TOPIC 12: ACCOUNTS OF NON-PROFIT MAKING ORGANIZATIONS

TOPIC 12: ACCOUNTS OF NON-PROFIT MAKING ORGANIZATIONS | B/KEEPING FORM 3

Preparation of Statement of Affairs

Prepare statements of affairs

Certainly,
proper accounting is essential for non-trading institutions. These
concerns maintain, generally, a cash book and later they prepare a
summary of cash transactions appearing in the cash book. This summary
takes the form of an account known as receipts and payments account.

Such
concerns also prepare ‘income and expenditure account’ (which is more
or less on the lines of profit and loss account) and the Balance Sheet.

The day-to-day accounting consists of maintaining.

Cash book for recording receipts and payments, and
Ledger for classification of transactions under proper heads.

Preparation of Income and Expenditure Account from a Receipts and Payments Account

Prepare income and expenditure account from a Receipts and payments account

Receipts and Payments account

It
is a summary of cash book for a given period, but the Receipts and
Payments account shows the totals of cash transactions under different
heads. All the receipts, be cheque or cash are entered on the debit
(receipts) side (as in cash book) whereas all the payments (both by
cheque or cash) are shown on the credit (payments) side. Following
features of the receipts and payments account will help to identify its
nature clearly:

It is a summary of cash book, like a cash book, receipts are shown on the debit side and payments on the credit side.
Cash
and bank items are merged in one column. That means receipts in cash
as- well-as by , cheque are entered in one column on debit and payments
in cash as-well- as by cheque are entered in one column on credit side.
Contra entries between cash and bank get eliminated.
It is not a part of double entry book-keeping. It is just a summary of cash book which is a , part of double entry system.
Just like cash book, it starts with the opening balance of cash and bank and closes with the closing balance of cash and bank.
Both
revenue and capital receipts and payments are recorded in this account.
For example, An organization that is exclusively set up to carryon with
the object of carrying out social service or promo & organization
of social activities, is a non- trading enterprise. payment for rent and
payment for building and machinery both are recorded on its payments
side. Similarly, receipts on account of subscription and machinery are
shown on the receipts side.
Usually, it shows a debit balance
which represents cash in hand and at bank. However, in case of bank
overdraft, which is larger than cash in hand, the account will show a
credit balance.
Receipts and payments account fails to disclose
gain or loss made by the concern during the period because (a) it is
prepared on actual receipt basis i.e. it records all
receipts-irrespective of the period to which it relates (previous year,
current year or future), (b) it also ignores the nature of the receipts
and payments (whether capital or revenue). I
Accounting concept
of gain or loss is based on “accrual concept” which by its very nature
“receipts and payments account” is not capable of considering.
Therefore, fails to disclose gain or loss (earned or suffered by the
concern) during the period. For example, this account ignores:

Decrease or increase i.e. depreciation or appreciation in the value of assets;
Increase or decrease in the value of stock;
Provision for expenses incurred but payments not made-outstanding expenses.
Accounting
for payment in advance for the services to be utilized in the next
accounting period-prepaid expenses. It also fails to distinguish
between:
Capital and revenue payments-whether expenditure or purchase of an asset, and
Business charge and appropriation- whether business expenditure or drawings.

Limitations of receipts and payments account

Receipts and payments account suffers from following limitations:

It does not show expenses and incomes on accrual basis.
It does not show whether the club or society is able to meet its day-to-day expenses out of its incomes.
It does not show expenses on account of depreciation of assets.
It
does not explain the details about many expenses and incomes. In order
to explain such questions, treasurer of the club prepares ‘Income and
expenditure account’ and balance sheet.

Income and Expenditure Account

This
account is prepared by non-trading concerns who want to know if during
the financial year their income has been more than their expenditure
i.e. profit or vice versa ( i.e. loss). Since the object of these
concerns is not primarily to’ earn profit, therefore, they feel shy in
giving it the name of profit and loss account. Because the word ‘profit’
is a taboo which any society ‘looks down upon’. Of course, it discloses
whether the concerned institution earned or lost.

It is equivalent to and serves the purpose of ‘profit and loss account’.

It
is prepared on “accrual basis” (not on receipt basis) meaning thereby
that all incomes are to be included which have been earned in the
relevant period (whether actually received or not). Similarly, it
includes all expenses incurred in the relevant period (whether actually
paid or not). This account serves exactly the purpose which ‘profit and
loss account’ serves in a trading concern. On the pattern of ‘profit and
loss account’ income is shown on the credit side and expenditure on the
debit side. It also distinguishes between ‘capital & revenue’ items
i.e. it does not take into consideration capital items {both receipts
and payments). It follows double entry principles faithfully.

The Value of Accumulated Fund

Calculate the value of the accumulated fund

The
term Capital, owner’s equity or shareholders’ equity is commonly used
by profit oriented organizations, while it would be inappropriate to use
owner’s equity or capital in non-profit accounting since they are owned
by no one. Therefore, the term accumulated fund is usually used to
refer to the capital of a non-profit organization.

The
value of the accumulated funds can be calculated at any time by valuing
the net assets (i.e. assets less liabilities) of the organization. The
accumulated fund is the equivalent of the capital of a profit-making
organization.

Calculation of Accumulated Funds:Funds = Assets – Liabilities OR Trial Balance OR Statement of Affairs

Reconstruction of Income Account and Expenditure Accounts

Reconstruct income account and expenditure accounts

Income
and Expenditure account shows the summary of all incomes and
expenditures of an organization for complete year. It is just like
Profit and Loss Account. Following points should be noted in respect of
Income and Expenditure Account:-

It is a nominal account.
All the expenses are shown in debit side.
All incomes are shown in credit side.
It shows income and expenditure of current year only on accrual basis.
Only revenue expenses are shown in this account. No capital expenditure is shown in this account.

Example 1

Prepare the Income and Expenditure Account of XYZ Club for the financial year 2014-15 from the following transactions

RECEIPTS	AMOUNT	PAYMENTS	AMOUNT
(IN RS.)	(IN RS.)
OPENING BALANCE	18000	SALARIES	48000
SALE OF INVESTMENTS	20000	STATIONERY	2000
DONATIONS	1000	DEFENCE BONDS	30000
SUBSCRIPTIONS	90000	RENT	5000
SALE OF OLD FURNITURE	3000	CYCLE PURCHASED	3000
(BOOK VALUE RS.4000/=)	FURNITURE PURCHASED	20000
CLOSING BALANCE OF CASH	24000
TOTAL	132000	TOTAL	132000

Solutions

XYZ CLUB, INCOME AND EXPENDITURE ACCOUNT AS ON 31.03.2015

	DEBIT		CREDIT
EXPENDITURE	AMOUNT	INCOME	AMOUNT
	(IN RS.)		(IN RS.)
SALARIES	48000	SUBSCRIPTIONS	90000
RENT	5000	DONATIONS	1000
STAIONERY	2000
LOSS ON SALE OF FURNITURE	1000
EXCESS OF INCOME OVER-
EXPENDITURE	35000
TOTAL	91000	TOTAL	91000

Note:

Sale of investment is not revenue income.
Loss on sale of furniture is to be shown in expenditure side. i.e. Book value less sale value.
Purchase of Defence Bonds is not expenditure. It in an investment.
Furniture is a capital expenditure.
Cycle is also capital expenditure.

Preparation of Balance Sheet

Prepare the balance sheet

The
balance sheet of a non-trading concern is on usual lines. Liabilities
on left hand side and assets on right hand side. In trading concerns,
excess of assets over liabilities is called ‘capital’. Here, in
non-trading concerns, excess of assets over liabilities is called
‘capital fund’. The capital fund is built up out of surplus from income
and expenditure account.

Peculiar items of non-trading concern’s

Generally,
in the exercises, the instructions are given as to the treatment of
special items. Such instructions are based on the rules of the concern.
These should be followed while solving the question. In cases, where no
specific instructions are given, the following guidelines may be
considered:

Legacy:
It is the amount received by the concern as per the ‘will’ of the
‘donor’. It appears on the receipts side of receipts and payments
account. It should not be considered as income but should be treated as
capital receipt i.e. credited to capital fund account.
Subscriptions:
The members of the associations, as per rules, are, generally, required
to make annual subscription to enable it to serve the purpose for which
it was created. It appears on the receipts side of the receipts and
payments account and is, usually, credited to income. Care must be
exercised to take credit for only those subscriptions which are
relevant.
Life membership fees: Generally, the
members are required to make the payment in a lump sum only once which
enables them to become the members for whole of the life. Life members
are not required to pay the annual membership fees. As ‘life membership
fees’ is a substitute for ‘annual membership fees’, therefore, it is
desirable that life membership fees should be credited to a separate
fund and fair proportion be credited to income in subsequent years. In
the examination question, if there is no instruction as to what
proportion be treated as income then whole of it should be treated as
capital.
Entrance fees: This is also an item to
be found on the receipts side of receipts and payments account. There
are arguments that it should be treated as capital receipt because
entrance fees is to be paid by every member only once (i.e. when
enrolled as member, hence it is nonrecurring in nature. But another
argument is that since members to be enrolled every year and receipt of
entrance fees is a regular item, therefore, it should -be credited to
income. In the absence of the instructions anyone of the above treatment
may be followed but students should append a note justifying their
treatment.
Sale of newspapers, periodicals, etc.:
As the old newspapers, magazines, and periodicals etc. are to be
disposed of every year, the receipts on account of such sale should be
treated as income, and therefore, to be credited to income and
expenditure account.
Sale of sports material:
Sale of sports material (used) is also a regular feature of the clubs.
Sale proceeds should be treated as income, and therefore, to be credited
to income and expenditure account.
Honorarium:
Persons may be invited to deliver lectures or artists may be invited to
give their performance by a club (for its members). Any money, paid to
invitees, is termed as honorarium and not salary. Such honorarium
represents expenditure and will be debited to income and expenditure
account.
Special fund: Legacies and donations
may be received for specified purposes. As discussed above, these should
be credited to special fund all expenses related to such fund are shown
by way of deduction from the respective fund and not as expenditure in
income and expenditure account.
Sale of old asset:
It is a non-recurring item. It cannot be taken to income and
expenditure account. It leads to reduction in asset. Therefore, it is
shown by way of deduction from the concerned asset. It is important to
note that it is the “book value” that is to be deducted from asset.
Profit or loss in such a case is taken to income and expenditure
account. Where the book value of asset is nil, the entire proceeds of
sale be treated as income.
Specific Donations:
These are received for specific purpose. For example: Donation for
building; Donation for prizes; Donation for pavilion etc. These are
capital receipts and shown on liabilities side. It is worthy to note
that such donations should not be treated as income because if they are
taken to income and expenditure account, it will increase income. The
increased income may be utilized for any other purpose. Thus, the
purpose of donation will not be served. Such donations appear on the
liability side because they create a long term obligation (liability) on
the institution. For example a donor may wish that prizes may be
awarded year after year out of the income earned on his donations. Such a
donation account can’t be closed within a year by transferring to
income and expenditure account.
General donations:
These donations are not for any specific purpose and being a recurring
income they are to be treated as income and are shown on the income side
of income and expenditure account.
Endowment fund:
It represents donation for a specific purpose. Here, the object of the
donor is to provide a source of permanent income to the institution.
Thus, it is shown in the liability side of balance sheet. Any income
earned during the year in such fund is added to it and any expenditure
incurred during the year is deducted from it.

Advantages and Disadvantages of Receipts and Payments Accounts

State the advantages and disadvantages of Receipts and payments accounts

Features Of Receipts And Payments Account

The essential features of receipts and payments account are as follows:

Summary Of Cash Transactions:
All cash receipts and payments made by the concern during the
accounting period are recorded in this book. Therefore, receipts and
payments account can be taken as a summary of cash transactions.
Cash And Bank Items In One Column:
All receipts either cash or bank are recorded in receipts column of
receipts side where all cash and bank payments are recorded in one
column of payment column of receipts and payments account. The cash and
bank transactions are merged toavoidcontra entries of cash and bank
transactions.
No Distinction Between Capital And Revenue:
All cash receipts and cash payments irrespective of capital and revenue
nature are recorded in receipts and payments account. No distinct is
made for capital receipts , revenue receipts, capital expenditures and
revenue expenditures.
Opening And Closing Balance Of Cash: Receipts and payments account starts from opening balance of cash and bank ends with the closing balance of cash and bank.
Recording Of Cash Receipts And Payments:
All cash and cheque receipts are recorded on debit side where as all
cash and cheque payments are recorded on credit side of receipts and
payments account.
Ignores Non-cash Transactions: Receipts and payments account does not record non-cash transactions.

Limitations Of Receipts And Payments Account

The receipts and payments accounts suffers from the following limitations:

Receipts and payments account does not differentiate capital and revenue expenses and incomes.
Receipts and payments account fails to show expenses and incomes onaccrualbasis.
Receipts and payments account fails to show surplus and deficiency.
Receipts and payments account fails to show non-cash transactions such as depreciation of fixed assets, pilferage etc.

TOPIC 12: ACCOUNTS OF NON-PROFIT MAKING ORGANIZATIONS | B/KEEPING FORM 3

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