Ch:1 – Accounting for Not for Profit Organisation

Introduction

Not for  profit organisations which are set up for providing Service to its members and the public in general. Profit is not the objective of such organisations.These organisations do not undertake any business activity. Ex: Clubs, Charitable Institutions, Schools, religious organisations,trade unions,welfare societies etc.

Characteristics of NPO

  1. NPO are formed for providing service to a specific group or public.
  2. These are organised as charitable trusts/societies and subscribers are called members.
  3. It is managed by elected managing/executive committee.
  4. The main sources of income are :- subscriptions from members,donations,govt. aid etc
  5. The funds raised by such organisations are credited to Capital fund/General fund.
  6. The surplus generated is not distributed among the members.

Difference between Trading organisation and Non-Profit Organisation

BasisTrading entitiesNot for Profit Entities
1. Motive To earn profitTo render service 
2. Status Proprietors or owners Subscribers or members
3. Distribution of profit Among the owners Not distributed to any one
4. Result of activitiesProfit or loss either withdrawn or retained in the businessSurplus or Deficit ,which cannot be withdrawn by the members
5. Accounting statements Manufacturing or Trading Profit and loss account and Balance Sheet Receipts and payments account, Income and expenditure account and Balance sheet
6.Accounting systemAccrual systemHybrid system (combination of accrual and cash system) 

Final Accounts of Not-For Profit Organisations 

The not for  profit organization prepare 3 financial statement at the end of every accounting  period. They required to provide necessary financial information to members, donors, contributors,  Registrar of Societies. It is also necessary to know whether the income during the year is sufficient to  meet the expenses or not. They are:-

  1. Receipt and payment account   

2. Income and expenditure account     

  3. Balance sheet

Receipt and payment account

t is a cash book. it is a summary of all cash transactions. It starts with opening cash and bank balance and ends with closing cash and bank balance. All receipts (cash and cheque) are shown on debit side and all payment (cash and cheque) are shown on credit side.Receipt and payment account never records non cash items like depreciation, outstanding expenses,  accrued incomes etc. Opening and closing balances in receipt and payment account represents the opening and closing cash/bank balance. If there is a bank over draft at the end it shall be shown on its debit side as the last item. 

Specimen of receipt and payment account

Receipt and payment account for the year ended (date)

Steps –

  1. Take the opening cash in hand/Bank balance and enter on Debit side,if balance is Bank overdraft at the beginning enter the same on Credit side
  2. All receipt enter on Debit side( including capital,revenue,or for past,current and future)
  3. All payments enter Credit side( including capital,revenue,or for past,current and future)
  4. Does not contain outstanding exp: and accrued income and non cash items(depreciation,bad debts etc)
  5. Balance the account  – if Debit side is more than credit side ,it is cash /bank balance(on credit side),otherwise balance is Bank overdraft (on debit side)

Salient features of Receipt and Payment Account

  1. It is a summary of the cash book
  2. It shows the total amount of all receipt and payments irrespective of the period to which pertain.
  3. It includes all receipts and payments whether they are of capital nature or of revenue nature.
  4. No distinction is made in receipts /payments made in cash or through bank.
  5. No non-cash items such as depreciation outstanding expenses,accrued income etc are shown in this account. 
  6. It begins with opening balance of cash in hand and cash at bank(or bank overdraft) and closes with the year end balances of cash in hand /cash at bank or bank overdraft

Illustration:

From the following information prepare Receipts and Payments Account of a Mumbai Fives Club during the year 2016-17 :
ItemsAmount
Cash Balance on 1-4-20161,125
Subscription2,900
Tournament Fund750
Life Membership1,000
Entrance Fees100
Donation for Building1,500
Sale of Newspapers50
Newspaper Subscription750
Rent paid250
Salary paid1,800
Office Expenses1,200
Sports Equipment purchased1,150
Tournament expenses450
5 (June 2017) CA

Answer :

Income and expenditure account

It is similar to Profit and Loss A/c prepared by trading concerns.It is debited with all expenses or losses and credited with all incomes and gains.The balance,being either excess of income over expenditure,Surplus (Net profit in the case of trading concern) or excess of expenditure over income ,Deficit(net loss in the case of trading concern) is transferred to capital fund.

Income and expenditure account for the year ended (date)

Steps in the preparation of Income and Expenditure Account

  1. Read the receipt and Payment Account carefully
  2. Exclude the Opening and closing cash/ Bank Balances,as they are not Income
  3. Exclude the Capital Receipts and Payments as these are  to be shown in B/S
  4. Consider only the Revenue Receipts and enter on the Income(Credit) side of IE a/c with adjustments.
  5. Take the revenue expenses to the expenditure(Debit) side of IE a/c with adjustments as per the additional information provided. 
  6. Consider the following items not appearing in Receipt and Payment A/c
  1. Depreciation of fixed assets.
  2. Provision for doubtful debts, if required
  3. Profit or loss sale of fixed assets.
  4. Balance the Account ,If  Credit side is heavier than debit side it is Surplus,  otherwise Deficit.
Capital Receipt:These are the mount received during the year ,the benefit of which will relate to future  years also.These are not in recurring nature.Ex:sale of fixed assetsCapital Payments: These are the payments made during the current period,the benefits of which are available in the future years also.They are not made at regular intervals.It increases the earning capacity of business.Ex: Purchase of furniture.Revenue Receipt:   Revenue receipts are the amount received out of conducting regular activities of the business.which are recurring nature / received repeatedly or regularly.Ex: subscriptionsRevenue payments:These are the payments of recurring nature and to be paid at regular intervals.It maintain the earning capacity of business.

Items of Receipts and Payments Account – The items of receipts and payments account may be classified as 1. Revenue Receipts, 2. Capital Receipts, 3. Revenue Payments and 4. Capital payments. 

1. Revenue Receipts – These are the amounts received by the organization on a recurring nature. 

  1. Annual membership subscription. 
  2. Admission fee not capitalized. 
  3. Receipts from sale of old news papers and magazines. 
  4. Hall rent received. 
  5. Interest received on investment, fixed deposits and loan advanced. 
  6. Donations, grants and legacies (receipt as per the will of a deceased person). 
  7. Locker rent, cloak room rent received.
  8. Receipts from sale of refreshment.
  9.  Any other items of similar nature. 

2. Capital Receipts – These are the amounts received during the current year, the benefit of which will relate to future years also. Such receipts are not received at regular intervals. They include:

  1.  Donations from outsiders or members for specific purpose.
  2. Amount received as loans.
  3. Life membership subscription.
  4.  Admission fees to the extent capitalized. 
  5. Sale proceeds of fixed assets. 
  6. Legacies for specific purposes.
  7. Grants received from Government for meeting capital expenditure. E.g. construction of a Library building. 
  8. Any other receipts of capital nature. 

3. Revenue Payments – These are the payments of recurring nature and to be paid at regular intervals.

  1.  Salaries, wages and honorarium paid.
  2.  Travelling and conveyance allowances.
  3.  Rent, taxes, insurance, electricity , printing and stationary, postage and telegram, repairs etc. 
  4.  Payments for organizing sports meets and tournaments. 
  5.  Payments for purchase of refreshment, dinner etc.
  6.  Interest paid on loan and on bank overdraft. 
  7. Any other payment of revenue nature. 

4. Capital Payments – These are the payments made during the current period, the benefits of which are available in the future years also. They are not made at regular intervals. 

  1. Construction expenses. 
  2. Purchase of fixed assets like furniture, office equipments etc. 
  3. Purchase of books for library.
  4. Amounts advanced to outsiders as loans. 
  5. Purchase of sports goods and equipments.
  6. Any other payments of capital nature. 

Treatment of Important Items

SubscriptionRevenue – Income – For current year only
Donation for general purposeRevenue – Income side of IE A/c
Donation for specific purpose(for Building,ground)Capital – Liability side of B/S
LegacyCapital (If small amount treated as Income )
Life membership feeCapital
Entrance fee/Admission feeFor Schools – Revenue Income ( Unless otherwise as per instruction)
For  Clubs – Capital
Government Grant – general PurposeRevenue-Income side of IE A/c
Government Grant – Specific Purpose(For building,ground etc)Capital – Liability side of B/S
Endowment FundCapital – Liability side of B/S
Sale of Fixed AssetsCapital – Add to Cash balance- (if profit or loss , to be shown in Income and Exp: A/c)
Sale of old news paper,periodicals, sports materialRevenue –Income side of IE A/c
Stationery Consumed Revenue – expenditure side of IE A/c
Sale of grassRevenue – Income side of IE A/c
HonorariumRevenue – expenditure side of IE A/c

Difference between receipt and payment account & income and expenditure account

Receipt and payment accountIncome and expenditure account
It is a real account
It is a summary of actual cash receipts and payments of a particular period
It includes both capital and revenue items
It includes all receipt and payments irrespective of the period to which it belongs
It does not include non cash transaction
It begins with the opening cash/bank balance and ends with the closing cash/bank balance
It is a nominal account
It is a summary of incomes and expenses of a particular period
It includes only revenue items
It includes only income and expenses of a particular period for which the account is prepared
It includes both the cash and non cash transactionIt does not have any opening balance. closing balance may either represent deficit or surplus

Answer:

Solution :

Illustration:4

The Receipts and Payments Account of a Private School is given below : Receipts and Payments Account (31-03-2017)
ReceiptAmountPayment Amount
Balance b/d (Cash at bank)30,800Furniture23000
Tution fees32000Investments55000
Admission Fees50200Salaries74400
Endowment Fund60000Stationery Expenses2400
Donations24000Advertisements4800
Interest on Investment4600Balance c/d (cash at bank)42500
Sale of Periodicals500
202100202100

The school has following assets and liabilities as on 01-04-2016 :
Land & Buildings Rs 4,50,000
Furniture Rs 1,85,000
School Bus Rs 1,15,000
Bank Loan Rs.1,50,000

Prepare the Income and Expenditure Account for the year ended 31-03-2017 and the Balance Sheet as on that date by considering the following :
(a) Half of the donations should be treated as income.
(b) Advertisement expenses outstanding Rs1,200.
(c) Interest on Bank Loan Rs 14,600 due for payment.
(d) Accrued interest on investments Rs 2,400. 8 (March 2018) CA

Solution:

Balance sheet

The Balance sheet of not for profit organization is prepared on the same principle as the balance sheet of a profit seeking business. it is a statement of all assets and liabilities of the business. There is no Capital in the case of a trading concern but it may have Capital Fund.Capital fund is made up of surplus of income over expenditure and certain items which are capitalised.Excess of assets over liabilities is called Capital Fund or General Fund

Balance sheet as on (date)

Illustration:

The Receipts and Payments Account of a Private School is given below : Receipts and Payments Account (31-03-2017)
ReceiptAmountPayment Amount
Balance b/d (Cash at bank)30,800Furniture23000
Tution fees32000Investments55000
Admission Fees50200Salaries74400
Endowment Fund60000Stationery Expenses2400
Donations24000Advertisements4800
Interest on Investment4600Balance c/d (cash at bank)42500
Sale of Periodicals500
202100202100

The school has following assets and liabilities as on 01-04-2016 :
Land & Buildings Rs 4,50,000
Furniture Rs 1,85,000
School Bus Rs 1,15,000
Bank Loan Rs.1,50,000

Prepare the Income and Expenditure Account for the year ended 31-03-2017 and the Balance Sheet as on that date by considering the following :
(a) Half of the donations should be treated as income.
(b) Advertisement expenses outstanding Rs1,200.
(c) Interest on Bank Loan Rs 14,600 due for payment.
(d) Accrued interest on investments Rs 2,400. 8 (March 2018) CA

Incidental trading Activity

Some non profit organisations may carry on trading activities such as running canteen,medical store,provision store ,bar etc. mainly to provide certain facilities to their members

In such cases the organisation would like to know the profit made out of trading activities separately. For this purpose a separate  trading account is prepared to disclose the profit or loss made from the trading activity.

Calculation of Subscription for the year

Amount collected from members periodically is called subscription.This is one of the main sources of revenue.This is shown on the credit side of income and expenditure account.Adjustments should be made to show the correct income for the period.

Method – 1

                                      Subscription received during the year          xxxx

                                          Add: Outstanding at the end                     xxx  – (Closing B/S -Asst)

                                                   Advance at the beginning                 xxx – (Open. B/S – Liabt)

                                           Less: Advance at the end                         xxx –(Closing –B/S- Liab)

                                                     Outstanding at the beginning         xxx  – (Open. –B/S- Asst)

                                              Subscription credited to income side    xxx

Method – 2

Format of Subscription Account

ParticularsAmountParticularsAmount
To   Sub. Outstanding A/c (Outstanding at the beginning of the year) 
To Income & Expenditure A/c(balancing figure)
To Balance   C/d( Sub. Received in advance at the end of current year)

Xxx
Xxx

xxx
By      balance  b/d(Sub.received in advance at beginning of the year)
By    Cash/Bank A/c(Total Sub. Received duringThe year)
By   Outstanding sub. A/c( Outstanding at the end of the current year)   
Xxx
Xxx
xxx
xxxxxx

Method – 3

Subscription received during the year    …………………

Opening BalanceClosing Balance
Outstanding+
Received in Advance+
Adjustment of Special Purpose Funds / Tournament Fund

If there is any special purpose fund, eg. Tournament fund, Charity Fund,Prize Fund, Endowment Fund etc. and there are certain items of expenses and incomes

relating to that fund ,then incomes and expenses should not be shown in the income and expenditure account but income should be added to the fund and expenses deducted from such fund on the liabilities side of the balance sheet , suppose the following figures are given

Tournament Fund – xxxx
Add : Tournament Income – xxxx
Interest on Tournament Investment – xxxx
xxxx
Less : Tournament Expenses – xxxx
Amount to be shown in Liability side of Balance sheet – xxxx

(If tournament fund Investment to be shown in asset side of Balance sheet)

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