Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

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Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Meaning of Not-for-profit Organisation:
1. There are certain organisation which are formed not to earn profits but to render services to its members and to the public. Such organisations include clubs, hospitals, libraries, schools, religious institutions, charitable institutions and literary societies.

2. These organisations exists with the- primary motive of providing services.

Some Important Items Relating to Non-Profit Seeking Organisations:
1. Subscription:

  • It is the main source of income of non-profit entity.
  • It will be appearing on the debit side of Receipts and Payments Account.

2. Life-Membership Fees:
These could be taken as capital receipts and every year a charge is debited based on some logic.

3. Endowments:

  • Sometimes, donations are also in the form of endowments to be’ used as per instructions of the donor.
  • These are to be treated as capital receipts.

4. Legacy:

  • It is the amount which a non-profit entity receives as per the ‘WILL’ of a deceased person.
  • It appears on the debit side of Receipt and payments A/c.
  • This amount is not of recurring nature, and such it treated as capital receipt and shown on the liabilities side.

5. Donation:

  • They could be used for meeting capital or revenue expenses.
  • It donations are received for a specific purpose, the amount is credited to a fund from which the amounts are distributed.
  • The fund may be invested in specific securities.
  • Income from such investment is credited to the Fund A/c only.
  • Small donation amounts which are not embarked for any specific purpose may be treated as revenue receipt.

6. Entrance Fees:

  • It is received from the new members apart from the amount of annual subscriptions.
  • Some people favour capitalising the entrance fee on the ground that it is collected once for all and as such it is not of the recurring nature.
  • It is treated as revenue income.

Final Accounts or Financial Statements:
1. The Non-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.

2. Although these organisation are non-profit making entities and they are not required to make Trading and Profit & Loss A/c but it is necessary to know whether the income during the year was sufficient to meet the expenses or not.

3. The final accounts of a ‘non-profit organisation’ consist of the following

  • Receipts and Payments A/c.
  • Income and Expenditure A/c.
  • Balance Sheet.

Preparation of Financial Statements of a Non-Trading Concern:
There are certain organisations that are not established for making profit but to provide some service. These services are generally given to members who make subscriptions to avail them. These are also called as non-trading entities. The examples of such organisations are:

  1. Gymkhana / sports clubs
  2. Educational institutions
  3. Public hospitals
  4. Libraries
  5. Cultural clubs like Rotary or Lions club
  6. Religious institutions
  7. Charitable trusts

Receipt and Payment Account:
This is similar to cash book. Entries are made on cash basis and items pertaining to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and payments are shown on credit side. Capital as well as revenue items are entered in the R & P Account. This account is real account in nature. No provisions are recorded in this account.

Features of Receipts and Payment Account:

  1. It is an Account which contains all Cash and Bank transactions made by a nonprofit organization during a particular financial period.
  2. It starts with the opening balances of Cash and Bank. All Cash Receipts both capital and revenue during the period are debited to it.
  3. All Cash Payments both capital and revenue during the period are credited to this Account. It ends with the Closing Cash and Bank Balances.
  4. While recording the Cash and Bank transactions all entries are made on Cash Basis.
  5. It is a summary of Cash Book.
  6. It follows Real Account.

Income and Expenditure Account:
This is similar to the Profit and Loss Account and is prepared exactly based on same principles. As the name suggests only revenue items are recorded herein. Incomes are recorded on the credit side while the expenses on the debit side. Both incomes and expenses must be taken on the basis of accrual concept.

Features of Income and Expenditure Account:

  1. It follows Nominal Account.
  2. All expenses of revenue nature for the particular period are debited to this Account on accrual basis.
  3. Similarly all revenue incomes related to the particular period are credited to this account on accrual basis.
  4. All Capital incomes and Expenditures are excluded.
  5. Only current year’s incomes and expenses are recorded. Amounts related to other periods are deducted. Amounts outstanding for the current year are added.
  6. Profit on Sale of Asset is credited. Loss on Sale of Asset is debited. Annual Depreciation on Assets is also debited.
  7. If income is more than expenditure, it is called a Surplus, and is added with Capital or General Fund etc. in the Balance Sheet.
  8. If expenditure is more than income, it is a deficit, and is deducted from Capital or General Fund etc, in the Balance Sheet.

Fund Asset Accounting and its peculiarities:
Following are the concepts of some funds which are generally maintained by organizations:
(i) Capital Fund: It is also called “General Fund” or “Accumulated Fund.” It is actually the Capital of a non-profit concern. It may be found out as the excess of assets over liabilities. Usually “Surplus” or “Deficit” during a period is added with or deducted from it.

(ii) Special Fund: It may be created out of special donation or subscription or out of a portion of the “Surplus”. For example a club may have a “Building Fund”. It may be used for meeting some specific expenses or for acquiring an asset.

Basic of Distinction Receipts and Payment A/c Income and Expenditure
1. Nature It is the summary of cash book. It is like a profit and loss account.
2. Side Debit side of this account records receipt and credit side payment. Debit side of this account records receipt and credit side payment.
3. Types of Account It is a real account. It is a nominal a/c.
4. Opening Balance It starts with the opening balance of cash and bank. It has no opening balance.
5. Closing Balance Balance at the end represents cash in hand at the end and balance of bank overdraft. Balance at the end represents excess of income over expenditure vice – versa.
6. Period Receipts and payments may also relate to preceding and succeeding period. Income and expenditure items relate only to the current period.

Accounting for Non-Profit Organisation MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Subscription received in advance is shown in ________.
(a) Liabilities side of the Balance Sheet
(b) Assets side of the Balance Sheet
(c) Receipt Item
(d) None of the above
Answer:
(a) Liabilities side of the Balance Sheet

2. Non-Recurring Expenses mean ________.
(a) Expenses incurred at regular intervals
(b) Expenses incurred at irregular intervals
(c) Expenses not incurred more than once
(d) Expenses not incurred at all
Answer:
(c) Expenses not incurred more than once

3. Organisations established for the purpose of providing services to members and beneficiaries are ________.
(a) Private Limited Companies
(b) Public Limited Companies
(c) Partnership Firms
(d) Non Profit Making Organisations
Answer:
(d) Non Profit Making Organisations

4.

No. of Members of Hare Ram Club 250.00
Annual subscription 500.00
Subscription received 97,500.00
Subscription receivable as on 31.03.2007 47,500.00
Subscription received in Advance ?

(a) ₹ 27,500.00
(b) ₹ 77,500.00
(c) ₹ 20,000.00
(d) ₹ 25,000.00
Answer:
(c) ₹ 20,000.00

5. Life membership fees received by a non-profit organisation is treated as:
(a) Revenue receipt.
(b) Capital receipt.
(c) Deferred revenue
(d) Both revenue & capital receipt
Answer:
(b) Capital receipt.

6. Subscription received for current year ₹ 50,000; Subscription of current year received in the previous year ₹ 5,000; Subscription received in advance in the current year ₹ 2500 and Subscription of previous year received in current year ₹ 10000. The amount of subscription to be shown in receipts and payments account is
(a) ₹ 50,000
(b) ₹ 62,500
(c) ₹ 60,000
(d) ₹ 55,000
Answer:
(b) ₹ 62,500

7. On 31st December 2011, a club had subscription in arrears of ₹ 16,000 ‘ and in advance ₹ 4,000 respectively. During the year ended 31.12.2012, the club received subscription of ₹ 2,08,000 which includes ₹ 10,400 relating to 2013. What amount of subscription will be recognized as income for the year 2012?
(a) 2,12,000
(b) 1,96,000
(c) 1,81,600
(d) 1,85,600
Answer:
(d) 1,85,600

8. Which one of the following financial statements is not prepared by a Non-profit organization?
(a) Balance Sheet
(b) Income and Expenditure Account
(c) Cash Flow Statement
(d) Receipt and Payment Account
Answer:
(c) Cash Flow Statement

9. Donations received by Gymkhana club in the form of endowment are treated as ________.
(a) Revenue receipts
(b) Deferred revenue receipts
(c) Capital receipts
(d) General income
Answer:
(c) Capital receipts

10. Subscription fees paid: 4,000; Prepaid fees at end: 1,000; Outstanding fees at end: 500. Profit & loss account is to be debited with:
(a) ₹ 3,500
(b) ₹ 4,500
(c) l 5,500
(d) ₹ 2,500
Answer:
(a) ₹ 3,500

11. Any donation received for a specific purpose is a:
(a) Liability
(b) Assets
(c) Revenue receipts
(d) Capital receipts.
Answer:
(b) Assets

12. Endow fund received by a club is a:
(a) Revenue Receipt
(b) Capital Receipt
(c) Advance Payment
(d) Revenue Payment.
Answer:
(b) Capital Receipt

13. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

14. The subscription details of club are given below:
Received during the year ₹ 1,080
Subscription is advance on 31.12.2014 ₹ 300
Subscription in advance on 31.12.2014 ₹ 50.
What amount will be entered in the income & expenditure account for the year ended 31st Dec., 2014?
(a) ₹ 1,330
(b) ₹ 830
(c) ₹ 1,080
(d) ₹ 1,380
Answer:
(a) ₹ 1,330

15. What does a credit balance of Income & Expenditure Account show at the end of a year?
(a) Surplus
(b) Loss
(c) Deficit
(d) Gross profit
Answer:
(a) Surplus

16. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

17. The capital of a non-profit organization is generally known as :
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund
Answer:
(a) Equity

18. The capital of non – profit organisation is generally known as ________.
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund.
Answer:
(a) Equity

19. Endowment fund receipt is treated as ________.
(a) Capital Receipt
(b) Revenue Receipt
(c) Loss
(d) Expenses
Answer:
(a) Capital Receipt

20. Income and Expenditure Account shows subscriptions at ₹ 10,000. Subscriptions accrued in the beginning of the year and at the end of the’ year were ₹ 1,000 and ₹ 1,500 respectively. The figure of subscriptions received appearing in receipts and payments account will be ________.
(a) ₹ 9,500
(b) ₹ 11,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 9,500

21. Receipts and Payments Account generally shows:
(a) A Debit Balance
(b) A Credit Balance
(c) Surplus or Deficit
(d) Capital Fund.
Answer:
(a) A Debit Balance

22. Income and Expenditure Account records transactions of:
(a) Revenue nature only;
(b) Capital nature only;
(c) Both revenue and capital nature.
(d) Income of only revenue nature and expenditure of revenue and capital nature.
Answer:
(a) Revenue nature only;

23. Income and Expenditure Account reveals:
(a) Surplus or Deficiency
(b) Cash in Hand
(c) Net Profit
(d) Capital Account.
Answer:
(a) Surplus or Deficiency

24. Donation received for special purpose:
(a) Should be credited to Income and Expenditure Account.
(b) Should be credited to separate A/c and shown in the Balance sheet.
(c) Should be shown on the asset side.
(d) Should not be recorded at all.
Answer:
(b) Should be credited to separate A/c and shown in the Balance sheet.

25. Subscription received by a school for organising annual function is treated as ________.
(a) Capital Receipt (i.e. liability)
(b) Revenue Receipt (i.e. Income)
(c) Assets
(d) Earned Income.
Answer:
(a) Capital Receipt (i.e. liability)

26. Amount received from sale of grass by club should be treated as :
(a) Capital Receipt
(b) Revenue Receipt
(c) Asset
(d) Earned Income.
Answer:
(b) Revenue Receipt

27. If there is a ‘Match Fund’ then match expenses and income are transferred to ________.
(a) Income and Expenditure A/c
(b) Assets side of Balance sheet.
(c) Liabilities side of Balance sheet.
(d) Both Income and Expenditure A/c and to Balance Sheet.
Answer:
(c) Liabilities side of Balance sheet.

28. Subscription received in cash during the year amounted to ₹ 40,000 subscription outstanding at the end of previous year was ₹ 1,500 and outstanding at the end of current year was ₹ 2,000. Subscription received in advance for next year was ₹ 800. The amount credited to Income and Expenditure Account will be ________.
(a) ₹ 38,700
(b) ₹ 39,700
(c) ₹ 40,300
(d) ₹ 41,300
Answer:
(b) ₹ 39,700

29. Subscription received in cash during the year amounted to ₹ 60,000 subscription received in advance for next year was ₹ 3,000 and received in advance during previous year was ₹ 2,000. Subscription in arrear at the end of the current year was ₹ 5,400. The amount credited to Income and Expenditure account will be ________.
(a) ₹ 53,600
(b) ₹ 66,400
(c) ₹ 55,600
(d) ₹ 64,400
Answer:
(d) ₹ 64,400

30. The opening balance of Price fund was ₹ 32,800. During the year, donations received towards this fund amounted ₹ 15,400; amount spent on prizes was ₹ 12,300 and was ₹ 4,000. The closing balance of Prize fund will be:
(a) ₹ 56,500
(b) ₹ 67,500
(c) ₹ 39,900
(d) ₹ 31,900
Answer:
(c) ₹ 39,900

31. Salary paid in cash during the current year was ₹ 80,000; outstanding salary at the end was ₹ 4,000; Salary paid in advance last year pertaining to the current year was ₹ 3,200; paid in advance during current year for next year was ₹ 5,000. The amount debited to Income and Expenditure Account will be :
(a) ₹ 85,800
(b) ₹ 77,800
(c) ₹ 82,200
(d) ₹ 74,200
Answer:
(c) ₹ 82,200

32. Subscription received in advance during the current year:
(a) An income
(b) An asset
(c) A liability
(d) None of these.
Answer:
(c) A liability

33. Which of the following is generally considered as non-profit oriented ________.
(a) Charitable Organization
(b) Corporation
(c) Audit Firm
(d) Insurance Companies.
Answer:
(a) Charitable Organization

34. Outstanding Subscription for non-profit organization is considered as/an ________.
(a) Expense
(b) Liability
(c) Equity
(d) Asset.
Answer:
(d) Asset.

35. Expenditure greater than Income of non-profit organization given rise to a ________.
(a) Loss
(b) Profit
(c) Surplus
(d) Deficit
Answer:
(d) Deficit

36. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decreases in liability and increase in capital
(c) Increase in assets and increase in liability
(d) Increase in capital and increase in assets.
Answer:
(d) Increase in capital and increase in assets.
Income earned but not received is accrued income so, when it will be collected, it will result in increase in assets with increase in capital also.

37. Receipt and Payment Account is based on ________.
(a) Cash Book
(b) Profit and Loss A/c
(c) Both a and b
(d) None of the above
Answer:
(a) Cash Book
Receipts and Payments Account is prepared at the end of the accounting year on the basis of cash receipt and cash payments recorded in the Cash Book. It is a summary of cash and bank transactions under various heads.

38. Income and Expenditure is which account ________.
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) Cash A/c
Answer:
(b) Nominal A/c
Income and Expenditure Account is a Nominal Account, Therefore, the rule of Nominal Account debit all expenses and losses and credit all incomes and gains is followed while preparing it while preparing the account, only items of revenue nature are recorded and all items of capital nature are ignored.

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