 6:

It was found out at the end of the year that amounts to be received for subscriptions were Rs 1,100 and for use of library hall were Rs 375, prepaid insurance on building was Rs 175 and outstanding sundry expenses were Rs 800.

Provide for depreciation 2 ½ % on building and write off 5%on investments and 10%on the opening amount of library books. Whole of the entrance fee is to be treated as revenue income. Prepare for the year ending at 31st December 2004.

Solution:

2. Preparation of Opening Balance sheet and Closing Balance Sheet from a given Receipts and Payments Account and Income and Expenditure Account.

Follow the following steps:

(A) Opening Balance Sheet:

(1) Consider Opening Cash and Bank balances from Receipts and Payments Account and write them in the asset side of the Balance Sheet.

(2) Consider other adjustments from income and Expenditure Account either income or expenses and put them in asset side or liability side of the Balance sheet.

(3) The difference between the asset side and liability side will reflect the capital Fund, as balanc­ing figure.

(B) Closing Balance Sheet:

(1) Take all the assets from Opening Balance Sheet, after due effect of depreciation (from Income and Expenditure A/c) additions (from Receipts and Payment A/c) and sold (from Receipts and Payments A/c), the net figure will be written in the asset side of the Balance Sheet.

(2) Take the Capital Fund from Opening Balance Sheet and add surplus or deduct deficit- and all other liabilities (from Income and Expenditure A/c) go to liability side of the Balance sheet.

(3) Closing cash and Bank Balances (from Receipt and Payment A/c) will be written on asset side.

(4) Compare each item from Income and Expenditure with Receipts and Payments Account and write suitably to close Balance Sheet.

Illustration 1:

The following particulars related to Sports Clubs of Delhi Income and Expenditure Account for the year ended 31st December 2004.

Illustration 2:

Receipts and Payments A/c and Income and Expenditure A/c of Asiatic Public Library for the year ended 31st Dec 2005 were as follows:

Illustration 3:

The following are the items of receipts and payments of the All India Sports Club summarized from accounts maintained by the Secretary:

You are required to prepare the Balance Sheets of the Club as on 1-4-2005 and 31-3-2006. The book values of the assets on 1 -4-2005 were as under.

Building Rs.44, 000; Furniture Rs. 4.000. Cricket equipment Rs. 25.000

The depreciation rate on Buildings 5%, on Cricket Equipment 10% and on Furniture 6%.

Solution:

Illustration 4:

The following is the Receipts and Payments Account and Income and Expenditure Account of the Club for the year ending 31st March, 2006

Illustration 5:

From the following information relating Delhi Sports Club, prepare the Balance sheet as on 1-4-2005 and on 31-3-2006:

(i) Assets on 1-4-2005 are: Club grounds and pavilion Rs. 50.000; Sports Equipment Rs. 30,000; Furniture Rs. 7.000; subscription in arrears on that date Rs. 1.000 and Creditors for stationery Rs. 1,000

Illustration 6:

The account set out below has been submitted to you for audit. If you do not approve of it, criticize and amend it. Also prepare the Balance Sheet of the Club.

Treasurers Note:

The subscriptions in arrears amount to Rs 120. Sundry Tradesmen’s bills Rs 42 were outstanding on 31st December, but have since been paid. The secretary’s salary although sanctioned by resolu­tion of the committee, has not yet been paid.

The 3 ½ % GP. Notes of the face value of Rs 2,000 were purchased at Rs 90. The lease of the club premises cost Rs 2,124. The balance of the Bank Loan now outstanding is Rs 1,000 secured by mortgage in the leasehold premises.

Solution:

3. Preparation of Receipts and Payments Account from a given Income and Expenditure Account and other information.

Sometimes, Income and Expenditure is given and students are required to prepare Receipts and Payments Account and in such a situation, the following procedure may be followed:

1. All expenditure, whether Capital or Revenue, irrespective of the periods, are shown on the Payment side.

2. All receipts, whether Capital or Revenue, irrespective of the periods, are shown on Receipt side.

3. Pick up opening balance and closing balance to the account.

4. Eliminate all adjustments made while preparing Income and Expenditure Account.

5. Purchase of assets may be calculated and shown on the payment side. For this compare the values of the assets at the beginning and closing of the period.

Illustration:

The following is the Receipts and Payments Accounts of Appollo Club in respect of the year 31st March 2004:

The following additional facts are ascertained:

1. There are 500 members, each paying an annual subscription of Rs 10, Rs 3,500 being in arrears for 2002-03 at the beginning of 2003-04. During 2002-03, subscriptions were paid in advance by 30 members for 2003-04.

2. Stock of stationery at 31st March 2003 was Rs 400 and at March 2004 Rs 500.

3. At 31st March 2004, the Rates and Taxes were prepaid to the following 31st January, the yearly charge being Rs 300.

4. A quarter’s charge for telephone is outstanding, the amount accrued being Rs 300. The charges for each quarter are same both for 2002-03 and 2003-04.

5. Sundry expenses accruing at 31st March 2003 were Rs 50 and at 31st March 2004 Rs 60.

6. At 31st March 2003, building stood in the books at Rs 30.000 and it is required to write off deprecia­tion at 10% p. a.

7. Value of 8% securities at 31st March 2003 was Rs 15,000 which was purchased at that date at par. Additional securities worth Rs 5,000 are purchased on 31st March 2004.

You are required to prepare:

(a) An Income and Expenditure Account for the year ended 31st March 2004.

(b) A Balance Sheet as at that date.

Solution:

4. Preparation of Income and Expenditure Account and Balance Sheet from a given Trial Balance with additional information.

Steps:

(1) All the current year’s revenue incomes are to be credited in the Income and Expenditure Account.

(2) All the current year’s revenue expenditures are to be debited in the Income and Expenditure Account.

(3) If the credit side is greater than the debit side, there will be ‘Surplus’ or ‘Excess’ of income over expenditure, and vice-versa in the opposite case.

(4) The surplus or deficit so made is to be added or deducted against the capital fund.

(5) All the capital incomes or Capital expenditures are to be shown in the Balance Sheet.

Illustration 1:

From the following Trial Balance and accompanying notes for adjustments, prepare Income and Expendi­ture Account for the year ended 31st December 2004 and the Balance Sheet as on that date of a Club:

Notes for adjustments:

(a) Out of the total subscriptions, Rs 1,125 represented arrears collected and Rs 760 paid in advance.

(b) An amount of Rs 500 was outstanding on account of rent.

(c) Unpaid salary amounts to Rs 200.

(d) Entrance fees to be capitalised.

(e) Out of the donation, Rs 3,600 represented donation towards election expenses and of the balance, half the amount shall be capitalized.

(f) Depreciation to be provided as under:

Library Books at 10%

Furniture and Fixtures at 15%

Club Buildings at 5%

Glass, Cutlery etc. Rs 1.700

Solution:

Distinction between Income and Expenditure Account and Profit And Loss Account:

The Income and Expenditure Account of a Non-trading concern is similar to profit and Loss Account of a Trading concern.

However, the following differences may be noted:

1. Income and Expenditure Account is prepared by a Non-trading concern while Profit and Loss Account is prepared by a trading concern.

2. Income and Expenditure shows Surplus or Deficit while Profit and Loss Account shows Net Profit or Net Loss.

3. Income and Expenditure Account does not start with Gross Profit or Gross Loss while Profit and Loss Account starts with Gross Profit or Gross Loss.

4. The Surplus (or Deficit) shown in the Income and Expenditure is added (or deducted) to/ from Capital Fund and is not distributed among the owners: whereas the Net Profit shown in the Profit and Loss Account is distributed among the owners.

Accounts of Professional Men:

Professional men like Doctors, Lawyers, and Architects etc. prefer to keep their accounts on what is called a Cash Receipt basis. They record their transactions on complete double entry system and prepare Trial Balance. They record their cash transactions in Receipts and Payments Account.

A revenue Account called Receipts and Expenditure is prepared by professional people. And this Ac­count is partly based on Cash System and partly on Accrual System. That is while preparing the Receipts and Expenditure Account, Cash System is followed for recording incomes but mercantile system is followed for recording expenditure.

Again, all outstanding expenses are taken into account but ignore outstanding incomes which have not been received. While preparing the Receipts and Expenditure Account, credit is taken for the outstanding incomes but at the same time a provision is created for an amount equal to the outstanding income by debiting the Receipts and Expenditure Account. This reduces the fees earned to a “Cash Received Basis”.

Here, the debtors for outstanding fees are of a very uncertain nature. Besides this, the professional people do not approach the court for recovery of such outstanding incomes. Thus, they do not treat the outstanding incomes as earned until received in cash.

Illustration:

Mr. Premlal who is a doctor commenced practice on 1st January 2004 with a cash of Rs 1, 00,000. At the end of the year the following details of his receipts and payments are available:

Other Information:

1. Fees Rs 5,000 are still to be received.

2. Salary to assistant unpaid Rs 750.

3. Creditors for drugs purchased Rs 10,000.

4. Stock of drugs still in hand Rs 5,000.

5. Depreciate furniture and equipment by 10% p.a.

Prepare Receipts and Expenditure Account and Balance Sheet as on 31st December 2004.

Solution: