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:
- 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:
|
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:
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:
|
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
|
