Financial Accounting - Final Accounts of a Non-Profit Organisation (Foundation Level)

 

Financial Accounting

Final Accounts of a

Non-Profit Organisation

(Foundation Level)

Part A: Discussion of basic theories in regard to methods of accounting for non-profit organisations including (1) definition, meaning and accounting treatment of some important items like subscriptions, entrance fees, donations, life membership fees, capital fund, etc., and (2) Format of Subscription Account.

 

Part B: Eight Illustrations with Solutions.

Part A

Introduction

Non-profit organisation is an organisation which is set up for the benefit of the society as a whole instead of for the benefit of any sole proprietor or any group of partners or shareholders. Earning profit is not the motive of the non-profit organisations rather their main objectives are providing social, educational, religious or charitable benefits to the society at large. Examples of non-profit organisation are club, charitable institution, charitable society, charitable hospital, etc. Like any business organisation a non-profit organisation also has to maintain its books of accounts throughout the accounting year and at the end of the year has to prepare its own final accounts.

 

Differences between a business organisation and a non-profit organisation

The major differences, from accounting point of view, between a Business Organisation and a Non-Profit Organisation are as follows:

1.           A business organisation is set up and exists for earning profit, whereas a non-profit organisation is set up and exists for rendering beneficial service to the society without making any profit for any member of the organisation.

2.           Final accounts of a business organisation consist of trading account, profit and loss account and balance sheet, whereas final accounts of a non-profit organisation consist of receipts and payments account, income and expenditure account and balance sheet.

3.           Profit and loss account of a business organisation is prepared to know the net profit or loss made by the organisation during the year, whereas income and expenditure account of a non-profit organisation is prepared to know the surplus (excess of income over expenditure) or deficiency (excess of expenditure over income) at the end of the year.

4.           In case of the business organisation there is proprietor’s capital which appears in the liability side of the balance sheet, whereas in case of the non-profit organisation there is no such proprietor’s capital. In fact, in case of the non-profit organisation there is capital fund which also appears in the liability side of the balance sheet.

 

Difference between Receipts and Payments Account and Income and Expenditure Account:

 

	Receipts & Payments A/c	Income & Expenditure A/c
1	It is a summarised Cash Book	It closely resembles the P/L A/c of a Trading concern.
2	Receipts are debited and Payments are credited.	Incomes are credited and Expenditures are debited.
3	Transactions are recorded on Cash basis.	Transactions are recorded on Accrual Basis
4	Receipts and payments related to previous period and future period are also recorded in this A/c along with receipts and payments of current period. Outstanding amounts for current period are excluded.	Incomes and expenditures of current period only are recorded in this A/c. Outstanding amounts of current period are included.
5	It records both Capital and Revenue transactions.	It records Revenue transactions only.
6	It is a Real Account in nature.	It is a Nominal Account in nature.
7	It starts with opening Cash and Bank Balances and ends with closing Cash and Bank Balances.	It does not record such balances; rather its final balance shows a surplus or a deficit for the period.
8	It does not record notional loss or non-cash expenses like bad debts, depreciations etc.	It considers all such expenses for matching against revenues
9	Its closing balance is carried forward to the same A/c of the next period.	Its closing balance is transferred to the Capital Fund or General Fund or Accumulated Fund of the same period’s B/S.
10	It helps to prepare an Income & Expenditure A/c.	It helps to prepare a Balance Sheet.

 

Definition, meaning and accounting treatment of some important items

CAPITAL FUND

Capital fund may be assumed to be the capital of non-profit organisation. It represents:

(a)        Amount contributed by the supporters, members and well-wishers of the organisation in cash or kind in the form of non-recurring general purpose donations;

(b)        Part of the entrance fees received from the members which have been capitalised; and

(c)        Surplus (excess of income over expenditure) generated during the year.

 

If there is any deficiency (excess of expenditure over income) at the end of the year it is deducted from the capital fund. Capital fund (also known as general fund or accumulated fund) is shown in the liability side of the balance sheet.

 

DONATION

It is the amount contributed by the supporters, members and well-wishers of the organisation in cash or kind. The donations may be special purpose donations or general donations. Examples of special purpose donations are donations received for prize, building, tournament, library, etc.

 

Special purpose donations are to be treated as capital receipts and accordingly should be credited to the particular fund for which the amount has been donated and should be shown in the liability side of the balance sheet.

 

General donations may be of two types: non-recurring and recurring. Non-recurring donations received should be credited to Capital Fund, whereas recurring donations received should be credited to Income & Expenditure Account.

 

LEGACY

It is an amount or other item of value received from a deceased person under the terms of a will. It is directly added to capital fund. If a legacy is received for any special purpose, it should be credited to the particular fund for which the amount of legacy has been received.

 

SUBSCRIPTIONS

It is the amount paid by the members at regular intervals (monthly, quarterly, half-yearly or yearly) to keep their membership alive. It is treated as income and credited to the income and expenditure account of the period concerned.

 

LIFE MEMBERSHIP FEE

It is a lump sum payment made by a member of an organisation in order to become a life member of the organisation. There are two alternative accounting treatments for the life membership fee.

 

Alternative: I

The entire amount of life membership fee received is credited to the capital fund.

 

Alternative: II

The amount of life membership fee received is credited to a special fund called life membership fund and an amount equal to the annual subscription is transferred every year to the income and expenditure account, the balance of the fund being carried forward till it is fully exhausted. If any life member dies before the entire amount paid by him has been transferred to the income and expenditure account in the above way, the balance should be transferred to the capital fund on the date of his death. In the absence of any specific instruction in regard to which alternative treatment is to be followed, the first alternative treatment should be followed.

 

ENTRANCE / ADMISSION FEE

It is the fee paid by a member at the time of becoming a member. It is paid by the member only once in life time for becoming a member. In the absence of any specific instruction entrance fee received should be treated as capital receipt and accordingly credited to the capital fund. When a specific direction has been given as to how much of the entrance fee received should be treated as capital receipt and how much as revenue receipt, it should be treated accordingly.

 

HONORARIUM

It is a token payment made to a person who has voluntarily undertaken a service which would normally command a fee. It is thus an expression of gratitude rather than a payment for the work done. It is treated as expense and debited to the income and expenditure account of the period concerned.

 

SPECIAL FUND

It is a fund set up for a special purpose. For example, a cricket club may wish to organise annual cricket tournaments and may set up a special fund for this purpose (may be by the name of “Tournament Fund”). It should be noted that all the amounts received as donations or by fund raising activities and all incomes relating to the special fund should be credited to the special fund. Similarly, all expenses relating to the special fund should be debited to the special fund. A special fund appears in the liabilities side of the balance sheet. If the Special Fund is used to purchase a fixed asset, the cost of the asset should be transferred from the Special Fund to the Capital Fund by the following journal entry:

 

Date	Particulars		Debit (Rs)	Credit (Rs)
1	Special Fund A/c	Dr
	To Capital Fund A/c
	(Cost of fixed asset purchased transferred from the Special Fund to the Capital Fund)

 

Accounting Treatment of Some Important Items

(Tabular Presentation):

ITEMS	INCOME AND EXPENDITURE ACCOUNT	BALANCE SHEET
1. Donation
Special purposes donation		Taken to balance sheet and added to the special fund in the liability side
General donation
Recurring	Credited to I/E Account
Non-recurring		Credited to capital fund (i.e. added to capital fund)
2. Legacy		Added to capital fund
3. Subscription	Credited to I/E Account
4. Life Membership Fee
1st Alternative		Credited to capital fund
2nd Alternative (by opening Life Membership Fund)   Note: In the absence of specific instruction about which alternative is to be followed, always the first alternative should be followed	Every year total subscription of the year will be deducted from the Life Membership Fund and will be credited to the I/E Account	Credited to Life Membership Fund in the liabilities side of the Balance Sheet   On death of a member, the balance left, if any, out of his Life Membership Fee should be transferred to the Capital Fund from the Life Membership Fund
5. Entrance fee / Admission fee	If there is any specific instruction to treat a part of the entrance fee as revenue receipt, that part of entrance fee should be credited to I/E A/c.	In the absence of any specific instruction, entrance fee should be credited to capital fund in the Balance Sheet as capital receipt.
6. Honorarium	Treated as an expense and debited to I/E A/c
7. Special fund / Endowment fund [Examples: Tournament fund, prize fund, cultural program fund, etc.]		It is shown in the liability side of balance sheet. All expenses relating to the special fund should be deducted from the special fund and all incomes relating to the special fund should be added to the special fund in the Balance Sheet.   If any fixed asset is purchased by using special fund, cost of such asset should be transferred to capital fund from the special fund.

 

How to calculate ‘income from subscriptions’ when ‘subscriptions received’ is given:-

Computation of income from subscriptions

	Particulars	Rs	Rs
	Subscriptions received		×××
A:	Outstanding subscriptions at the end of the year	×××
A:	Subscriptions received in advance at the beginning of the year	×××
A:	Subscriptions written off during the year	×××	×××
			×××
L:	Outstanding subscriptions at the beginning of the year	×××
L:	Subscriptions received in advance at the end of the year	×××	×××
	Income from subscriptions (Credited to the Income and Expenditure Account)		×××

 

How to calculate ‘subscriptions received’ when ‘income from subscriptions’ is given:-

Computation of subscriptions received

	Particulars	Rs	Rs
	Income from subscriptions		×××
A:	Outstanding subscriptions at the beginning of the year	×××
A:	Subscriptions received in advance at the end of the year	×××	×××
			×××
L:	Outstanding subscriptions at the end of the year	×××
L:	Subscriptions received in advance at the beginning of the year	×××
L:	Subscriptions written off during the year	×××	×××
	Subscriptions received (Debited to the Receipts and Payments Account)		×××

 

Subscription Account

‘Income from subscriptions’ and ‘Subscriptions received’ can also be calculated as balancing figures by preparing Subscription Account as follows:

Format of Subscription Account in PDF

Click here for the Format of Subscription Account in PDF

Example:

There are 100 members in a club. Subscription per member per annum is Rs 5,000. For the current accounting year 2021- 2022, 8 members could not pay their subscriptions, whereas 12 members paid their current year’s subscriptions in the previous year. 10 members could not pay their previous year’s subscriptions out of which 4 members cleared their dues during the current year. 10 members paid their next year’s subscriptions during the current year in advance.

 

Prepare

1.           Receipts and Payments A/c for the year ended 31.03.2022 (extracts);

2.           Income and Expenditure A/c for the year ended 31.03.2022 (extracts);

3.           Balance Sheet as at 1^st April, 2021 (extracts); and

4.           Balance Sheet as at 31^st March, 2022 (extracts).

 

Solution to Example

Part B

Financial Accounting

Accounting for

Non-Profit Organisation

Selected Problems and Solutions

(Foundation Level)

Illustration: 1

From the following details prepare Receipts and Payments Account.

	Rs
Opening Cash in hand	3,400
Opening Cash at Bank	23,400
Subscriptions received	25,000
Donations collected	5,000
Salaries paid	6,000
Rent Paid	1,000
Tournament Expenses	3,000
Purchase of Investments	10,000
Interest Received	600
Sundry expenses	15,000
Electricity charges	500
Cash in hand at the end	700

Click here for Solution: 1 in PDF 

Illustration: 2

From the following Receipts and Payments Account of the Venkateswara Society for the year ended 31.12.2014 prepare income and expenditure account for the year ended 31.12.2014.

Receipts	Rs	Payments	Rs
To Balance b/d	3,485	By Books	6,150
To Entrance Fees	650	By Printing and Stationery	465
To Donations	6,000	By Newspapers	1,110
To Subscriptions	6,865	By Sports Materials	5,000
To Int. on bank deposit	1,900	By Repairs	650
To Sale of furniture	685	By Investments	2,000
To Sale of old newspapers	465	By Furniture	1,000
To Proceeds from entertainments	865	By Salaries	1,500
To Sundry Receipts	125	By Balance c/d	3,165
	21,040		21,040

 Additional Information:

   1. The Entrance Fees and Donations are to be capitalised; and

  2. Sports materials value Rs 4,000 as on 31.12.2014.

 Click here for Solution: 2 in PDF

 

Illustration: 3

From the following Receipts and Payments Account of the Guntur Sports Club for the year ended 31.3.2014, prepare Income and Expenditure Account.

Receipts	Rs	Payments	Rs
To Balance b/d	14,000	By Salaries	1,400
To Subscriptions (incl. Rs 1,000 for the P.Y.)	18,000	By Repairs	600
To Legacies	2,000	By Sports Equipment	2,000
To Life Membership Fees	5,000	By Furniture	8,000
To Sale of tickets	500	By Honorarium	5,000
To Locker Rent	1,500	By Books	2,000
To Entrance Fees	1,000	By Investments	10,000
To Interest on Investment	200	By Office Exp.	1,200
		By Balance c/d	12,000
	42,200		42,200

 

Additional Information:

a)       Outstanding Salaries Rs 600.

b)       Value of opening stock of sports equipments is Rs 1,000 and that of closing stock is Rs 500.

c)        Interest accrued on investments Rs 200.

d)       Subscription receivable for the year 2013-2014 is Rs 3,000.

e)       Entrance Fees are to be treated as revenue receipts.

 

Click here for Solution: 3 in PDF 

Illustration: 4

From the following Receipts and Payments Account prepare Final Accounts of Dhakuria Sports Club for the year ended 31.03.2014.

Receipts	Rs	Payments	Rs
To Subscriptions	15,000	By Land	10,000
To Donations	50,000	By Buildings	40,000
To Legacies	10,000	By Furniture	10,000
To Entrance Fees	5,000	By Sports Mat.	5,000
To Life Membership Fees	3,000	By Sports Exp.	6,000
To Sports Income	17,000	By General Exp	1,000
To Sundries	5,000	By Magazines	1,500
To Sale of old newspapers	500	By Ground Exp	4,000
		By Balance c/d	28,000
	1,05,500		1,05,500

 

Capitalize half of each of donations, legacies, entrance fees and life membership fees. Subscriptions still outstanding Rs 5,000. Depreciate fixed assets other than land by 5% and sports material by 10%.

 

Click here for Solution: 4 in PDF

Illustration: 5

From the following Receipts and Payments Account and additional information prepare the income and expenditure account for the year ended 31^st Dec., 2013 and a Balance Sheet as on that date of Cosmopolitan Club.

 

Receipts	Rs	Payments	Rs
To Donations	50,000	By Furniture	10,000
To Life Membership Fees	10,000	By Buildings	40,000
To Legacies	40,000	By Salaries	5,000
To Subscriptions	41,000	By Wages	1,000
To Lectures	9,000	By Entertainment Expenses	4,000
To Entertainment Incomes	13,000	By Newspapers	1,800
To Sale of old papers	500	By Printing and Stationery	1,200
To Sundries	500	By Telephone Exp.	300
		By Grass Seeds	700
		By Bats and Balls	5,000
		By Balance c/d	95,000
	1,64,000		1,64,000

 

Additional Information:

a)       Salaries Outstanding Rs 1,000.

b)       Printing & Stationery outstanding Rs 200.

c)        Bats and Balls on 31.12.2013 Rs 3,000.

d)       Depreciate Buildings at 5%.

e)        Depreciate Furniture at 10%.

f)             Subscriptions include Rs 1,000 relating to 2014.

g)       Subscriptions payable by members for the year 2013 is Rs 500.

 

Click here for Solution: 5 in PDF

Illustration: 6

Laxman Cricket Association gives you the following Receipts and payments account for the year ended 31^st March, 2014.

 

Receipts	Rs	Payments	Rs
To Balance b/d:		By Salaries	22,000
Cash	1,500	By Sports Equipment	50,000
Bank	14,200	By Stationery	2,000
To Subscriptions	75,000	By Maintenance of Ground	8,000
To Admission Fees	13,500	By Prizes	1,000
To Int. on Inv.     (@ 10% p. a. for full year)	10,000	By Balance c/d:
To Donations	2,000	Cash	23,200
		Bank	10,000
	1,16,200		1,16,200

 

Additional information:

	On 1.4.2013	On 31.3.2014
a)      Subscriptions due	4,000	5,500
b)      Subscriptions received in advance	800	500
c)      Land and buildings (Cost less depreciation)	2,00,000	1,90,000
d)      Salaries due	1,000	2,000

 e) Admission Fees and Donations are to be treated as revenue receipts.

Prepare Income and Expenditure A/c for the year ended 31^st March, 2014 and Balance Sheet as on that date.

Click here for Solution: 6 in PDF

Illustration: 7

From the following Receipts and Payments Account and other details of Pattabhi Memorial Trust, which commences its working from 1^st January, 2014 with a capital of Rs 40,000 in cash and furniture Rs 20,000 prepare an Income & Expenditure Account for the year ended 31^st December, 2014 and the Balance Sheet as at that date.

Receipts and Payments Account

For the year ended 31.12.2014

Receipts	Rs	Payments	Rs
To Balance b/d	40,000	By Salaries	15,000
To Donations (General and Non- Recurring)	60,000	By Conveyance	6,000
To Legacies	16,000	By Rent	12,000
To Subscriptions	14,000	By Subscriptions      to Journals	5,400
To Furniture sold     (on 31.12.14)	6,000	By Stationery	1,000
		By Books	4,000
		By Buildings      (purchased       01.01.14)	68,000
		By Balance c/d	24,600
	1,36,000		1,36,000

 

Additional information:

a)       Provide for depreciation on Furniture @10% and on Buildings @10% and on Books Rs 1,000.

b)       Outstanding subscriptions at the end of the year 2014 were Rs 15,000 and subscriptions received in advance for 2015 were Rs 5,000.

c)        Outstanding expenses for the year 2014 were: Rent Rs 1,000; Salary Rs 2,000.

 

Click here for Solution: 7 in PDF

Illustration: 8

From the following Receipts and Payments Account of Shyam Sports Club for the year ended 31^st December, 2015 prepare Income and Expenditure Account for the year ended 31.12.2015 and Balance Sheet as at that date.

Receipts and Payments Account

For the year ended 31.12.2015

Receipts	Rs	Payments	Rs
Cash in hand	150	Mowing machine	1,100
Cash at bank	2,100	Ground men’s Fees	1,500
Subscriptions	5,800	Rent	500
Rent of the Hall	3,000	Salaries to coaches	4,500
Life Membership Fees	2,000	Office expenses	2,400
Entrance Fees (Income)	200	Purchase of Sports Equipment	1,200
Donations (General and Recurring)	1,500	Cash in hand	350
Sale of Grass	100	Cash at bank	3,300
	14,850		14,850

 

Additional information:

Subscriptions due on 31^st December, 2014 and on 31^st December, 2015 were Rs 900 and Rs 800 respectively. Subscriptions received also included subscriptions for the year 2016 Rs 200. Sports Equipment in hand on 31^st December, 2014 was Rs 1,100. The value placed on Sports Equipment in hand on 31^st December, 2015 was Rs 1,300. The mowing machine was purchased on 1^st January, 2015 and is to be depreciated @ 20% per annum. Office expenses include Rs 300 for 2014 and Rs 400 for the current year are still due for payment.

Click here for Solution: 8 in PDF