ACCOUNTING FOR - NOT - FOR - PROFIT – ORGANISATION


LEARNING Outcomes;
After studying the lesson, students will be able to:
·               Understand non-profit entities and state its meaning.
·               Different Accounting terminology related to non-profit entities.
·                Explain the concept of fund accounting.
·               Understand Receipts and payment account and its features.
·               Understand Income and Expenditure Account and its features.
·               Identify the items for the preparation of Income and Expenditure Account.
·               Differentiate between Receipts and Payment Account and Income and Expenditure Account.
·               Prepare Income and Expenditure Account with the given receipts and
    Payment Account and additional information
Introduction:
Organisations are of two types:
a.      Profit making organisations are the business organisations whose main objective is to earn profit by selling goods or providing services. These organizations are formed with Profit-Motive.
b.      Not-for-Profit organisations are formed to promote certain cultural, recreational, religious, political, educational, medical activities etc. These organizations are formed with Service Motive. This chapter helps in understanding the major differences involved in doing accounting for profit making organizations and Non Profit making organizations.



Salient Points:-
A. Meaning of Non-Profit Organisations:
 Not for profit organisations refer to the organisations that are used for the welfare of the society and are set up as charitable institutions, which function without any profit motive.
B. Characteristics of Not for Profit Organisation:
a.     Formed for providing service to a specific group or public at large.
b.     Organized as charitable trust/society.
c.     Managed by Managing Committee elected by members.
d.     Main Source of Income is:
        Subscriptions, donations, government general grants etc
e.     Funds raised through various sources are credited to capital fund
f.     Government Schools, Charitable hospitals, Recreational Clubs, etc are examples of Not for profit organisation.
C. Basic Accounting Terminology:
1.  Subscription: Subscription is the amount paid by member to the non-profit organization in order to maintain their membership. It is the main source of income for N.P.O. and it is shown in the    income side of Income and Expenditure A/c.

2. Life membership fees: it is the amount paid by member to the non-profit organization for the maintenance of entire life membership. It is shown in the Liabilities side of Balance sheet.

                3. Legacy : It is the amount received as per the will of a deceased  person.  It appears on the receipts side of the Receipt and payment account and is directly added to capital fund / general fund in the balance sheet.

4. Endowment Fund: it is the funds received for providing permanent means of support. It is a capital receipt because the fund provides permanent source of income.

5. Grant: it is the amount received from central, state or local government for routine expenses of these institutions. Grant received from government for routine expenses are income. Grant received for specific purpose is treated as liability.

D. Accounting Records of Not for Profit Organisations:
The financial statement of Not for Profit organization includes:
        1. Receipt and Payment A/c
        2. Income and Expenditure A/c
        3. Balance Sheet.
1. Receipt and Payment A/c:
a.        It is a Summary of the Cash Book.
b.       Its shows the total amount of all receipts and payments irrespective of the Period to which they pertains.
c.        It includes all receipts and payments whether they are of revenue or capital nature.
d.       No non-cash items are shown in this A/C.
e.        It has both opening and Closing Cash balance.
f.        Format of:
Receipts and Payments Account

Receipts
Amount
Payments
Amount
To Balance b/d
To Revenue Receipts:
a. Subscriptions
b. General Donations
C. Proceeds from sale of Tickets, grass and old newspapers.
d. Locker Rents.
e. Entrance fees, if not capitalized
To Capital Receipts:
a. Specific purpose donations
b. Legacies
c. Specific Purpose donations
d. sale of fixed assets and Investment
e. Capitalised Entrance fees
f. life membership fees


Note: all revenue receipts goes to Income Side of Income and Expenditure Account



Note: Capital Receipts goes to Balance sheets
By Revenue Payment:
a. Rent rates and taxes.
b. newspapers, magazines, periodicals
c. salaries
d. electricity expenses.
e. consumable items.



By Capital Payment:
a. fixed assets
b. Investments etc.
Note: all revenue Payments goes to Expenditure Side of Income and Expenditure Account






Note: Capital Payment goes to Balance sheets
2. Income and Expenditure Account:
The main features of Income and Expenditure Account:
               i)      It is prepared for an accounting period on accrual concept following the matching principle.
               ii)     Only revenue items are considered, while capital item are excluded.
               iii)   All items both cash and non-cash (depreciation) are recorded
iv)       Expenditure are recorded on the debit side and incomes on the credit side
v)          Difference is known as Surplus (if come in Expenditure side) or Deficit (if come in Income side).
3. Balance Sheet:
Balance sheet is prepared for not-for –profit organization to ascertain the financial position of the organization. it is prepared on the same pattern as in the case of profit making organization. The only difference is that “Capital fund” or “General Fund” is shown in place of Capital and Surplus or deficit as per income and expenditure account will be added or deducted from the capital fund.
Note: if in a question capital fund in the beginning of current year is not given then we have to prepare Opening Balance sheet to ascertain it.
D. Topic for 03 Marks:
  1. CALULATION OF SUBSCRIPTION INCOME TO BE SHOWN IN INCOME SIDE OF INCOME AND EXPENDITURE ACCOUNT:

Formula 1.

Particular/Income
Amount
Total Subscription received during the year
Add:
1.  Subscription received in advance during Previous Year{p.y advance}
2.  Outstanding (arrear) Subscription of Current year(C.Y O/S}
Xxx

Xxx
xxx
Less:
1.     Subscription received in advance during current year(N.Y){C.Y. advance}
2.     Outstanding(arrear) Subscription of Previous year, received during current year.{P.Y. o/s}

Xxx

Xxx
xxx
Subscription income of Current Year
xxx

Formula 2:-
Particular/Income
Amount
Total Subscription received of Current year
Add:
1.  Subscription received in advance during Previous Year
2.  Outstanding (arrear) Subscription of Current year
Xxx

Xxx
xxx
Subscription income of Current Year
xxx

2. Calculation of Amount Spent on consumable item:
Consumable item are those item which are consumed during the process of their use like, Medicine, Stationery, Sports material etc.
In Case of non-profit organization the amount spent on item consumed during the year is shown in the expenditure side of Income & Expenditure A/C:-

Formula:

Particular/Expenditure
Amount
Amount paid for Consumable items
Add:
  1. Opening stock of Consumable items(Beginning of current year)
  2. Opening Advance Paid to supplier Consumable items (Beginning of current year)
  3. Closing creditor of Consumable items (End of current year)
Xxx

Xxx
Xxx


Xxx


Less:
     1. Closing stock of Consumable items (End of current year)
2. Closing Advance Paid to suppliers of Consumable items y(end  of current year)
3. Opening creditor of Consumable items (Beginning  of current year)

Xxx

Xxx

Xxx
xxx
Amount spent on Stationery Consumed during current Year to be shown in expenditure side of Income and Expenditure A/c
XXX

3. TREATMENT OF SPECIFIC FUND, It’s INVESTMENT, INCOME AND EXPENSES RELATED TO THEM:-

e.g. TOURNAMENT FUND, MATCH FUND, PRIZE FUND etc.

Specific funds are used for specific purposes. We have to show their treatment in the balance sheet in the following way depending upon the information given in question:

Let’s assumed that specific fund is tournament fund:-

  Balance Sheet of …………………..

Liabilities
Amount
Assets
Amount
Tournament Fund            xxx
Add:
  1. Income received from Tournament or Tournament fund investment.              xxx
  2. Income O/s from Tournament or Tournament fund investment               xxx
                                              Xxx
Less:
1.     Tournament Expenses
Paid                                   xxx
2.     O/s Tournament
expenses                            xxx

O/S tournament expenses















XXX

XXX
Tournament fund Investment



Income O/s from Tournament or Tournament fund investment              

XXX






XXX
1 Mark Questions
Q.1.        During the year 2007 a club received Rs1, 00,000 as entrance fees.  According to accounting policy for the club 40% of the entrance fees is to be capitalised.  How will you deal with entrance fees received by NPO?
Ans.1      Entrance fees Rs. 60,000 (i.e. 60% of Rs. 1,00,000) will be credited to 'Income and Expenditure Account' and Rs 40,000 (i.e. 40% of Rs. 1,00,000) will be added to capital fund in the balance sheet.
Q.2      Not-for-Profit organizations have some distinguishing features from that of profit organisations state any one of them.
Ans.2      The main motive of not for profit organization is to provide services for welfare, while the main purposes of profitable organization is to earn profit.
Q.3.        Why depreciation on fixed assets is not recorded in Receipts and payment account?
Ans.3      Because depreciation is a non-cash item while Receipts and Payments Account records only cash and bank transactions
Q.4         What is Endowment fund?
Ans.4      Endowment funds contains assets donated by the donors with the condition  that only the income covered by these assets can be used to finance the specific activities and not the principle amount.
Q.5         Give two main sources of income of a Not for profit organization?
Ans.5      Subscriptions, donations, government general grants etc
Q.6.        What do you mean by legacy? Give the Accounting treatment of it.
Ans.6      Legacy: It is the amount received as per the will of a deceased person.  It appears on the receipts side of the Receipt and payment account and is directly added to capital fund / general fund in the balance sheet.
Q.7.        What is honorarium?
Ans.7      A token payment made to a person who has voluntarily undertaken a service which will normally demand of fee.  It is thus an expression of gratitude rather than a payment for the work done.

3- Marks questions:

Q.1.Extracts of receipt and payment Account for the year ended 31st March, 2010 are   given below:

            Subscriptions                                                                     Rs.
                        2008-09                                                                         2,500
2009-10                                                                       26,750
2010-11                                                                         1,000       
                                                                                                             30,250

     Additional information:
      a. Total number of members:        300
         Annual membership fee:      Rs 125
      b. Subscription outstanding for 2009-10 Rs. 6,000.
      c. Subscription outstanding on April 1, 2009:   Rs.  2,750

 Prepare a statement showing all relevant items of subscriptions viz. income, advance, outstanding etc.                                                                                                                        (3)

Ans 1. This question can be solved by two methods:

Formula 1.

Particular/Income
Amount
Total Subscription received during the year
Add:
1.  Subscription received in advance during Previous Year{p.y advance}
2.  Outstanding (arrear) Subscription of Current year(C.Y O/S}
30,250

 4,750

 6,000

Less:
1.     Subscription received in advance during current year(N.Y){C.Y. advance}
2.     Outstanding(arrear) Subscription of Previous year, received during current year.{P.Y. o/s}

41,000

1,000

2,500
Subscription income of Current Year
37,500

2nd formulae:
Particular/Income
Amount
Total Subscription received of Current year
Add:
1.  Subscription received in advance during Previous Year
2.  Outstanding (arrear) Subscription of Current year
26,750

  4,750

  6,000
Subscription income of Current Year
37,500

Working Note:
Subscription received in advance during Previous year:
Total subscription income for one year(300 X 125) =         37,500
Less:
1. Total Subscription received of Current year                     26,750
2. Outstanding Subscription of current year                            6,000
Subscription received in advance during Previous year        4,750
Q.2. Show the following information in the Balance Sheet of the cosmos club as on 31st March 2007:
Particulars                                                      Debits(Rs.)           Credit(Rs.)
Tournament Fund                                                 -                          1, 50,000
Tournament fund Investment                         1, 50,000                       -
Income from Tournament
Fund Investment                                                   -                           18,000
Tournament Expenses                                       12,000                        -

Additional Information:
Interest accrued on Tournament fund Investment Rs.6, 000
Outstanding Tournament Expenses Rs. 3,000              
Donation for Tournament Rs. 2,000                                                         (3)

Ans.
                            Balance Sheet Of Cosmos Club
                            (as on____________________)

Liabilities
Amount
Assets
Amount
Tournament Fund         1,50,000             
Add:
a. Income  from 
Tournament fund
investment.                        18,000
b. Interest accrued on
tournament fund
investment                          6,000
c. Donation for tourn-
    ament                              2,000
                                          1,76,000
Less:
a. Tournament Expenses  12,000

b. O/s Tournament
expenses                           3,000

O/S tournament expenses















1,61,000

     3,000
Tournament fund Investment





Interest accrued on tournament fund investment                         


1,50,000






    6,000


Q.3. On the basis of the following information, calculate the amount to be debited to Stationary account in the Income and Expenditure for the year ended 31.03.2011:

Stock of Stationery on 1.04.10                                                  3,000
Creditors for stationery on 1.04.2010                                       2,000
Amount paid for Stationery during 2010-11                            10,800
Stock of stationery on 31.03.2011                                                 500
Creditors for Stationery on 31.03.2011                                      1,300                                     (3) 

Ans. 3.
Particular/Expenditure
Amount
Amount paid for stationery
Add:
  1. Opening stock of Stationery(Beginning of current year)
  2. Closing creditor(End of current year)
10,800

  3,000
  1,300

Less:
     1. Closing stock of Stationery(End of current year)
2. Opening creditor(Beginning  of current year)

15,100

      500
    2,000
Amount spent on Stationery Consumed during current Year
12,600

QUESTIONS 06 MARKS

Q.1. Following is the receipts and payment account of a recreation club for the year ended 31st March 2009
RECEIPTS AND PAYMENTS ACCOUNTS
FOR THE YEAR ENDED 31ST MARCH, 2009

Receipts
Amount
(Rs.)
Payments
Amount
(Rs.)
To cash in Hand
To Subscriptions
To Entrance Fees
To Sale of refreshments
To Sale of Dance Tickets
To Interests on Investments @7%



8,320
26,000
3,900
9,880
5,850

4,550

By Rent of Hall
By Salaries
By Purchase of Sports Equipment
By Dance Expenses
By Supply of Refreshment
By Honorarium
By Sundry Expenses
By Electricity changes
By Cash at Bank
3,600
5,200

16,640
4,940
6,760
1,040
3,250
1,820
15,210

Total
58,500
Total
58,500



Following additional information are also provided to you:
(i)              Following were the assets and liabilities on 31st March, 2008:
Sports equipment Rs.6,760, subscription in arrears Rs.1,950, Furniture Rs. 12,480
Liabilities –Accrued rent Rs.780 and subscription received in advance Rs.520.
(ii)            Following were the assets and liabilities on 31st March 2009:
Sports equipments Rs. 19,760, Subscription in arrear Rs. 1, 690, Furniture Rs. 11,180,
Liabilities – Accrued rent Rs. 390, subscription received in advance Rs. 2, 340.
(iii)          Entrance Fees is to be capitalized.
You are required to prepare income and expenditure account for the year ended 31st March, 2009 .

Solution: 1

INCOME AND EXPENDITURE ACCOUNT OF A RECREATION CLUB

(FOR THE YEAR ENDED 31ST MARCH, 2009)
Dr                                                                                                                    Cr.
Expenditure
Amount (Rs)
Income
Amount (Rs)
To Rent of Hall                  3,640
Add: Accrued Rent
(Current Year)                    +390
                                            4,030
Less: Accrued Rent
(Previous Year)                   780

To Salaries
To Honorarium
To Sundry Expenses
To Electricity charges
To Supply of Refreshment
To Dance expenses
To Depreciation                   Rs.
Furniture                            1,300

Sports Equipment              3,640
To Excess of Income
 Over Expenditure (Surplus) Transferred to Capital Fund





3,250

5,200
1, 040
3,250
1,820
6,760
4, 940



4,940

13,000
By Subscription                    Rs.     26, 000
Add: Subscription in
Advance in Previous Year                    520
26,520
Add: Subscription in
Arrear for Current Year                     1,690
28,260
Less: Last Year’s arrear                    1,950
  26,260
Less: Subscription-received in
Advance for next  Year                   –2,340

By Sale of Refreshment
By Sale of Dance Tickets
By Interest on Investments










23,920

9,880
5,850
4,550

Total
44,200

44,200
Note:
  Value of Investment in the beginning of the year has been calculated as follow:
Interest Investment ×100/Rate of investment
4,550 X 100     = Rs. 65,000
          7

Q2. Prepare income and expenditure account for the year ended 31st March 2009 and the balance-sheet as at 31-3-2009 from the following information related to Somnath welfare society.

RECEIPTS AND PAYMENTS ACOUNT OF SOMNATH WELFARE SOCIETY
FOR THE ENDED 31ST MARCH, 2009                               

Receipts
Amount (Rs.)
Payments
Amount (Rs.)
To Balance b/d
To Subscriptions
  2007-08   Rs.      8,910
  2008-09   Rs. 2,31,000
  2009-10   Rs.     2,750

To Legacies

To Donations for Building
To Sale of Old Furniture
    (at book value)
To Miscellaneous Receipts
19,800



2,42,660

7,920

46,200

6,600
79,408

By Salaries and Wages
By 10% Investments
(Face value 13, 750)
Purchased on 1-10-08
By Rates and Taxes
By office Expenses
By Entertainment Material
By Telephone Charges
By Advance for Building
By Internet Charge
By Balance c/d

1,42,802


11,000
6,809
8,602
64,020
2,860
16,500
1,320
1,48,675

Total
4,02,588

4,02,588

Additional information:
(i) On 31st March 2008, the society has following assets and liabilities:
Assets:
10% investment Rs. 1,21,000 (face value Rs. 1,65,000) Furniture Rs. 88,000; Musical instruments Rs. 13, 420, Machinery Rs. 61,600, Fax Machines Rs. 18,700, Subscription in arrears Rs. 17,600.
Liabilities:
(i)              Creditors for entertainment material Rs. 5,500, subscription received in advance Rs. 2,310 and building fund Rs. 55,000.
(ii)            Charge depreciation @ 20% on furniture, machinery and fax machines.
(ii)        On 31st March, 2009 entertainment material was valued at Rs.
             28,732. Internet charges was outstanding Rs. 1,650.
(iii)          Each year subscription is paid by 110 members, each paying Rs. 2,310.
(iv)          Payment for Entertainment material includes 2,200 for previous year.

Solution:

INCOME AND EXPENDITURE ACCOUTN IN THE BOOKS OF SOMNATH WELFARE SOCIETY
(FOR THE YEAR ENDED 31ST MARCH, 2009)

Expenditure
Amount
(Rs.)
Income
Amount
(Rs.)
To Salaries and Wages
To Rates and Taxes
To Entertainment Material                               
  64,020
Less: Payment for last year                                                  
2,200
  61,820
Less: Closing stock         
   28,732
To Office Expenses
To Telephone Charge
To Internet Charges 
   Rs.  1,320
Add: Outstanding                     1,650
To Depreciation on:
a. Furniture 20% of 81,400
b. Machinery 20% of 61,600      
c. Fax Machine 20% of 18,700  
To Excess of Income
    Over Expenditure (Surplus)

1,42802
    6,809






33,088
   8,602
    2,860


 2,970

16,280
12,320
3,740

1,21,225



By Subscriptions:           Rs. 2,42,660
Less: Outstanding
Subscription Received
  (2007-08)                                 8,910                       
2,33,750
Less: Received
In Advance                                 2,750          
  2,31,000
Add: Subscription
Received in 2007-08
As Advance                                 2,310
2,33,310
Add: Outstanding
Subscription for Current
year                                           20,790

By Interest on Investments
Rs. 1,65,000 X 10   =  16,500
100
Rs. 13,750 X10X6  =       688
100 X 2
By Sunday Receipts



















2,54,100






17,188



79,408

Total
3,50,696

3,50,696





BALANCE SHEET AS AT 31ST MARCH, 2009

Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
                                             Rs.
*Capital Fund                          2,77,310   
Add: Legacies                             7,920
                                     2,85,230
Add: Surplus                          1,21,225

Building Fund                     Rs. 55,000   
Add: Donation for
 Building                                 46,200
                                         1,01,200
Less: Advance for
Building                                  16,500

Creditors for Entertainment
Material (Rs. 5,500–Rs. 2,200)

Prepaid Subscription

Outstanding Internet Charges            




4,06,455






84,700


3,300

2,750

1,650
                                                    Rs.
Furniture                                  88,000
– Sale                                      –6,600
                                                81,400
–Depreciation                         16,280

Musical Instrument
                                               

Machinery                               61,600
–Depreciation                          12,320

Fax Machines  Rs.                     18,700
–Depreciation                           –3,740

10% Investments Rs.             1,21,000
Add: Purchases                         11,000

Outstanding Interest
On Investments

Entertainment Material
Outstanding Subscription              2003-04                       =             8,690
2004-05                       =           20,790

Cash





65,120
13,420



49,280


14,960


1,32,000


17,188

28,732


29,480

1,48,675
Total
4,98,855

4,98,855

* Interest on investment is always calculated on face value.




MEMORANDOM BALANCE SHEET OR
 *BALANCE-SHEET AS AT 31ST MARCH, 2008

Liabilities
Amount
(Rs.)
Assets
Amount
(Rs.)
Creditors for Entertainment
Material
Subscription Received
In Advance
Building Fund
Capital Fund
(Balancing Figure)

5,500

2,310
55,000

2,77,310
Cash
Subscription Outstanding
10% Investments
(Face value Rs. 1,65,000)
Fax Machine
Musical Instrument
Machinery
Furniture
19,800
17,600


1,21,000
18,700

13,420
61,600
88,000
Total
3,40,120

3,40,120