Friday, July 19, 2013

Accounts of Non Trading Concern

A. Not-For-Profit Organisation 2007
A Not-For-profit organisation is a voluntary association of persons, set up and operated not for the purposes of earning profit but, for the welfare of the society or promotion of art, culture, sports and general public utility. Examples of these are schools, hospitals, club and sports association. These organisations provide services to their members and to the public in general. Their main source of income is membership fees, subscription, donation, grant-in-aid, etc.
Characteristics of Not-for-profit organisations: Following are the main characteristics or the salient features of Not for Profit organisations: 2009
a)      The objective of such organisations is not to make profit but to provide service to its members and to the society in general.
b)      The main source of income of these organisations is not the profit earned from purchase and sale of goods and services but is admissions fees, subscriptions, donations, grant-in-aid, etc.
c)       These organisations are managed by a group of persons elected by the members from among themselves. This group is called managing committee.
d)      They also prepare their accounts following the same accounting principles and systems that are followed by business for profit organisations that are run with an objective to earn profits.

The type of financial statements that are generally prepared by not-for- Profit Organisations are:
1.       Receipts and Payments Account
2.       Income and Expenditure Account
3.       Balance Sheet

B. Receipts and Payments Account
A Receipts and Payments Account is a summary of bank and cash transaction. Receipts are shown on the left hand side while payments are shown on the right hand side. It starts with opening cash and bank balances and ends with their closing balances. All receipts and payments are recorded in this account whether these are of revenue nature or capital nature.
Following are the main features of Receipts and Payments Account: 2006, 2009, and 2012
a)      It is prepared at the end of the year taking items from the cash book.
b)      It is the summary of all cash transactions of a year put under various heads.
c)       It records all cash transactions which occurred during the year concerned irrespective of the period they relate to i.e. previous/current/next year.
d)      It records cash transactions both of revenue nature and capital nature.
e)      Like any other account it begins with opening balance and ends with closing balance.
Advantages of Receipts and Payments Account:
a)      It is possible to know receipts and payments during a period under different heads.
b)      It helps in preparation of an income and expenditure account.
Limitations of Receipts and Payments account: 2010
a)      It is prepared on cash basis of accounting. It does not record non-cash items.
b)      It records both the revenue and capital items. It does not show any surplus or deficit.

Need for preparing Receipts and Payments Account 2007
As most of the transactions of Not-for-Profit Organisations are for cash, the Receipts and Payments Account shows most of the items at one place. As it is in a summary form, it gives an idea of large number of transactions at a glance. It contains accounting information under various heads. So it gives information item wise for the accounting year. It shows the closing cash or/and bank balance, this cash/Bank balance is taken to the Balance Sheet.
The Receipts and Payments Account serves the purpose of trial balance and becomes the basis of preparing financial statements i.e. Income and Expenditure Account and Balance sheet for the organisation. Very small Not-for-Profit Organisations (NPOs) prepare only Receipts and Payments Account.
As the name itself suggests, Receipts and Payments Account is an account which has two sides, the debit side and the credit side. All receipts are written on the debit side and payments on the credit side.

Difference between Receipts and Payments account and Cash Book
Receipts and Payment Account
Cash Book
1. Basis
It is prepared on the basis of cash book
It is prepared on the bases of each receipt
And payment.
2. Period
It is prepared at the end of the accounting year. It is a summary of the cash book.
It is written on a daily basis.
3. Date
Transactions under it are not written date wise.
Transactions are written date wise in the Cash book.

Difference between Receipts and Income (Payments and Expenditure Differentiated on the same Basis)
1.Capital and Revenue
Receipt can be a capital receipt or a revenue receipt.
But it is a revenue item only and is recorded in the income and expenditure account.
2. Period
It is the amount received during the year whether related to past, present or future years.
It is the amount received and receivable for the year.
3. Non-Cash Items
It related to cash items only.
It related to cash and non-cash earnings for the year.
4. Received amount
Any cash received is regarded as receipt.
Any cash received may or may not be regarded as income.
5. Side of the account
It is recorded on the debit side of cash book/ receipts and payments account.
It is recorded on the credit side of income and expenditure account.

Treatment of Some Specific Items in Receipts and Payments accounts
1. Subscription: It is a regular payment made by the members to the organisation. It is generally contributed annually. It is one of the main sources of income. It appears on the debit side i.e. Receipts side of the Receipts and Payments Account. Apart from amount for current year, it may include amount pertaining to previous year or advance payment for next years.
2. Entrance fees or Admission fees: Whenever a person is admitted as a member of the organisation certain amount is charged from him/her to give him/her admission. This is called entrance fee or admission fee. It is an item of income and is shown on the debit side of the Receipts and Payments Account.
3. Life membership fees: Membership, if granted to a person for the whole life, special fee is charged from him/her, this is called life membership fees. It is charged once in the life time of a member. It is a capital receipt for the organisation.
4. Endowment fund: It is a fund which provides permanent means of support for the organisation. Any contribution towards this fund is an item of capital receipt.
5. Donation: Donation is the amount received from some person, firm, company or any other body by way of gift. It is also an important item of receipt. It can be of two types:
(a) Specific donation: It is a donation received for a specific purpose. Examples of such donations are: donation for library, donation for building, etc.
(b) General donation: It is a donation which is received not for some specific purpose. It can be of two types:
(i) General donation of big amount
(ii) General donation of small amount
6. Legacy: It is the amount which is received by organisations as per the will of a deceased person. It is treated as a capital receipt.
7. Sale of old newspapers/periodicals and sports material: Old newspapers used/condemned sport material is sold and fetches some money. It is a source of revenue. It is taken to the debit of Receipts and Payments account.
8. Purchase of fixed assets: Assets such as building, machinery, furniture, books etc. are purchased for the organisation. These are items of capital expenditure. These are shown on the credit side i.e. the payment side of Receipts and Payments Account.
9. Payment of honorarium: This is another item of payment. This is an amount paid to persons who are not the employees of the organisation but take part in the management of the organisation. Remuneration paid to them is called honorarium. For example, payment made to the secretary of the club as honorarium. This is a payment of revenue nature.

C. Income and Expenditure Account
Income and Expenditure Account is a Nominal Account which is prepared at the end of the accounting period by a Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income over expenditure, or the deficit, i.e.  Excess of expenditure over income.
Features of Income and Expenditure Account.
a)      It is a nominal account which reveals either surplus, i.e., excess of expenditure over income.
b)      It is prepared for an accounting period based on the accrual concept following the matching principle.
c)       Only revenue items are considered, while capital items are excluded.
d)      Both cash and non-cash items, such as depreciation, are recorded.

Difference between Receipts and Payments Account and Income and Expenditure Account  1999, 03,08,
Receipt and Payment Account
Income and Expenditure Account
1. Nature
It is a Real Account
It is nominal Account.
2. Recording
It records receipt and payments of both capital and revenue nature.
It records incomes and expense of revenue nature only.
3. Opening
Balance at the beginning represents cash and bank balance at the beginning of the year.
There is no balance at beginning.
4. Closing
Balance at the end represents cash and bank balance at the end of the year.
Balance at the end represents either surplus or deficit.
5. Period of items
It records the items received or paid during the current year, whether relating to past, present or future periods.
It includes expenses or incomes relating to current year only.
6. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
7. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.
8. Carrying forward
Closing balance is carried forward to the next period.
Closing balance is added to the capital fund.

Difference between Income and Expenditure and Profit and Loss Account
Income and Expenditure Account
Profit and Loss Account
1. Prepared by
It is prepared by Not-For-Profit Organisation.
This account is prepared by business enterprises.
2. Object
The main object of Income and Expenditure Account is to ascertain excess of income over expenditure or excess of expenditure over income.
This account prepared by business enterprises.
3. Balance
The balance of this account is termed either as surplus or deficit.
The balance of this account is termed either as net profit or net loss.
4. Basis of Preparation
It is prepared from the receipts and payments account and additional information.
It is prepared from the trial balance and additional information.
5. Sharing of Surplus
Surplus is added in the capital fund and is not withdrawn by the members for their personal use.
Profit shown in this account is distributed among the owners and is withdrawn by them in the form of drawings.

Difference between Not – for profit organisation and Profit earning organisation
Not-For-Profit Organization
Profit Earning Organization
1.    Motive
Motive is to provide services.
Motive is to earn profits.
2.    Funds
It is represented by the general fund comprising donations, subscriptions, surplus etc.
It is represented by capital comprising contributions by proprietors and accumulated reserves.
3.    Financial Statements
Financial statements include receipts and Payments A/C and Balance sheet
Financial Statements include Manufacturing AC, Trading AC, Profit and loss AC and balance sheet.
4.    Surplus/Profit
The balance of the Income and Expenditure Account is either surplus or deficit.
The balance of the Profit and Loss AC is either Net Profit or Net loss.

D. Steps in Conversion of Receipts and Payments account to Income and expenditure account:
a)      Ignore opening and dosing cash and bank balances appearing in receipts and payments account.
b)      Eliminate all items of capital receipts and payments.
c)       Ascertain income of the relevant year by deducting from the total receipts the income received on account of previous and future years and by adding the income accrued due in the year but not received and income received in the previous year but relating to this year.
d)      Ascertain expenditure of the relevant period by deducting expenditure both relating to preceding period and succeeding period from the total payments and by adding the expenditure outstanding at the end and expenditure prepaid in the beginning.
e)      Make adjustments, as per additional information, such as depreciation, bad debts etc., if any.
f)       The income and expenditure account, when balanced, will disclose surplus (if the credit side is bigger) or deficit (if the debit side is bigger). If surplus i.e. excess on income over expenditure add it to the capital or accumulated fund. However, if deficit i.e., excess of expenditure over income deduct it from the capital or accumulated fund.

E. Accounting treatment of some important items in Income and Expenditure account:
a)      Legacy: This is the amount donated to the non-trading concern by means of a will. It is recorded in Receipts and payments account and is not considered as income because it is non-recurring in nature. However, legacy of small amount may be considered as income.
b)      Subscription: It is a major part of the income of the non-trading concern. It is recurring in nature. In non-trading concerns recurring receipts are treated as income.
c)       Donations: It is the amount received from some person, firm, company or any other body by sway of a gift. It is shown in receipts and payments accounts of the year. If a donation is received for a specific purpose (donation for building, donation for conducting specific events – sports, annual day celebration etc.) It is in the nature of a capital receipt credited to a separate Fund account and shown in the balance sheet. The non trading concern has to fulfill the purpose for which the donation is received.
If the donation is not for a specific purpose, it is known as a general donation. General donation of a big amount is capitalized and not shown as income as it is non-recurring in nature. Donations of a small amount may be expected every year. So this may be considered as income during the year.
d)      Entrance fee/Life Members fees: It is receipt and recorded in the receipts and payments account. This is paid only once by the members. It is non-recurring in nature. The recurring receipts are only treated as income. Hence the entrance fee is capitalized, similarly, life members fee are also paid only once by members, and hence not a revenue receipt. 2002
e)      Sale of old assets: The amount realized by the sale of old asset is shown in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is surplus and is shown in the income and expenditure account.  2002, 2004
f)       Sale of old newspapers, journals, magazines etc: This appears in the receipts and payments account and is considered as income and recorded in the credit side of the Income and Expenditure account. Selling old newspapers is a routine one and is justified to consider it as income. 2002
g)      Sale of sports materials: The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account. 2002, 2004
h)      Payment of honorarium: It is the revenue expense and is shown in the expenditure side of the income and expenditure account. It is the amount paid t the person who is not the employed of the organization paying the amount.
i)        Special Funds in non trading concerns: In non trading concerns, specific funds are created for specific purpose (prize fund for giving prizes, tournament fund for conducting tournaments, charity fund for clarity etc.) and they are invested in specific securities. The income derived from the investment is added to that fund and is not treated as income.
Example                                                               Rs.
Prize Fund                                                           20,000
Prize fund investment                                   15,000
Interest on Prize Fund                                     2,000
Investment for the year
Prize given                                                            8,000

Now the total Prize fund is Rs. 22,000 (20,000 + 2,000) the interest of Rs. 2000 is added with the Prize fund. The expenses incurred out of fund are deducted from the fund itself. In the previous example the accumulated Prize fund is Rs. 22,000. The Prize given for of Rs. 8,000 is deducted from the Prize fund and the balance fund of Rs. 14,000 will be shown in the Balance sheet.

F. Deferred Revenue Expenditure:          2010
Sometimes, some expenditure is of revenue nature but its benefit likely to be derived over a number of years. Such expenditure is called deferred revenue expenditure. 
a)      Expenditures for developments, improvement and alterations are revenue expenditures but treated as capital expenditure.
b)      These expenditures are not immediately written off in the year of actual expenditure but split over a period of certain years as per the decisions and policies of the management.
c)       These expenditures are treated as assets and shown at the assets side of balance sheet.
Ø  Advertising suspense
Ø  Preliminary expenses
Ø  Loss on issue of shares
Ø  Cost of issue of shares and debentures.

G. Frequently asked questions and answers:
Fill in the Blanks
a.       Fund based accounting is maintained by Non trading Concern.                   2009
b.      A life membership fee is a Capital Receipt.                                                          2011
c.       Income and Expenditure account records transactions of Revenue nature only. 2012
d.      Receipts and Payments account record transactions of both capital and revenue nature.                              2010
e.      A debit balance in the Income and Expenditure A/c denotes excess of Expenditure over Income.
f.        A credit balance in the Income and Expenditure A/c denotes excess of Income over Expenditure.
g.       Debit balance in income and expenditure a/c is Deficit and credit balance is Surplus.
h.      Receipts and Payments account is a Real Account.
i.         Income and expenditure account is a Nominal Account.
j.        Not for profit organisation prepares Income and Expenditure a/c and Receipts and Payments a/c.
k.       Subscription received in advance is treated as Liability. (any amount received in advance is a liability) 2012
l.         Legacy is an item of Non-recurring nature. (Non-recurring = capital receipt)
m.    Endowment fund is a capital receipt.                      2011

True or False: (All Statements are true)
a.       Receipts and payment account shows receipts and payments for a particular period.
b.      Subscription in arrear is shown on the credit side of income and expenditure account and assets side of balance sheet.
c.       Admission fees should be treated as revenue unless the amount is pretty large.
d.      Profit on sale of furniture is credited to income and expenditure account.
e.      Life membership fees should be capitalized.
f.        If there is a specific fund for prize, then income or expenditure relating to prize distribution should not be shown in the income and expenditure account.
g.       Income from investment of any fund is added with the respective firm.
h.      Receipts and Payments account is prepared on cash basis of accounting.                               2013
i.         Income and expenditure account is prepared on accrual basis of accounting.