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.
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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 |
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