Sunday, August 10, 2014

AHSEC - 12: Accounting for Not For Profit Organisation Important Questions for Feb' 2018 Exam

Unit – 1: Accounting for Not For Profit Organisation
Q.1. What do you mean by Receipts and Payments Account? What are its features? Mention its merits and limitations.        99, 05, 09
Ans: Receipts and Payments Account: A Receipts and Payments Account is a summary of bank and cash transaction which is prepared to show the closing balance of cash and bank. 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:      2013, 2017
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.
Objectives or Need for preparing Receipts and Payments Account           2007, 2015
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.
a. As it is in a summary form, it gives an idea of large number of transactions at a glance.
b. It contains accounting information under various heads. So it gives information item wise for the accounting year.
c. It shows the closing cash or/and bank balance, this cash/Bank balance is taken to the Balance Sheet.
d. 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.
Q.2. What do you mean by Income and Expenditure Account? What are its features? Distinguish between Receipts and Payments and Income and Expenditure Accounts?          99, 03, 08, 2016, 2017
Ans: 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
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. 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.
4. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
5. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.

Q.3. What is Not-For-Profit Organisation? What are its features? Distinguish between Not-For-Profit Organisation and Profit Making Organisation?      2007, 2008, 2015, 2016
Ans: Not-For-Profit Organisation: 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:                                                2016
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 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
Difference between Not – for profit organisation and Profit earning organisation
Not-For-Profit Organization
Profit Earning Organization
1.    Motive
Main Motive is to provide services to the society.
Main Motive is to earn profits by selling goods and services.
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, Income and Expenditure A/c and Balance sheet.
Financial Statements include Manufacturing AC, Trading AC, Profit and loss AC and balance sheet.

Q.4. Explain the Treatment of the following Specific items in Receipts and Payments and Income and Expenditure accounts.
Ans: 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. 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.
3. 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.
4. 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. It is treated as capital receipt.
(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: It is treated as capital receipt.
(ii) General donation of small amount: It is treated as revenue receipt.
5. 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.
6. 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.
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.
Q.5. What is Deferred Revenue Expenditure? What are its features? Give Examples.  2010
Ans: Deferred Revenue Expenditure: 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.
Examples: Advertising suspense, Preliminary expenses, Loss on issue of shares, Cost of issue of shares and debentures.
Q.6. What is Capital fund?                           2011, 2014, 2017
Ans: In case of non trading organisations, excess of assets over liabilities is called “Capital Fund”. The capital fund is built up out of surplus derived from income and expenditure account. It also includes donation, legacy and entrance fees to the extent capitalised.
Q.7. What is incidental trading activities?
Ans: Sometimes, NPO’s carry on trading activities such as canteen, restaurant, chemist shop etc. to provide facilities to its members or public in general. Such activities are called incidental trading activities. In such cases, trading account is to be prepared to find out profit/loss from such activities.
Q.8. What is fund based accounting? Distinguish between fund based and non-fund based accounting.      2016, 17
Ans: In fund based accounting separate accounts are maintained for specific activities of the organisation such as sports fund, price fund etc. All items related the specific funds are recorded fund wise and consolidation of these statements or accounts are presented in the financial results.
Difference between fund based and non fund based accounting
Fund Based Accounting
Non fund based Accounting
Accounting base
It is based on cash basis.
It is based on accrual basis.
Specific funds are used for specific purposes except for general fund.
Funds can be used for any profit earning purpose.
Economic interest
Owners have no economic interests.
Owners have economic interest in the form of profit.
Accountability is towards law, regulations, legislature, parliament contributors and donors of fund.
Accountability is towards all stock holders, viz, owners creditors, government regulations etc.