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ACCOUNTS FOR NOT-FOR-PROFIT ORGANIZATIONS LEARNING OBJECTIVES

Financial Accounting

There are several organizations that are established and run for the purposes of meeting the social, cultural, health and , at times, educational needs of the citizens. Such organizations are not set-up for the purpose of making profits from their activities and are thus called not-for-profit organizations. Examples include government-owned hospitals, voluntary health and welfare organizations, social clubs and organizations, religious bodies and so on.

These organizations even though are not for profit-making, but need to prepare accounts so as to be able to tell their stakeholders and other donors how they have utilized the contributed funds.

The legal status of such organizations is usually well defined in club (or association) rules and regulations. It is important that external financial information provided by such organization must conform to the generally accepted account principles.

Usually, the accounts of non-for-profit organizations consist of the following:

  • Receipts and payments account
  • Income and expenditure account
  • Balance sheet

Receipts and Payments Account

The receipts and payments account is a summarized cash book (i.e. it incorporates the cash and bank transactions of a non-profit organization).

In other words, it is a statement of cash actually received and paid during a given period. It commences with the opening balance of either cash in hand or at the bank. It is debited with all sums of money actually received and credited with all cash paid during the period.

The receipts and payments account include all cash paid or received in a period, whether they relate to capital or revenue items and whether or not they belong to the period when the transactions occur. The final balance of cash in hand and the credit or debit balance at the bank at the end of the period.

Format of Receipts and Payments Account

Hypothetical Example of Receipts and Payments Account for the year Ended…

Receipts N Payment N
Opening balance at the beginning of the period x Purchase of fixed assets x
Donation x Management expenses x
Membership subscription x Stationeries x
Sundry income x Utilities (e.g. electricity, water rates etc.) x
Sales of fixed assets x
Income from club’s activities x Balance at the end of period x
xxx xx

Note: The opening balance represents the cash balance either in hand or at bank for the period, while other items appearing on the debit side of the account are sources of revenue to the club or associations.

The items appearing on the credit side represent items on which cash were expended during the period. They include capital and revenue items. The list of items appearing on both sides are, however, not exhaustive as there could be other items that can appear on either side depending on the activities being carried out by the club.

Income and Expenditure Account

The income and expenditure account represents the profit and loss account of a non-profit-making organization. It contains only revenue items. It is debited with all expenditure incurred which are of revenue in nature, and credited with all incomes of a period whether or not they have actually been paid or received in the period.

The final balance of an income and expenditure account represents the excess of income over expenditure or the excess of expenditure over income as the case may be for any particular period. Thus, the final balance is similar to the net profit (i.e. excess of income over expenditure) or net loss (i.e. excess of expenditure over income) or a trading organization. It is important to pint out to the students that:

  • The receipts and payments account and the income and expenditure account are used by non-profit-making organizations to present their financial position to their members and other stakeholders.
  • The two accounts are different from each other in forms and contents.

Difference between receipts and payments account and income and expenditure account are as follows:

Receipts and payment account Income and expenditure account
Contains opening balance which will represent the amount of cash in hand or at the bank in the beginning of the year. It has no such item as it records only cash spent.

 

It is used to record cash transactions only. It records cash transactions and also includes accrued transactions (i.e. it is prepared on ‘accrual basis’).
It records and includes capital receipts (i.e. cash from sale of fixed asset) and capital payments (i.e. cash spent to purchase fixed asset). All inflows (incomes) are credited while all outflows (expenditure) are debited into this account.
The balance in this account at the end of the period (year) represents cash in hand, cash at bank or bank overdraft as the case may be. The balance in this account will represent surplus (i.e. when income is more than expenditure) or deficit (i.e. when the expenditure is more than income) in any period (year).

Membership Subscription

Clubs, societies and association receive payments from members for benefits which members enjoy in the form of subscriptions usually on an annual basis. Membership subscription is one important source of income to clubs and/or associations. It is usually payable one year in advance. Such payments in advance by members are shown as liability in the balance sheet of clubs; this because the year’s membership still has to run as at the balance sheet date.

However, in practice, a large number of members will never pay their subscription at the appropriate time and will be owing the club, making a substantial amount of subscriptions to be in arrears. As it mostly happens, these subscriptions are never received by the clubs or association.

The treatment of subscriptions in arrears poses a problem in the preparation of clubs’ account as decision has to be made whether to show subscriptions in arrears as debtors in the balance sheet or not, as the balance sheet could be distorted by a fictitious asset of debtors; where subscription in arrears are recognized and included in the balance sheet and are never paid by affected members.

The points to note are as follows:

  • Recognizing subscriptions in arrears and treating them as debtors (assets) in the balance sheet is inappropriate due to the application of the accrual concept. It is recognized that subscriptions in arrears are incomes that have been earned for a particular accounting years, but for which cash has not been received.
  • On the other hand, excluding subscription in arrears from the balance sheet is the application of prudence concept. The exclusion is due to the fact that subscriptions that are owed by the members for a long time end up not being paid eventually.

Irrespective of the method adopted, treatment of subscriptions in arrears by a club in the balance sheet should be applied on a consistent basis and changes made where the club or association conditions justify the change

Illustration 1

The Barca fans club had the following transactions in their subscription account for the year ended 31 December, 2008.

(a)  Cash received for subscription N290,000

(b) Subscription owing by member as at 31 December 2007 amounted to N40,000

(c)     Subscription owing by members as at 31 December, 2008 was N60,000

(d)    Subscription paid in advanced by members for 2008 amounted N10,750, while subscription in advance for 2009 was N54,500.

You are required to prepare the subscriptions account as it would be at the end of 31 December 2006.

Solution

Subscriptions Account for the Year Ended 2008

Particulars N Particulars N
Subscriptions owing at 01/01/2008

 

Amount transferred to

income and expenditure

account as income for

the year

 

Subscription paid in

advance for 2009

40,000

 

 

 

266,250

 

 

 

54,500

 

360,750

Subscription paid in

Advance at 01/01/2008

 

Cash received from

members for subscription

payment in 2008

 

 

subscription owning at

31/12/2008

10,750

 

 

 

290,000

 

 

 

60,000

 

360,750

 

Subscription paid in

Advance b/d

 

54,500

i

The carrying forward subscription in advance means the application of matching concept. In the illustration, the payment of N54,500 included in the amount received for subscription for 2009 represents income meant for 2009 accounting year. This must be removed from the current year’s payment of cash received for subscription in the year. Hence, the debit carry forward of the amount of N54,500 on the subscription account. This will be shown in the balance sheet as a liability.

Life Membership

At times, subscriptions are received from life members pay a once-and-for-all subscription which entitles them to use of club facilities for the rest of their lives. This once-and-for-all payment from life members are not income relating to the year in which they are received by the club, because the payment is for the life of the members which can last a very long time to come.

In practice, if life membership subscriptions are small, they are credited to income account as received, but if they are significant in amount, they should be credited in equal proportion over the estimated active club membership of such members.

 

Accumulated Fund

The accumulated fund represents the opening capital of a non-profit-making organization. It has the same meaning with the capital account of a sole trader and partnership.

It is calculated as the difference between total assets and liabilities in a particular period. In situation where a club keeps an incomplete records or single entry, the accumulated fund is derived through preparation of statement of affairs.

Illustration 2

The Swagger Youth Club prepared the following information relating to the club activities for the year ended 31 December 2009.

N N
Cash in hand

Subscription:   2008

2009

Receipts for use of club facilities

Receipts from refreshing guests

Payments:

Repairs

Salaries and wages

Printing and stationeries

Refreshment materials

Electricity expenses

Vehicle running expenses

Caretaker wages

Creditors for repairs

Creditors for vehicle expenses

Creditors for refreshment materials

Subscription owning for 2009

 

 

 

 

 

 

120,000

500,000

80,000

58,000

18,000

11,000

3,000

2,000

400

3,000

50,000

900,000

1,000,000

4,500,000

1,000,000

100,000

 

You are required to prepare:

  • Receipts and payments account
  • Income and expenditure account for the year ended 31 December 2009.

 

Bar Trading Account

As part of the activities to partly provide relaxation and enjoyable moments for members and to partly generate additional income for effectiveness running of a club, a club may engage in running a bar alongside other activities which can generate profit. The profit will not be distributed among members, but rather used for the purpose of the club.

Thus, if a club has a bar, a separate trading and profit and loss account will be prepared for its trading activities. The net profit arising from the bar activities is then included as income in the income and expenditure account, and may loss from the bar trading is included in the expenditure side of the income and expenditure account.

Illustration 3

The Financial Secretary of chop-1-chop Fun Club presented you with the following summary of receipts and payments account of the club for the year ended 31 December, 2007.

Receipts and Payments Account for the Year Ended 31 December 2007

Receipts N Payments N
Bal. b/f

Membership subscription

Entrance fees

Bar receipts

Sundry receipts

49,000

57,600

8,400

75,000

38,000

 

 

 

 

 

 

 

228,000

Rent and rates

Bar purchases

General wages

Bar wages

Social activities

Expenses

Equipment

Electricity expenses

Postage

Bank charges

Insurance

Bal. c/f

      8,040

35,800

25,600

11,040

 

30,000

57,200

2,080

3,520

1,160

6,040

47,520

228,000

 

Other additional information includes the following balances:

31/12/2016 31/12/2007
(a)         Furniture and fittings

(b)         Premises

(c)          Bar stocks

(d)         Subscription in arrears

(e)          Wages owning

(f)           Subscription in advance

(g)         Insurance prepaid

        44,000

600,000

10,400

800

1,800

4,000

1,360

28,400

600,000

14,200

1,200

 

 

1,800

 

Depreciation to be provided on equipment at 20%

You are required to prepare:

  • Bar trading accounts
  • Income and expenditure account for the year ended 31 December 2007
  • Balance sheet as at that date.

 Solution

Bar Trading Account for the Year Ended 31 December 2007

Particulars N N
Sales

Opening stock bar

Add: Bar purchases

 

Less: Closing stock of bar

 

Add bar wages

Bar profit transfer to income and exp. Account

 

10,400

35,800

46,200

14,200

 

32,000

11,040

 

 

75,000

 

 

 

 

 

 

(43,040)

31,960

 

 

Income and Expenditure Account for the Year Ended 31 December 2007

Expenditure N Income N
Rent & rated

General wages (25,600 – 1,800)

Social activities expenses

Postage

Electricity expenses

Insurance

Bank charges

Furniture & fixture

(44,000 – 28,400)

Equipment (20    x 57,200)

100

Excess of income over

Expenditure

 

     8,040

23,800

30,000

3,520

2,080

5600

1,160

15,600

 

11,440

 

 

39,120

140,360

Membership subscription

Entrance fees

Bar profits

Other income

 

  62,000

8,400

31,000

38,000

 

 

 

 

 

 

 

 

 

140,360

 

Chop-1-chop Fun Club

Calculation of Accumulated Fund as at 1 January 2007

Assets   N
Premises

Furniture and fittings

Bar stock

Insurance prepaid

Subscription in arrears

Bank balance

Liabilities

Wages owing

Subscription in advance

 

 

 

 

 

 

 

1,800

4,000

 

 

600,000

 

 

 

 

 

 

 

(5,800)

 

31,960

 

This calculation of the accumulated fund is done in order to derive total opening capital of the club as the beginning of the year. Thus, the addition of the total assets of the club at the beginning of the year from which we deduct the total liabilities of the club again at the beginning of the year give us the accumulated fund.

Balance Sheet as at 31 December 2007

Particulars N N
Fixed Assets

Premises

Furniture and fittings

Less: depreciation

Equipment

Less: depreciation

 

Current Assets

Bar stock

Subscription in arrears

Insurance prepaid

Bank

 

 

 

Represented by

Accumulated fund

Add: excess of income over

expenditure

 

 

44,000

(15,600)

57,200

(11,440)

 

 

14,200

1,200

1,800

47,520

 

 

 

600,000

 

28,400

 

45,760

674,160

 

 

 

 

 

 

64,720

738,880

 

699,760

39,120

738,880

 

Workings

Subscription Account

Dr                                                                                                                                            Cr

Particulars N Particulars N
Bal. b/f

 

Income and

Expenditure

 

 

 

Bal. b/f

     800

 

62,000

 

 

 

62,800

1,200

Bal. b/f

 

Receipts and

Payment

 

Bal. c/f

 

4,000

 

57,600

 

 

1,200

62,800

Insurance Account

Dr                                                                                                                                            Cr

Particulars N Particulars N
Bal. b/f

 

Receipt and

payment a/c

 

  800

 

 

6,040

7,400

Income and

expenditure a/c

 

Bal. c/f

 

5,600

 

 

1,800

7,400

Use the Data Below to Answer Questions 1 to 5:

Receipts and payments account for the year ended 31 December 2008

Receipts N Payments N
Bal. b/f

Subscriptions

Receipt and

payment a/c

 

 

  16,000

 

 

6,040

 

7,400

Equipment

Bar purchases

 

18,000

60,000

 

1,800

 

7,400

 

See also

SINGLE ENTRY AND INCOMPLETE RECORDS

ACCOUNTING RATIOS AND INCOMPLETE RECORDS

ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS

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