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CHAPTER 8 Accounting for Financial Statements of Not-for-Profit Organizations LEARNING OBJECTIVES After studying the chapter, you will be able to: state the meaning of Not-for-profit organizations. differentiate between Not-for-profit and other business organizations. explain the concept of fund accounting. understand the fund-based accounting entities. understand the types and mode of receipts, payments and transfers by Government. prepare receipt and payment account. prepare financial statements of Not-for-profit organizations.

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Page 1: CHAPTER 8 Accounting for Financial Statements of …libvolume1.xyz/accounting/bcom/2ndyear/advanced...CHAPTER 8 Accounting for Financial Statements of Not-for-Profit Organizations

CHAPTER 8

Accounting for Financial Statements ofNot-for-Profit Organizations

LEARNING OBJECTIVES

After studying the chapter, you will be able to:

● state the meaning of Not-for-profit organizations.

● differentiate between Not-for-profit and other businessorganizations.

● explain the concept of fund accounting.

● understand the fund-based accounting entities.

● understand the types and mode of receipts, payments andtransfers by Government.

● prepare receipt and payment account.

● prepare financial statements of Not-for-profit organizations.

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ACCOUNTANCY338

Accounting is always done with respectto an entity. An accounting entity may bean individual such as a sole proprietor, adoctor, a lawyer or a chartered accountant.An accounting entity may also be a groupof persons such as a Hindu UndividedFamily, a Partnership Firm, a Joint StockCompany, a Cooperative Society, a Club,a Hospital, School, etc. On the basis of theobjectives to be achieved accountingentities can be divided into two categories.These are: (i) Entities for profit, and (ii)Not-for-profit entities (See Exhibit 8.1).Entities for profit: The objective of suchentities is to conduct business and earnprofit. These entities include manufac-turers, wholesalers, retailers, serviceproviders such as transporters, bankers,insurance agencies, and professionals suchas doctor’s lawyer, engineers, architects,professional advisors, etc.Not-for-profit entities: The objective ofsuch entities is to provide services to thepeople without any intentions to seekprofit. The main objective of these entitiesmay be social, educational, religious,cultural or charitable. These entities maybe in the form of sports club, social orliterary club, religious institutions,libraries, hospitals, educational institu-tions, professional bodies, societies andcharitable institutions like orphanagehomes, and old age homes.

Some not-for-profit entities such assports and recreation clubs exist with theprimary objective of providing services toits members. These may consist one ormore sub entity, which may undertaketrading in order to add the income frommemberships, subscriptions, donationsand grants. For example, a cricket club, a

not-for-profit organization may run arestaurant as a sub entity of cricket clubto earn profit and the same fund may beused for the furtherance of the objectivesof the club.

So far you have studied aboutaccounting of the transactions of BusinessOrganizations, which are profit-makingand follow accrual system of accounting.This chapter seeks to explain the conceptsand procedures of accounting followed bynot-for-profit organizations. Not-for-profit organizations follow usually theCash system of accounting and partly theAccrual system of accounting and hence,the system is hybrid in nature or ModifiedAccrual Accounting. This chapter isdivided into two parts. Part I dealswith Accounting for GovernmentalOrgani-zations and Part II dealswith Non-Governmental Not-for-ProfitOrganizations.

8.1 Concept of Not-for-ProfitOrganizations

The primary reason of the existence of not-for-profit organizations is the existence ofmany social and political groups withinour present-day society, which provideservice and carry on activities in theinterest of society. Thus, the interest ofsociety is considered to be of primeimportance because it is desirable to makeavailable certain services whicheconomically and physically challengedpeople cannot afford, but are required tobe provided for the empowerment of thedeprived people or for promotion ofcertain activities, which cannot be pursuedindividually. The not-for-profit organi-zations grow in any society with the

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 339

growth of its collective socialconsciousness, which propels the peopleto ameliorate the hardships and sufferingsof the common people. It is for thesereasons that during the last decade a largenumber of Non-GovernmentalOrganizations (NGOs) have flourished. Anot-for-profit organization does notrestrict itself from earning surplus fromits activities. Rather such surplus is usedfor the furtherance of the activitiesemanating from the objectives for whichthe organization was created.

Not-for-profit organizations are thoseorganizations, which operate with thepurpose of achieving the objectives forwhich they are created and not necessarilyfor profit motive. It can be defined as “anentity that provides, without profit, aservice beneficial to society and that hasan equity interest that cannot be sold ortraded.” According to Emerson O. Henke,the term “without profit” in case of Not-for-profit organizations is not intended toimply that such an organization cannotplan or realize profit, but it implies thatthe activities pursued are not solely

governed by the profit motive. Hence, innormal course of activities a Not-for-profitorganization can have excess of revenuesover expenditure, called surplus. Whensuch addition takes place to the net assets,it is used to implement and enlarge theservices of the organization. Equity toNot-for-profit organizations is providedby membership contributions, alloca-tions, contributions, grants or membershipsolicitations. It is to be noted that this istrue only in c ase of Non-GovernmentalNot-for-profit organizations such as clubs,hospitals, colleges, sports-boards (such asCricket Control Board), Museums,Temples, Gurudwaras, Wakf Boards andChurches. In case of Not-for-profitorganizations in Government sector(Universities, Research Institutions,Scientific Institutions, MunicipalCorporations) do not have equity inthe same sense as that in the caseof commercial enterprises. Since there isno equity in Government sector,financing is done through tax-collections,surpluses from Public enterprises andborrowings.

ENTITIES

COMMERCIAL ENTITIES

MANUFACTURINGMININGFARMING/FISHINGTRADINGAGENCY SERVICESFINANCING, Banking, InsurancePROFESSIONALS

NOT-FOR-PROFIT ENTITIES

GOVERNMENTAL NON-GOVERNMENTAL• CENTRAL• STATE• LOCAL• UNIVERSITIES• INSTITUTIONS• COLLEGES• SCHOOLS

• TRUSTS• HOSPITALS• CLUBS• RELIGIOUS

INSTITUTIONS• PRIVATE

EDUCATIONALINSTITUTIONS

→ →

→ →

(Contd. at Page 440)

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PRIMARY MOTIVES is carry on the above mentionedactivities and thereby bring financial gain to theowner(s)

PROPRIETORSHIP or interest of the owner(s) orowners equity represents the proprietors investmentin the business which consists of the original moneyput into the business plus the profits not withdrawn

RESULT OF ENTITY’S ACTIVITIES is profit, whichrepresents the difference between sales revenue andother incomes, if any, over the cost of sales and financialcharges. The profit and may either be withdrawn, orretained in the business.

ACCOUNTING STATEMENT prepared to serve theinformation needs of decision makers include all orsome of the following:

(i) Manufacturing or Production a/c(ii) Profit & Loss Account(iii) Balance Sheet

PRIMARY MOTIVES is to provide services to themembers or to the society at large. Profits arising outof any trading activities are used to further serviceobjectives.

PROPRIETORSHIP or interest of the members isknown as Capital Fund or Accumulated Fund whichrepresents the Accumulated surplus of subscriptions,donations and profits from trading and social activitiesover expenses.

RESULT OF ENTITY’S ACTIVITIES is the surplus,which represents the excess of revenue income overrevenue expenditure during a period, and indicates theextent of utilization of incomes for the pursuit of serviceobjects. It increases the Accumulated Fund of themembers and cannot be withdrawn by them.

ACCOUNTING STATEMENTS prepared to serve theinformation needs of decision makers include

(i) Receipt & Payment Account,(ii) Income & Expenditure Account,(iii) Balance Sheet.

8.2 Distinction between Not-for-Profit and Commercial Entities

A Not-for-profit organization can be differentiated from a profit seeking organizationon the following basis:

Exhibit : 8.1

Basis Commercial entity Not-for-Profit entity

1. Primary motive

2. Ownership

3. Distributions of profit.

4. Result

To carry on the activities for earningprofits.

Proprietors of business are owners andhence, entitled to share the profits.

Profits are distributed among theowners.

Result of the entity’s activities is calledprofit, which is the difference betweensales and other incomes, if any, over theexpenses. The profit either bewithdrawn or retained in a business.Excess of expenses over incomes iscalled loss.

To provide services to the members orto the public at large. Profits earned outof any trading activities are used tofurther the service objectives.

Subscribers to the membership of theNot-for-profit entity are called themembers.

Profits are not distributed among themembers.

Result of the entity’s activities is calledthe surplus, which is the excess ofincome over expenses. It increases theCapital Fund and cannot be withdrawnby the members. The excess ofexpenses over incomes is called deficit.

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 341

8.3 Concept of Fund Accounting

Government and Not-for-profit organi-zations are required to organize theiraccounting systems on a fund basis. Afund is defined as an independent fiscaland accounting entity with a self-balancing set of accounts recording cashand/or other resources together withliabilities, obligations, reserves, andequities which are segregated for thepurpose of specific activities to achievecertain objectives in accordance withspecial regulations, restrictions andlimitations. Thus, each type of fund is asub accounting entity for the purpose ofinternal as well as external reporting offinancial estimates, budgets andperformances to the stakeholders. Not-for-profit organization uses it, which arelegally responsible for ensuring thatcertain funds are used only for suchspecific purpose for which the same havebeen contributed by the donors. Hence,there is a need for separate accountabilitywhenever, a Not-for-profit organizationreceives such restricted contributions.

8.3.1 Features of Fund Accounting

Following are the features of fundaccounting:

1. This system of accounting is used by

Not-for-profit organizations of bothtypes, viz., Governmental and Non-Governmental.

2. Each fund is a separate entity foraccounting and accountability.

3. Each fund has to balance for incomereceived and expenditure made inaccordance with the restrictionsplaced on their use.

4. Budget approval and appropriation isthe basis of income generation andspending.

5. Despite restrictions being placed onthe use of specific funds, there willalways be a general fund from whichorganizational expenses will bepassed.

6. In addition to fund accountingentities, there will be memo-accountgroups which disclose the assetsrequired and liabilities incurred. Incase of large borrowings, organizationmay choose to crate “Debt Fund”. Itis to be noted that cash generated toraising of debt is treated as revenue.In order to better understand the

mechanism of accounting under FundAccounting System, the relationship ofvarious accounts can be expressed asfollows:Assets + Expenditure + Encumbrances +Estimated revenues + Interfund Claims =

Basis Commercial entity Not-for-Profit entity

5. AccountingStatements

The accounting statements are preparedto serve the information needs of theusers include all or some of thefollowing:

(i) Manufacturing Account(ii) Profit and Loss Account(iii) Balance Sheet.

The accounting statements prepared toserve the information needs of the usersinclude:

(i) Receipts and PaymentsAccount,

(ii) Income and ExpenditureAccount and

(iii) Balance Sheet.

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Liabilities + Appropriations + Revenues +Interfund Obligations + Fund Balance.

8.3.2 Terminology of FundAccounting

Some of the new terms used in the aboveequation as also the other terms used infund accounting are explained hereunder:

Expenditure: It is an amount paid fortransfer of an asset, for acquiring servicesor assets or for settling a loss.

Encumbrances: Obligations/liabilitiescommitted during the accounting year byagreement of purchase or contract. Aportion of general funds may be set asideto meet the obligations on account ofpurchase orders.

Interfund Claims/Transfers: This impliesearmarking of resources for specificpurpose or use. Usually, this is done bytransfers from general revenues or fromother funds. For the purpose of full-disclosure, it is necessary that Interfundtransfers/claims be shown clearly to avoidthe mis-reading of financial statement. Ifnot properly presented along withexplanations, such transfers may give theimpression of willful manipulation ofreported income. Since, transfers aremerely internal allocations, they must notbe shown as income of the receiving fundand expense of transferring fund.

Appropriation: Appropriations areinternal authorizations to spend money ona given expenditure head. It is defined asone that sets out the amount earmarkedor authorized to be spent for a particularactivity or function. Expenses incurredout of Appropriate Funds should becharged as expenses in the year incurred,

and the related appropriations should bereversed if there is excess. Disclosureshould be made by way of a note.Revenues: Revenues are the currentincomes received by way of cash inflowsthrough gifts, fees, grants, interest,dividend, rent etc.

8.4 Objectives of Accounting forNot-for-Profit Entities:

Following are the objectives of accountingfor Not-for-profit entities:● To compare the actual financial

results of operations withorganization’s approved and legallyadopted budget.

● To assess financial performance of theentity during the current accountingyear.

● To determine the compliance withrules, regulations and laws underwhich Not-for-profit accountingsystem is operating.

● To evaluate the organization’sefficiency in spending money onmeeting the assigned tasks andresponsibilities.

8.5 Types of Funds

Following are the most commonly usedgroup of funds:

● Current Unrestricted or GeneralFunds: This fund is created to carryout the general activities and is alsocalled “Operating Fund”,“Unrestricted Fund” or “GeneralFund”. This fund does not containany restrictions on the use of assetscontributed to it. This fund is usedfor the attainment of objectives for

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 343

which the organization wasestablished. All unrestricted grants,gifts, contributions and incomes arerecorded in this fund. If theorganization does not receive anyrestricted fund, this fund would showall activities of the organization.Common example of Unrestrictedfunds are – annual membership fee,non-specified gifts and grants,contributions.

Accounting Entries for General Fund

(a) Receipt of Fund:Bank/Cash a/c Dr.

Contributions a/c

(b) Use of Funds:Contributions a/c Dr.

Fund Balance a/c

● Current Restricted fund: This fundaccounts for contributions received bythe Not-for-profit organization forcarrying out those activities for whichsuch contributions are made. Thisfund is also called “Donor-restrictedFund” or “Fund for SpecifiedPurposes”. For example, a school mayreceive Rs. 1 Lakh for a programmeof Public Education for Drug Abuse.In this case, this is a restricted fund,which is to be used for promotingDrug abuse programme. Suchamounts are recorded in the specificfunds. In the given example, theamount will be recorded in DrugAbuse Fund Account. Often theCurrent Restricted Funds arerelatively small in amount and areused either in the current year or inthe following year. Usually, all

Good Luck Community Service CentreCurrent Unrestricted Fund

Statement of Income, Expenses and Charge inFund Balances for the year ended 31 March 2002

Particulars Amount Rs. Amount Rs.

Income: 5,40,000Contribution and Gifts 4,00,000Service Fees 1,00,000Investment Income from endowment fund 25,000Other Incomes 15,000

Expenses: 3,50,000Salaries 2,00,000Rent 75,000Utilities 50,000Other 25,000

Excess of income: 1,90,000Over expenses 10,000Fund balance, beginning of the year 2,00,000Less: Transfer to fixed asset fund 1,50,000Fund balance at the end of the year 50,000

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Current Restricted Funds are clubbedunder one head. Another examplewould be, the Research Grants Fundwhich is the sum-total of the grantsreceived by different teachers indifferent departments of a college tocarry out specific individual researchprojects. It is to be noted that detailsof each research project with respectto the amount sanctioned, amountreceived, amount spent and balancewill be shown for each scheme ofresearch project.

Accounting Entries

If a Not-for-Profit Organization:

(a) For Receipt of Funds:

Cash Operating a/c Dr. Restricted Fund a/c

(b) Use of Fund: Restricted Fund a/c Dr.

Contributions for Research a/c

● Endowment Fund: EndowmentFunds are the assets donated to Not-for-profit organizations with the legalcondition that the principal amountwill be maintained in perpetuity andonly the income earned from theseassets can be used for the variousactivities of the organization. Usually,income arising from the investment ofEndowment Fund, is unrestricted foruse hence, should be reported in theCurrent Unrestricted Funds.

In some cases, endowment donationsare received with restriction on the use ofincome from the fund investment. In suchcases, the income is added to theEndowment Fund and relatedexpenditure is subtracted from the fund

Good Luck Community Service CentreCurrent Restricted Fund

Statement of Income, Expenses and Charge inFund Balances for the year ended 31 March 2002

Particulars Amount Rs. Amount Rs.

Income: 3,00,000Contributions 2,00,000Gifts 75,000Other Incomes 25,000

Expenses: 2,58,000Sports prizes 1,75,000Welfare Programme 45,000Other expenses 38,000

Excess of income:Over expenses 42,000Fund balance, beginning of the year 18,000

Fund balance at the end of the year 60,000

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 345

income. Any excess of income overexpense is added to the fund and isinvested to generate further income for theoriginal purpose. For example, aUniversity may receive Rs. 1 Lakh forawarding gold medal to the meritoriousstudent. In this case, the endowment forGold Medal is a restriction and hence, theexpenditure on the Gold Medal will beless than or equal to the interest incomearising from the investment In case ofsurplus, the same will be invested andadded to the fund.

Another possibility is that a donation/grant may be received by the organization.Such donation is invested and income ispaid to the beneficiary as per the directivesof the donor. For example, an organizationmay donate Rs10 lakh for promoting studyof literature. In this case the Rs10 lakh willbe invested and income arising out of thatwill be distributed by way of Scholarshipto people pursuing study of Literature.The donations so received will be shownas “Scholarship Fund”.Accounting entries:(a) Receipt of Endowment:

Cash/bank a/c Dr.Endowment Fund a/c

(b) Making of Investment:Investment a/c Dr.

Cash/Bank a/c

(c) Receipt of Interest/Dividend:Cash/bank a/c Dr.

Interest/Dividend a/c

(d) Transferring interest toEndowment and matching

expensesInterest/dividend a/c Dr.

ExpenditureEndowment

(e) Purchase of Medals etc.Expenditure a/c Dr.

Cash/Bank

(f) Transfer to Unrestricted FundEndowment Fund a/c Dr.

Unrestricted Fund

● Fixed Asset Fund: The gifts andcontributions received by Not-for-profit organisations for theacquisition/creation of assets arerecorded in “Fixed Assets Fund”/“Building & Equipment Fund”/“Plant Fund”. Often amount spent arefunded by both donor restricted andunrestricted gifts. This fund will alsoinclude unspent Building Fundcontributions. Creating a separatefund and thereby indicating that thisamount is not available for day-to-day operations of the Not-for-ProfitOrganizations. Sometimes, the

Abstract Balance Sheet as at 31 March 2001

Liabilities Amount Rs. Assets Amount Rs.

Current Restricted Fund 60,000 Current Restricted Fund 60,000Investment with

HDFC Bank 30,000Bank of Baroda 20,000Cash 10,000 60,000

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amount of unrestricted gifts/generalfund may be transferred to anotherfund. Such transfer of amount is knownas Interfund transfer. Depreciation isshown in the Plant Fund or in the

unrestricted fund. In the latter case, anamount equal to the depreciationcharge is transferred from the unres-tricted funds to Plant Fund. Thefollowing explains this process:

Unrestricted Fund

Particulars Rs. Rs.

Provision for Depreciation XXXXXX Transfer to Plant Fund XXXXXX

Plant Fund

Particulars Rs. Rs.

Transfer from Unrestricted Fund XXXXXX Accumulated Depreciation XXXXXX

Good Luck Community Service CentreFixed Asset Fund

Statement of Change inFund Balances for the year ended 31 March 2002

Particulars Amount Rs.

Fund balance in the beginning of the year 8,00,000Add: Transfer from ensuer fund 1,50,000

Fund balance at the end of the year 9,50,000

Abstract Balance Sheet as on 31 March, 2001.(Rs. In lakhs)

Liabilities Amount Rs. Assets Amount Rs.

Sir SayajiRao Diamond Sir SayajiRao DiamondJubilee Fund 20 Jubilee Fund 20

Investment withAs per last Account 15 HDFC Bank 10Exp. As per last Account 3 Bank of Baroda 5Add: Donations 2 Addition to Building 5

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 347

Difference between Fund Accounting and Non-fund Accounting

Fund Accounting Non-Fund Accounting

1. Basis of Book-keeping

2. Use of Money

Cash Basis.

Except general funds, all other funds areused for specific purpose and separatefunds are created for recording.

Accrual Basis.

All resources are used for any of theobjectives or basis and all resources areclassified as owner’s equity and loans.

Good Luck Community Service CentreAbstract Balance Sheet as on 31st March, 2001.

(Rs. In lakhs)

Liabilities Rs. Assets Rs.

Fixed Assets Fund 9.5 Fixed Assets 9.5

Fund Accounting Non-Fund Accounting

3. EquityAccounting

4. Entity ofAccounting

5. Accountability

6. FinancialStatements

7. Surplus v/s.income

8. Budget

There is no individual or group of personswho have economic interest and hencethere is no equity.

Each fund is a fiscal and financialaccounting entity.

Accountability is towards law,regulations, legislature, Parliament,contributors and donors of funds.

Budget, income and expenditure account,statement of changes in funds alongwiththeir utilization, summary of debts.

Usually expenditures are more or equalto receipts, hence deficit is the commonfeature. Sometimes individual funds mayhave excess of current income overexpenses because of restrictions.

Approval of budget is fundamental forfinancial transactions. Hence,authorizations and appropriations aresacrosanct. Moreover, all account headsemanate from budget.

Equity accounting is of primary focus asthese are ownership equities.

Business enterprise is the accountingentity for recording and reportingbusiness transactions.

Accountability is towards allstakeholders viz., owners, creditors,workers, Government, regulators,consumers and all other general public.

Profit & Loss Account, Balance sheet,cash-flow statement and statement ofchanges in financial position of businessentity.

The result of matching of revenues andexpenses may either be profit or loss.

Commercial principles of codification ofaccounting are followed and budgetsystem is optional.

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8.4 Governmental Accounting System

It is to be noted that the discusstion thatfollows hereunder is to give a synoptic viewof Government Accounting System of theGovernment of India. For further details,one can refer to Government AccountingRules framed and enforced from time-to-time.

The fundamental objective ofGovernmental Accounting System is toforecast with greatest possible accuracywhat is expected to be received and paidduring the year and whether the receiptsalong with previous years balance of fundis sufficient to cover the expenses. For this,every year a Budget is laid before theParliament/State Legislature showing theCapital and Revenue receipts and capitaland revenue disbursements. Further,division is made between plan and non-plan expenditure. The budget has to bevoted and passed by the Parliament/Legislature and a separate AppropriationBill is to be passed to indicate autho-rizations for different receipts anddisbursements. On the basis of the budgetand accounts the Government determines(a) whether it will be justified in curtailingthe expenditure or expanding theactivities, and (b) whether it can or shouldraise revenues accordingly. In brief,

following are the purposes of GovernmentAccounting System:

1. Historical record of financialoperations of the Governmentalongwith the legally adopted budget.

2. Report expenditure incurred onvarious activities.

3. Provide information about howGovernment financed its activitiesand met its cash requirements.

4. Provide aggregate information usefulin evaluating the Governmentsperformatnce in terms of services,cost–efficiency and accomplishments.

5. Provide help in the financialmanagement of the country/state/union territory through periodicalreporting.

8.4.1 Method of GovernmentalAccounting

The mass of Government transactions arecash based, hence cash system ofaccounting is followed. However, forcertain transactions for whichGovernment acts as banker, remitter,borrower or lender, accrual System ofAccounting is followed. There are threepillars viz., elements (expense, revenue,receipt, disbursements, liabilities, cashbalance), measurement and recongnition.

9. Adjustment

10. Depreciation

Under cash system, outstanding and pre-paid expenses, accrued income are notrecorded. However, for restrictedpurposes under modified accrual system,such adjustments are recorded.

Depreciation is not recorded as cost ofcarrying on operations. Depre-ciation istreated as allocation of funds based onreplacement cost of the asset in use as isfollowed in Indian Railways.

All adjustments are made by invokingthe Generally Accepted AccountingPrinciples (GAAP).

Depreciation is recorded as Businessexpense and proper asset accounting isdone.

Exhibit : 8.2

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 349

These are explained below:

1. Element is and item of transactionrelating to expense, income, receipt,disbursement, liability, or asset.

2. Measurement is the process ofdetermining the monetary amounts atwhich elements are to be recorded.

3. Recognition is the processs ofincorporating in a financial statementan item that is within the definitionof an element and satisfies the criteriafor recognition.

Cash Basis of Accounting:

● Recognises transaction at exchange ofcash.

● Financial result is expressed in termsof cash received and cash paid.

● Elements covered are:

(a) Receipts(b) Expenditure(c) Cash balance

Accrual Basis of Accounting: Accrualsystem of Accounting follows GenerallyAccepted Accounting Principles and isrecommended for use in case of trusts,capital projects, special assessment, andInter-Governmental transfer of funds. Themodified Accrual basis of accounting isused for general funds, special reveruesand Debt Service Funds. The modifiedaccrual basis of accounting is defined asthat method of accounting in whichexpenditures and revenues are recordedat the exchange of cash except for materialand approved revenues. Revenue sourceswhich give rise to legally enforceableclaims (such as property taxes, which canbe duly ascertained and Inter-Governmental transfers are recorded on

accrual basis. Following are the elementscovered:

● Revenues● Expenses● Assets including physical assets● Liabilities● Net assets● Cash flows

Receipts: Receipts are cash inflows arisingfrom reciprocal and non-reciprocaltransactions, borrowings, interest, orcustodial contributions/receipts.

Non-Reciprocal Transactions:

● Taxation● Issue of currency● Grants● Donations● Contributions

Reciprocal Transactions:

● Sale of goods and services● Sale of Assets.

Financial Inflows:

● Interest receipts● Borrowings● Capital contributions● Custodial receipts

Payments:

Reciprocal Transactions:● Purchase of goods and services● Acquisition of asssets● Capital investment and loans

Non-reciprocal Transactions:

● Governmental transfers● Grants● Contributions● Donations

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Financial Outflows:

● Interest payment● Repayment of debt

Custodial payments

Assets: An asset is a resource controlledby the entity as a result of past event andfrom which future economic benefits areexpected to flow. Assets may be financial(bonds, securities, shares, debentures etc.),physical (gold, silver, land & building,bridges, furniture, fixtures, equipmentand plant, currency) and intangible(patents, copyrights, licences etc.).

Liabilities: A present obligation arisingfrom past events settlement of which isexpected to result in the outflow ofresources embodying economic benefits.Examples of liabilities are accountspayable, accrued interest payable, accruedwages and salaries, pension and otheraccrued terminal benefits, guarantees andindemnities likely to be invoked, currency

issued, debt, obligation under accidentcompensation.

Commitment: It is a Governmentresponsibitlity for a future liability basedon contractual agreement. Obligation isnot certain but when it occurs, it is to berecognized as a liability because it ceasesto be a commitment.

8.4.2 Classification of GovernmentAccounts

Government accounts are kept in threeparts, viz., Part I Consolidated Fund ofIndia, Part II Contingency Fund of Indiaand Part III Public Account of India (SeeExhibit 8.3)

Consolidated Fund of India

It is the account of all revenues received,all loans raised and all money received bythe Government in repayment of loans.This account has two divisions. The first

Government Account

Consolidated Fund of India Contingency Fundof India

Public Account of India

Receipts

● Tax Revenue.

● Non-Tax Revenue.

● Grants in aid &Contributions.

Expenditures

● General Services.

● Social Services.

● Economic Services. ●

Grants in aid &Contributions.

RevenueSection

CapitalSection

Receipts

● Small Savings.

● Deposits & Advances.

● Reserve Fund.

● Suspense &Miscellanceous.

● Remittances.

● Cash Balance

Expenditures

● General Services.

● Social Services.

● Economic Services. ●

Grants in aid &Contributions.

Exhibit 8.3: Structure of Government Account

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 351

division consists of revenue account,detailing about revenue receipts andexpenditure heads. The second divisioncomprises capital receipts and capitalexpenditure. The third section relates toPublic Debt and Loans and Advanceswhich include loans raised and theirrepayment by Government such asInternal debt, external debt of CentralGovernment, Loans and Advances madeby Government and their recoveries.

Contingency Fund: It is Part II ofGovernment Accounts. The ContingencyFund is in the nature of an imprest createdthrough the law by the Parliament andplaced at the disposal of the Governmentto enable advances to be made for meetingunforeseen expenditure, pendingauthorization by the Parliament.

Public Account of India: This is the thirdpart of Government Accounts. All othermoneys received by or on behalf of theGovernment of India shall be credited tothe Public account of India. Thetransactions leading to debt (other than inPart I), deposits, advances, remittancesand suspense are recorded in this account.

Sectors and Sub-sectors of Accounts:Under each division and section of theConsolidated Fund of India, thetransactions are grouped into Sectors such

as General Services, Social and Commu-nity Services. This classifi-cationhighlights the Function or the Servicecarried on by the Government. The Sectorsmay be divided into Sub-sectors. EachSector in a section is distinguished by analphabet.

Major, Minor and Detailed Heads: Majorhead of account falling in the ConsolidatedFund of India corresponds to the functionsof Government such as services likeagriculture, defense provided by theGovernment. A Minor head identifies aprogramme undertaken and asub-minor head indicates the scheme oractivity undertaken. A detailed head istermed as an object classification. It ismeant for itemized control overexpenditure such as salaries, officeexpenses, grant-in aid, loans, andinvestments.

Codification of Accounts: A four-digitArabic-numerical code is assigned toMajor Heads followed by two-digit codefor the relevant Major Sub-head followedby a three-digit code for Minor Heads (SeeExhibit 8.4). This is illustrated by thefollowing example:

Procedure for Receipts, Payments andInter-Government Transfers: All receipts(taxes, borrowings, interest receipts and

Major Head Code in the section for

Receipt Heads Expenditure Expenditure Loans andFunction Revenue Heads Heads Capital Advances

Account Revenue AccountAccount

1. Medical andPublic Health 0210 2210 4210 6210

2. Shipping 1052 3052 5052 7052

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others), payments (expenses for civil,defense, and general services for eachhead) and inter-governmental transfersare carried out through the use ofvouchers, formats whereof are prescribed

in Government of India Accounting Rules,1990. The procedure for receipts,payments and inter-governmentaltransfers is presented in a synoptic formin Exhibit 8.5.

Classification andCodification of Accounts

Characteristics of the Function

Part

Division

Section

Sector

Sub-sector

Sub-sub-sector

Function Itself

Major Head Function 4 Digit Code

Sub-Major Head Sub-Function 2 Digit Code

Minor Head Programme 3 Digit Code

Sub-Minor Head Scheme 2 Digit Code

Detailed Head Sub-Scheme 2 Digit Code

Object Head Item Class 2 Digit Code

▼ ▼

Exhibit 8.4: Coding System

Reserve Bank of India

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 353

Exhibit 8.5: Procedure for Receipts, Payments and Transfers.

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As revenues are received, cash account is debited and revenue account is credited.Assuming that (out of Rs. 5,00,000 tax revenue) Rs. 4,50,000 is collected (and distributedas follows)

Recording of Transactions

1. Recording Estimated Revenue

Estimated revenue is, being an Asset account is debited and Fund Balance is credited.

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditEstimated Revenue 9,00,000

Fund Balance 9,00,000

Estimated Revenues LedgerTax Revenue 5,00,000Licenses and Permits 2,00,000Service charges 1,20,000Fines and others 80,000

2. Recording Appropriations

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditFund Balance 8,00,000

Estimated other uses 30,000Appropriations 7,70,000

Appropriations LedgerGeneral Government 4,00,000Public Safety 2,00,000Public Parks 60,000Health and Welfare 1,10,000Estimated other uses 30,000

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditCash 4,50,000

Revenue 4,50,000Revenue Ledger

General Government 3,00,000Public Safety 30,000Public Parks 40,000Health and Welfare 80,000

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 355

3. Recording ExpenditureWhen the authorized liabilities have beenincurred, an appropriation is consideredexpended. Expected liabilities are calledencumbrances/obligations. In order torecord an encumbrance, usually in case of

purchase or other commitments, theEncumbrances Controlling Account isdebited and Reserve for Encumbrances iscredited. For example, encumbrances forthe year 2002 are of Rs. 1,00,000. Thetransaction is recorded as follows:

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditEncumbrances 2002 1,00,000

Reserve for Encumbrances 2002 1,00,000Revenue Ledger

General Government 50,000Public Safety 25,000Public Parks 20,000Health and Welfare 5,000

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditEncumbrances 2002 1,00,000

Reserve for Encumbrances 2002 1,00,000Revenue Ledger

General Government 50,000Public Safety 25,000Public Parks 20,000Health and Welfare 5,000

When expenditures are actually paid,expenditures (and its subsidiary account)is debited and liability account is created

for the amount paid to the creditor. Forexample, Rs. 90,000 of Rs. 1,00,000 of theencumbrances is paid as follows:

General Ledger (Rs.) Subsidiary Ledger (Rs.)

Debit Credit Debit CreditReserve for Encumbrances 2002 90,000

Encumbrances 2002 90,000Encumbrances Ledger

General Government 45,000Public Safety 20,000Public Parks 20,000Health and Welfare 5,000

Expenditure 2002 90,000Vouchers Payable 90,000

Expenditure LedgerGeneral Government 45,000Public Safety 20,000Public Parks 20,000Health and Welfare 5,000

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In this way, all transactions arerecorded in the General Fund(Consolidated Fund of India) and entriesare made in the Budgeting Process. A

Illustration 1

A college has received endowments for furtherance of research. Following are the detailsof the various endowments:

Balances as on 1 April, 2000 Rs.

IPCL Research fund in Management 20,00,000

IPCL Research fund in Microbiology 10,00,000

GSFC Fellowship 20,00,000

Interest Balance as on 1 April, 2000

IPCL Research fund in Management 40,00,000

IPCL Research fund in Microbiology 5,00,000

GSFC Fellowship 3,00,000

Interest received during the year ending 31 March, 2001.

IPCL Research fund in Management 6,00,000

IPCL Research fund in Microbiology 1,50,000

GSFC Fellowship 3,00,000

Expenditure during the year

IPCL Research fund in Management 5,00,000

IPCL Research fund in Microbiology 3,50,000

GSFC Fellowship 2,00,000Contribution received for GSFC Fellowship Fund. 2,00,000

Investment at the end of the year

IPCL Research fund in Management 50,00,000

IPCL Research fund in Microbiology

(In Government Bonds) 14,00,000

GSFC Fellowship (LIC Annuities) 36,00,000

pictorial representation of the flow ofreceipts and payment procedure is shownin exhibit 8.5.

Balances of funds are maintained in the Bank Account with the State Bank of India.From the above information, you are required to prepare Statement of Change in

Endowment Fund. Show the relevant items in the Statement of Affairs.

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Solution

Statement of Change in Endowment Fund

Particulars Amount AmountRs. Rs.

A. IPCL Research fund in ManagementOpening Balance of Interest 40,00,000Add: Interest Received 6,00,000

46,00,000Less: Expenditure during the year 5,00,000Closing Balance of Interest 41,00,000Opening Balance of Fund 20,00,000Closing Balance of Fund 61,00,000

B. IPCL Research Fund in MicrobiologyOpening Balance of Interest 5,00,000Add: Interest Received 1,50,000

6,50,000Less: Expenditure during the year 3,50,000Closing Balance of Interest 3,00,000Opening Balance of Fund 10,00,000Fund received during the year 2,00,000 Closing Balance of Fund 15,00,000

C. GSFC Fellowship FundOpening Balance of Interest 3,00,000Add: Interest Received during the year 3,00,000

6,00,000Less: Expenditure during the year 2,00,000Closing Balance of Interest 4,00,000Add: Opening Balance of Fund 30,00,000Add: Contributions Received 2,00,000Closing Balance of Fund 36,00,000

Total Endowment Fund 1,12,00,000

Statement of Affairs as at 31 March 2001

Liabilities Amount Assets AmountRs. Rs.

Endowment Fund: Endowment Fund:A. IPCL Research fund

in Management 61,00,000 A. IPCL Research fund inManagement

Govt. Bonds 50,00,000Bank Balance* 11,00,000 61,00,000

B. IPCL Research fund B. IPCL Research fund inin Microbiology 15,00,000 Microbiology

Govt. Bonds 14,00,000Bank Balance* 1,00,000 15,00,000

C. GSFC Fellowship C. GSFC Fellowship FundFund 36,00,000 LIC Annuities 36,00,000

TOTAL 1,12,00,000 TOTAL 1,12,00,000

* Balance of Bank account for respective fund

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8.2 Accounting Statement for Non-Governmental Not-for-ProfitOrganizations

The Not-for-Profit organization being adifferent type of entity necessitates adifferent type of accounting treatment. Thisneed arises on account of the type ofinformation required to be generated tosupport the various decisions of themanagement. Besides, their funding patternis also different as these entities receivemoney from members and other agenciesto promote their activities, which is usuallynot in the case of business enterprises.All the accounts are compiled at the endof the financial year and presented in theform of following statements:1. Receipt and payment account (also

known as Receipt and Disbursementaccount) stating the actual receiptsand payments made during the year.This includes for revenue receipts andpayments.

2. Budget is an estimate of receipts andpayments of next financial year-presented to the Parliament/Legislatureindicating expenses to be charged, voted,expenditure to be voted on account andthe receipts under various head such astax collection, interest and other receiptssuch as revenue receipts and capitalreceipts. The capital receipts and disbur-sement and revenue receipts and disbur-sement are shown in two sub-heads :● Planned expenditure● Non-Planned expenditure.

3. Appropriation bill is placed in theParliament for seeking approval ofthe house for the proposal made inthe budget for raising revenue fromreceipts, disbursements and payments.

4. Along with receipt and paymentaccount, a statement of position ofconsolidated fund is presented in theform of a statement.

8.3 Receipt and Payment AccountReceipt and Payment account is a similarto cashbook; therefore it serves thepurpose of cashbook. Proper classificationof receipts and payments help indifferentiating receipt of capital natureand revenue nature and of the expenses.Apart from this, it indicates the openingand closing balance of cash. Such aclassification can help in the preparationof cashbook from the receipt and paymentaccount. It is also called Receipt andDisbursement Account.

The Receipt and Payment Account isgenerally presented horizontally (in T-form) with cash receipts on the left handor debit side and cash payments on theright hand or credit side, as:

Debit || Credit Receipts Payments

8.3.1 Preparation of Receipt andPayment Account

Receipt and payment account is preparedby keeping in view the following points:

1. This account starts with the openingbalance of cash in hand and cash atbank. Cash in hand always have adebit balance and, therefore, appearson the debit side. Cash at bank haveeither a debit or favourable balanceor a credit (overdraft) or onfavourable balance. If it has afavourable balance (debit balance) itwill be shown on the debit side andan overdraft (credit balance) will beshown on the credit side.

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 359

2. All cash collections made during theaccounting year as shown on thereceipts or debit side and all cashpayment made during the year asshown on the payments (credit) side.The period to which the transactionsmay belong (i.e. previous year (s),current year or future years (s)) and thenature of the transaction, (whethercapital or revenue) is recorded on thedebit side. For example the payment ofrent, (revenue item) outstanding rentor prepaid rent will be shown on thecredit side. Similarly, the paymentfor the purchase of furniture (capital

item) will also be shown on the creditside.

3. Only actual receipt of cash and paymentof cash are recorded. All non-cash itemssuch as outstanding expenses,depreciation on fixed assets and accruedincomes do not form the part of theReceipts and Payments account.

4. The Receipts and Payments accountis balanced at the end of theaccounting year to show the closingbalance of cash in hand and at bankor bank overdraft, as the case may be.

The format of the Receipt and PaymentAccount is as given below:

Receipt and Payment Account

Receipts Amount Rs. Payments Amount Rs.

Salary xxxWages xxxHonorarium xxxRent xxxTaxes xxxInsurance xxxElectric Changes xxxPrinting xxxPostage and Stationary xxxRepairs xxxRefreshments purchased xxxConveyance xxxTournament xxxInterest on Loan xxxInterest on Bank xxxOverdraft xxxBuilding xxxFurniture xxxOffice Equipment xxxBooks xxxSports Goods xxxSports Equipment xxxInvestments xxxLoan Advanced xxxFixed Deposit xxxBalance c/f xxx Cash————— Bank—————(Balancing fig.—————) xxx

Balance b/f xxxCash ———-Bank———— xxx

Subscriptions2000————-2001————-2002————- xxx

Donations xxxLocker Room Rent xxxCloak Rent xxxHall Rent xxxSale of old news papers xxxand magazines xxxSale of refreshments xxxInterest received xxxLife membership xxxTournament Fund xxxSubscriptions xxxAdmission Fee xxxSpecific Donations xxxGrants xxxLoan Obtained xxxSale of Investments xxxSale of Fixed Assets xxx

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8.3.2. Items of Receipt andPayment Account

These items may be classified as follows:

(i) Revenue Receipts(ii) Capital Receipts(iii) Revenue Payments, and(iv) Capital Payments.

These items have been discussed on thefollowing lines.

(i) Revenue Receipts: These are theamounts received on a recurringbusiness and include:

a) Annual membership subscriptions;b) Donations, grants and legacies

received regularly for generalpurposes;

c) Admission fees not capitalized;d) Locker rent and cloakroom rent from

members for the use of locker andcloakroom;

e) Hall rent received from outsiders forthe use of hall;

f) Receipts from sale of old newspapersand magazines;

g) Receipts from sale of refreshments,dinner coupons, tickets for dances andother social functions;

h) Interest received on investment, fixeddeposit and loans advanced;

i) Any other item of the similar nature.

(ii) Capital Receipts: These refer to thoseamounts received during the yearwhich will yield benefits to theorganization during the current yearas well as in the future years.Amounts of capital receipts are not

received at regular intervals.Following items are included in thecapital receipts-

a) Life membership subscriptions i.e.amounts received for the life timemembership of the organizations;

b) Admission fees to the extentcapitalized;

c) Donations from outsiders or membersfor specific purposes such asconstructions of building;

d) Legacies i.e. amounts given to theorganizations under a will on thedeath of the contributors for specificpurposes such as prizes andscholarships;

e) Grants received for meeting capitalexpenditure from the governmentsuch as construction of a publicdispensary;

f) Amount received as loan;g) Sale proceeds of fixed assets such as

investment, furniture, books etc.h) Amount received on account of any

other similar item.

iii) Revenue Payments: These are thepayments for amounts spent atregular intervals not resulting in theformations of fixed assets. Revenuepayments include the following-

(a) Payments for the salaries, wages andhonorarium;

(b) Payments made for rent, taxes,insurance premia, electricity charges,printing, postage and stationarycharges and repairs.

(c) Payments for travelling andconveyance

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 361

(d) Payments for purchase ofrefreshments, dinners;

(e) Payments for organizing sport meetsand tournaments;

(f) Interest paid on loans and on bankoverdraft and

(g) Payments for other items of similarnature.

iv) Capital Payments: These arepayments for those items whosebenefits are available to theorganization during the currentaccounting year as well as futureaccounting year also. Capitalpayments are not made at regularintervals. Following are included inthe capital payments-

(a) Payments for construction andextension of building, purchase offurniture and office equipment;

(b) Payments for purchase of books forthe library;

(c) Payments made for purchase of sportsgoods and equipment by a sportsclock;

(d) Cost investments purchased;(e) Amounts invested in banks as fixed

deposits;(f) Amounts advanced to outsiders as

loans and;(g) Any other payment of similar nature.

8.3.3. Uses of Receipt andPayment Account

On the basis of accounting system adoptedby an organization the Receipt andPayment account can be used in twoalternative ways.

i. Those organizations, which followcash basis of accounting, this accountplays a vital role. On the one hand, itserves the purpose of cashbook, whileon the other hand it provides supportin the preparation of financialstatements, income statement, andstatement of affairs to be presented tothe members at the year-end as aresult of the enterprise’s activities. Insuch a case, the surplus will be the diffe-rence of receipts and payments. Whenpayments will be more than receiptsthen it will be a situation of deficit.

ii. In organizations using accrual basisof accounting the Receipt andPayment account works as asummarized cashbook and is asupplement to the Income andExpenditure account and the BalanceSheet. These are the basic statementspresented to the members to showsurplus or deficit and the financialposition respectively.

Illustration 2

Membership subscription received byModern Cricket Club during the year 2001amounted to Rs 15,600, which includes Rs900 received in arrears for the year 2000and Rs 2,100 received in advance for 2002.It is found that Rs 2,500 has not beenreceived as subscription for the currentyear (2001) and that Rs 1,000 was receivedin advance in 2000 as subscription for 2001.Calculate the income from subscription forthe year 2001.

In the above illustration the totalsubscription of the current year have beenworked out by doing additions and

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subtractions of the items of information tothe subscriptions received in cash during thecurrent year. The total amount ofsubscriptions due for the current year conalso be prepared by preparing subscriptionsaccount as has been illustrated in theillustrations given below:

Illustration 3

Rs.51.500 subscriptions were received by

Sita Tracking Club during the year 2001,which includes Rs 1,500 received in arrearsfor the year 2000 and Rs2,500 received inadvance for the year 2002. It is found thatRs3000 has not been received assubscriptions for the current year and thatRs 1,800 was received in advance in the2000 for the year 2001. Find out the incomefrom subscriptions for the year 2001 bypreparing a subscription account.

Solution: Rs

Amount collected for subscription in cash. 15,600Add subscriptions received in 2000 for 2001 1,000Add subscriptions received in 2001 not yet received 2,500

________18,100

Less subscriptions received in arrears for 2000 900Subscriptions received in advanced for 2002 1,200

2,100

Income from subscriptions to be transferred to Income andExpenditure Account 17000

Dr. Subscription Account Cr.

Date Particulars Amount Date Particulars AmountRs. Rs.

1 Balance b/f Cash-outstanding 1,500 subscriptionsubscription received 51,500received for 2000 AdvanceAdvance subscription 1,800subscription received in 2000(Income and balance c/fExpenditure 2,500 outstandingAccount) subscription of 3,000Subscription for current year)current year 52,300

56,300 56,300

Solution:

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 363

Illustration 4

With the help of the following information extracted from the books of Rajdhani Club,Calculate Sub-scriptions for the Current Year, 2001.Subscriptions received during the year Rs.1,50,000Additional Information

Year 2000 Year 2001

Rs. Rs.Outstanding Subscription 3,700 4,200Advance Subscriptions 3,900 5,000

Solution

Statement showing calculations of subscription of the current year 2001.Rs.

Subscriptions received in cash for 2001 1,50,000Add: Outstanding received in cash Rs.4,200

Advance Subscription received Rs.3,900 8,100In 2000 for 2001. 1,58,100

Less: Outstanding subscription of Rs.3,700the year 2000 received in 2001

Advance subscriptions received Rs.5,000 8,700in 2001 for 2002.

Subscription 2001 14,940

Dr. Subscription Account Cr.

Date Particulars Amount Date Particulars AmountRs. Rs.

Balance b/f 3,700 Pay Balance c/f 3,900(outstanding (advanceSubscription in subscriptionsthe beginning) in the beginning.)

Income & 1,49,400 Cash - Subscription 1,50,000Expenditure received.

Account By Balance c/f 4,200Subscription (outstandingfor current year. subscription

Balance c/f 5,000 in the end.)(advancesubscriptionin the end.)

1,58,100 1,58,100

Alternatively the problem can be solved by preparing a subscription account as shownbelow:

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Illustration 5In 2001 the subscriptions received wereRs.2,10,000/-. These subscriptions includeRs.3,000/- for the year, 2000 and Rs4,000/- for the year, 2002. On 31.12.2001subscription due but not received were

Rs.5,000/. Pass necessary journal entriesto record the above transactions, preparesubscriptions account, subscriptionsoutstanding account and subscriptionreceived in advance account of RoyalGym.

Royal GymJournal

Date Particulars L.F. Debit CreditAmount Amount

2001 Rs. Rs.

Dec. 31 Cash a/c Dr. 2,10,000 Subscription a/c 2,10,000(Subscriptions received during, 2001)

Dec. 31 Subscriptions a/c Dr. 3,000 Subscriptions Outstanding a/c 3,000(Amount of subscriptions relating to 2000transferred from subscriptions A/c tosubscription outstanding account)

Dec. 31 Subscriptions a/c Dr. 4,000 Subscriptions received in advance a/c 4,000(Advance subscriptions received in 2001 for2002 transferred to subscriptions received inadvance account)

Dec. 31 Subscription outstanding a/c Dr. 5,000 Subscriptions a/c 5,000(Amount of subscriptions still due for2001 but not yet received. Credited tosubscriptions account)

Dec. 31 Subscription a/c Dr. 2,08,000 Income & Expenditure a/c 2,08,000(Subscription for 2001 credited toSubscription a/c)

Dr. Subscriptions Account Cr.

Date Particulars Amount Date Particulars Amount2001 Rs. 2001 Rs.

March 31 Subscription 3,000Outstanding Dec. 31 Cash 2,10,000

2001 Outstanding 5,000March 31 Subscription 4,000 Dec. 31 Subscription

received in advance

Income & Expenditure 2,08,000

Dec. 31 2,15,000 2,15,000

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 365

Illustration 6From the following particulars relating to Golden Point Club, prepare a Receipts and Payments account forthe year ending 31st March 2002.

Sale of old sports materials 1,200Rs. Donation received for pavilion 4,600

Opening cash balance 1,000 Rent paid 3,000Opening bank balance 7,200 Sports materials purchased 4,800Subscriptions collected for: Purchase of refreshments 600

Expenses for maintenance of tennis:1999 Rs. 500 court 2,0002000 Rs. 7,600 Salary paid 2,5002001 Rs. 900 9,000 Tournament expenses 2,400

Furniture purchased 1,500Office expenses 1,200

Sale of refreshments 1,000 Closing cash in hand 400Entrance fees received 1,000

SolutionGolden Point Club,

Receipts and Payments AccountFor the year ending 31st March 2002

Dr. Cr.

Receipts Amount Payments AmountRs. Rs.

Balance b/f Rent 3,000Cash 1,000 Sports materials purchased 4,800Bank 7,200 Purchase of refreshments 600Subscriptions Maintenance expenses for tennis court1999 500 Salary 2,0002000 7,600 Tournament 2,5002001 900 9,000 Furniture purchased 1,500Sale of refreshments 1,000 Office expenses 1,200Entrance fees 1,000 Balance c/f:Sale of old sports 1,200 Cash 400materials Bank (balancing figure) 6,600Donation for 4,600

pavilion 25,000 25,000

Dr. Subscriptions Outstanding Account Cr.

Date Particulars Amount Date Particulars Amount2001 Rs. 2001 Rs.

Dec. 31 Balance b/f 3,000 Dec. 31 Cash 2,10,000

Subscription 5,000 OutstandingSubscription 5,000

2002 8,000 8,000Jan., 1 Balance c/f 5,000

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8.4 The Income and ExpenditureAccount

The Income and Expenditure account is arevenue account of a Not-for-Profit entity,like a charitable or cultural society,educational institutions, hospitals, sportsclub etc. It is a type of income statementsimilar to profit and loss of other businessorganizations. The income andexpenditure account is prepared on thebasis of some principles, which areapplicable in the preparation of profit andloss account. Fund based expenses arefirst matched against the income arising/accrued from the same fund. Fund basedexpenses cannot be in excess of the incomeaccrued from the fund however a transfermay be made from general fund to thespecific fund to set off the deficit.

Any surplus arising on the income ofa firm has to either accumulate in the funditself or is to be disposed off as for thespecific provisions. Items of revenuenature alone are dealt with in this accountbut they are not confined to actual cashtransacted during the accounting period.Gains whether received or accrued arecredited and expenses and loses whetherpaid or incurred are debited to the Incomeand Expenditure Account. Any advancereceipt of income on payment or expenseis duly adjusted. After due adjustment ofaccruals, prepayments, provisions,depreciation etc, the final balance of theaccount represent an excess of income overexpenditure which is called surplus.When the expenditure is in excess over theincome then the balance is called deficit.[Incomes- Expenditures = Surplus],[Expenditures-Income = Deficit]. It must

be kept in mind that in the context ofincome and Expenditure account the term‘ expenditure’ is used interchangeably butin the same sense the word ‘expense’.

8.4.1 Preparation of Income andExpenditure Account

Following steps are involved in thepreparation of the Income andExpenditure Account:

(i) It is generally prepared in ‘T’ formwith revenue expenditure on the debitside (left hand side) and revenueincome on the credit side (right handside). It follows the rules given below:

Debit Expenditure || Credit Income

(ii) This account can also be prepared ina vertical form where in incomes arefirst shown and added up. There after,the expenditures are presented andadded up. From the totals of theincome s the totals of expenditure arededucted to ascertain surplus ordeficit.

(iii) The Income and Expenditure accountdoes not start with any openingbalance, because it is prepared toascertain only the current year’ssurplus or deficit. The previous year’ssurplus or deficit is therefore , notrelevant.

(iv) This account shows only the revenueitems and hence the capital items arenot recorded. For example buildingowned by a sport club should not betaken into consideration.

(v) In this account only the expenses andincomes of the particular current

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 367

accounting year are shown. Hence,the revenue receipt and paymentpertaining to the pervious year(s) andfuture year(s) should be suitably or allto be adjusted. Similarly, outstandingexpenses and accrual incomespertaining to the previous accountingyear of which the income andexpenditure account is beingprepared must be included in the totalof the expenses and incomes.

(vi) The closing balance of this accountshows surplus i.e. excess of revenueincome and revenue expenses. Thesurplus is added to and the deficit isdeducted from the ‘Not-for-Profit’organization’s ‘capital fund ‘.

8.4.2 Items of Income andExpenditure Account

The above discussion makes it clear that theIncome and Expenditure account includesonly the revenue items of the particularaccounting year for which it is prepared.Some of the important items, which arerelevant to this account, have been discussedin the following lines:

Revenue Expenditure: It generally refersto the revenue expenses paid and due fora particular year and non-cash losses. Itcan be shown as follows in the form of anequation.

Revenue Expenditure = RevenuePayments made during the year +(outstanding revenue payments of theyear + prepaid revenue payments of theyear at the beginning of the year) -(outstanding revenue payments in thebeginning of the year + prepaid revenuepayments at the end of the year)Revenue Income: It refers to the revenuereceipts accruing during a particular year.Therefore;

Revenue Income = Revenue Receiptduring the year + (accrued revenue receiptat the end of the year + revenue receiptsreceived in advance at the beginning of theyear) - (accrued revenue receipts in thebeginning of the year + revenue receiptsreceived in advance at the end of the year)+ gain on sale of fixed assets.

The format of Income and expenditureaccount is given below:

Subscription

Total received in current year

Add outstanding at the end

Less outstanding in the beginning

Add advance receipt in the previous year

Less advanced received in current year

Total subscription of current year

Gain on sale of assets

Sale price of assets

Expenses

Total paid in current year

Add outstanding at the end

Less outstanding in the beginning

Add Advance paid in previous year

Less Advance paid in current year

Current year’s expenditure

Purchase of consumable stores:

Opening stock of the item

Add payment /or credits for the items

Income and Expenditure Account of (Name of the Not-for-Profit organizations)for the year ended (date)

......... .........

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Less closing stock of the itemLess creditors for the items in the beginningAdd creditors for the items at the endAdd advance payments in the previous yearLess advance payment in the current yearValue of items actually usedExpenses out of special collectionsExpenses paidLess collectionNet ExpensesLoss on sale of assetsBook of value of assets soldLess sale priceNet lossOther expenses and loses with adjustmentDepreciationExcess of income over expenditure carried overto balance sheet-surplus

Less book value of assets sold

Net gain on sale of assetsReceipt for special expensesAmount receivedLess expenses paidNet incomeOther incomes and gains with adjustmentExcess of expenditure over income carried overto balance sheet -deficit

Note: There shall be one of these items at a timenot both.

Note: There shall be one of these items at a time not both.

Difference between Receipt and Payment Account and Income and Expenditure Account

S.No Basis Receipt and Payment Income and ExpenditureAccount Account

1. Assets v/sRevenue

2. Openingbalance

3. Capital v/sRevenue

4. Cash v/sNon-cash

5 Cashbalance v/sSurplus/deficit

It is a summary of the cash transactionsof a not-for-profit organization showingcash inflows (Receipt) on the debit sideand cash out flows (Payments) a thecredit side as in case of a cash book.

It starts with an opening balance of cashin hand and cash at bank.

Capital receipt and payment in cash areincluded in this account.Revenue receipts and payments in cashare also included in this account.

Non-cash expenses such as depreciationon fixed assets; bad debts, provisions etc.are not included in this account.

The closing balance of this accountrepresent the closing cash in hand andat bank or bank overdraft.

It is the revenue account of a not -for -profitorganization similar to profit and loss accountof a profit seeking organization. Incomes areshown on the credit side and expenditure onthe debit side.

It does not start with any balance.

Capital receipts and payments are excludedfrom this account only.Revenue receipts and payments in cashconcerning the current year are also shown inthis account and hence capital receipt isexcluded.

Non-cash expenses relating to the currentaccounting year are also included in thisaccount.

The closing balance of this account excess ofincome over expenditure i.e. surplus. Whenexpenditure is more than income the differenceis called deficit.

.........

.........

.........

.........

.........

.........

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 369

8.4.3 Difference between Incomeand Expenditure Accountand Profit and Loss Account

Though Income and Expenditure Accountand Profit and Loss Account are seems to

be similar still they differentiate on thefollowing grounds:

● Type of organizations● End results● Sharing surplus and profit

S.No. Income and Expenditure Account Profit and Loss Account

1. It is presented to ascertain the amount ofsurplus or deficit as a result of the not-for- profit entity’s activities.

2. The surplus always increases the capitalfund of the entity and can be used forfurther enhancing the objectives of theorganization. It can never be distributedamong the members in any form.

It is prepared to ascertain the net profit earnedwhich will be paid out to the proprietors, partners,or shareholders, as the case may be, or retained inthe business.

The net profit obtained belongs to the owner(s) whomay withdrawn it or retain in the business.

Rs.Prepaid expenses on 31.12.2000 1,500Expenses Outstanding on 31.12.2000 2,300Expenses Outstanding on 31.12.2001 2,500Prepaid Expenses on 31.12.2001 1,400

Ascertain the amount of expenses, which will be debited to the income and expenditureaccount for the year, 2001.

Solution

Rupees Rupees

Amount of expenses actually paid. 12,650

Add: Expenses of 2001 paid in advanceIn 2000. 1,500Expenses Outstanding on 31.12.2001 2,500 4,000

Less: Expenses of 2000 paid in 2000. 2,300Expenses paid in advance in 2001 1,400 3,700Expenses of 2001 to be debited to Income &Expenditure Account.

12,950

Illustration 7Miscellaneous expenses actually paidduring the year, 2001 amounted to

Rs.12,650.00. Information about prepaidand outstanding expenses is as under:

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Illustration 8From the following particulars of Faridabad Sports Club, prepare the Income and Expenditure account forthe year ending 31 March 2002

Subscriptions collected (including Rs. 2,000 for 2001 and Rs. 1,5000 for 2003) 30,000Subscriptions due but not received in 2002 3,000Salary paid (including Rs. 300 for 2001 4,500Salary outstanding for 2002 400Donations received 1,000Entrance fees (of which 40 percent is to be treated as capital receipt) 2,000Entertainment expense 600Tournament expense 1,500Rent 1,800Printing, postage and stationary 1,200Purchase of sports equipment 5,000

SolutionFaridabad Sports Club

Income and Expenditure AccountFor the year ended 31 March 2002

Dr. Cr.

Expenditure Amount (Rs.) Income Amount (Rs.)

Salary 4,600 Subscription 29,500Entertainment expenses 600 Donation 1,000Rent 1,500 Entrance fees 1,200Tournament expenses 1,800Printing postage and stationery 1,200Excess of income over expendituretransferred to Capital Fund 22,000

31,700 31,700

Notes(1) The income from subscriptions for 2002 is as follows: Rs

Subscriptions received in cash 30,000Add: Subscriptions due for 2002 but not received during the year 3,000

33,000Less: Subscriptions received in arrears for 2001 2,000

Subscriptions received in advance for 2002 1,500 3,500

29,500

(2) Donation received is not for any special purpose and is thus treated as a revenue item.

(3) Since it is the policy of the Club to treat 40 per cent of entrance fees received duringthe year as a capital receipt, the remaining 60 per cent is a revenue receipt.

(4) Expenses for salary during 2002 is ascertained below: Rs.Salary paid in cash during 2002 4,500Add: Salary outstanding for the year 400

4,900Less: Salary paid for 2001 300

4,600

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 371

Nagi’s ClubReceipts and Payments Account

for the year ending 31.3.2002Dr. Cr.

Expenditure Amount (Rs.) Income Amount (Rs.)

Balance c/d – Bank 25,000

Subscriptions2001 1,5002002 10,0002003 500 12,000

Donations 2,000Hall rent 300Interest on bank 450depositsEntrance fees 1,000

40,750

Purchase of furniture (1.4.88) 5,000Salaries 2,000Telephone expenses 300Electricity charges 600Postage and Stationery 150Purchase of books 2,500Entertainment expenses 900Purchase of 5% Government 8,000papers (1.7.88)Miscellaneous expenses 600Balance c/d 300Cash 20,400Bank

40,750

The following additional information is available:

(i) salaries outstanding – Rs 1500;(ii) entertainment expenses outstanding – Rs 500;(iii) bank interest receivable – Rs 150;(iv) subscriptions accrued – Rs 400;(v) 50 per cent of entrance fees is to be capitalised;(vi) furniture is to be depreciated at 10 per cent per annum.

Nagi’s ClubIncome and Expenditure Account

for the year ending 31.3.2002Dr. Cr.

Expenditure Amount (Rs.) Income Amount (Rs.)

Salaries paid 2,000Add: Outstanding 1,500 3,500 Subscriptions 10,400Telephone expenses 300 Donation 2,000

Entrance Fees (50% of 500Electricity charges 600 Rs.1,000)Postage and stationery 150 Bank interest 600Entertainment expenses 1,400 Interest on investment 200Miscellaneous expenses 600 Hall rent 300Depreciation on furniture 375Excess of Income over 7,075Expenditure transferred tothe Capital Fund

14,000 14,000

Illustration 9From the undermentioned Receipts andPayments Account for the year ending 31st

March 2002 of Nagi’s Club, prepare anIncome and Expenditure Account for thesame period:

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Rs.Notes(1) Income from subscriptions for 2002

Subscriptions received for 2002 10,000Add: Accrued Outstanding subscriptions 400

10,400(2) Donations are not for any specific purpose and are,

therefore, treated as revenue income

(3) Income from bank interest for 2002Bank interest received 450Add: Interest receivable 150

600(4) Interest receivable from investments for 2002

5 6–––– × 8000 × –––– = Rs. 200 200100 12

(5) Entertainment expenses for 2002:Entertainment expenses paid 900Add: Outstanding amount 500

1400(6) Depreciation on furniture for 2002

10 9–––– × 5000 × –––– = Rs. 375 375100 12

8.5 Balance Sheet for Not-for-Profit Organization

The proforma Balance Sheet of a Not-for-Profit organization is given below:

Balance Sheet of (Name) of Not-for-Profit Organisation as at (Date on which it is prepared)

Liabilities Amount Assets Amount

AssetsLast balance b/fAdd purchase in current yearLess book value of assets soldLess depreciationClosing balance –––––––Stock of consumable itemsClosing stock as given orLast balance b/fAdd purchases in current yearLess value actually consume incurrent year. Closing balance –––––––Cash/bank saving A/c

Capital FundLast balance b/fAdd capitalized incomesof current yeara) General Donationsb) Entrance feec) Legaciesd) Life membership fee etc.Special Fund Donation –––––––Last balance b/fAdd a) receipts for theitems during the current yearsb) income arising from fund.Less expenses out of fund/

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 373

Illustration 10Good luck sports club has 2000 members. Theannual subscriptions per member is Rs.50/-during the year, 2001 only 1900 members paidthe subscriptions for the current year. On1.1.2001, the subscriptions in arrears were from50 members out of which 30members cleared

SolutionGood Luck Sports Club,

Balance Sheet (Memorandum)of as on 31.12.2000.

Liabilities Amount Assets AmountRs. Rs.

Advance 1,250 Outstanding 2,500subscriptions subscriptions

Illustration 11The receipt and payment account of RoyalGym shows a payment of Rs.25,000/-towards salary for the year, 2001 ended31.3.2001. In the records of the Royal Gymindicate the following details:

31.3.2000 31.3.2001

Rs. Rs.Outstanding Salary 3,000 2,700Prepaid Salary 4,000 1,500

donationCreditors for purchase –––––––Bank overdraftOutstanding expensesLast balance b/fLess paid in current yearAdd o/s for current year –––––––Income received in advanceIncome and Expenditure A/cLast balance (Cr) b/fAdd surplusLess deficit if any –––––––

Fixed deposit accountAccrued incomes –––––––Last balance b/fLess received in current yearAdd accrued for current yearPrepaid expenses –––––––

their arrears. 25 members paid the subscrip-tions in advance in the year 2000 and30members paid the subscriptions in advanceduring the year, 2001. Show how thesubscriptions outstanding will be shown in thebalance sheet as on 31.12.2000 and 31.12.2001respectively.

Good Luck Sports Club,Memorandum Balance Sheet

of as on 31.12.2000.

Liabilities Amount Assets AmountRs. Rs.

Advance 1,500 Outstandingsubscriptions subscriptions

Year, 2000 :1,000Year,2001:3,750 4,750

Pass the necessary adjustment journalentries and find out the amount ofsalary which will be debited to theincome and expenditure account ended31.3.2001, also indicate on which sideof the balance sheets as on 31.3.2000and 31.3.2001 respectively these itemwill appear.

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Royal GymJournal

Date Particulars L.F. Debit CreditAmount Amount

2001 Rs. Rs.

March 31 Salary a/c Dr. 25,000 Cash a/c 25,000(salary paid during the year ended 31.3.2001)

March 31 Outstanding salary a/c Dr. 3,000 Salary a/c 3,000(salary for the year ended 31.3.2000paid during the current year)

March 31 Salary a/c Dr. 2,700 Outstanding Salary a/c 2,700(outstanding salary for the current year ended31.3.2001 recorded)

March 31 Salary a/c Dr. 4,000 Prepaid salary a/c 4,000(salary paid in advance during the year ended31.3.2000 transferred to salary account)

March 31 Prepaid salary a/c Dr. 1,500 Salary a/c 1,500(advance salary paid during theyear ended 31.3.2001)

March 31 Income and Expenditure a/c Dr. 27,200 Salary a/c 27,200(Total salary for the current year ended31.3.2001 transferred to Income andExpenditure account)

Dr. Salary Account Cr.

Date Particulars Amount Date Particulars Amount2001 Rs. Rs.

March 31 Cash 25,000 2001 Salary 3,000March 31 outstanding

March 31 Prepaid Salary 4,000 March 31 Prepaid Salary 1,500

March 31 Outstanding 2,700 Income andsalary Expenditure A/c 27,200

31,700 31,700

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 375

Salaries outstanding are liabilitiesand prepaid salaries are assets,therefore, outstanding salary Rs 3000as on 31.3.2000 will be shown on theliabilities side of the balance sheet ason 31.3.2000 and the outstanding salaryof Rs 2,700 as on 31.3.2001 will beshown on the liabilities side of the

balance sheet as on 31.3.2001. Prepaidsalary 4,000 for the year-ended31.3.2000 will be shown. On the assetside of the balance sheet as on 31.3.2000and the prepaid salary Rs 1,500 for theyear ended 31.3.2001 will be shown onthe asset side of the balance sheet ason 31.3.2001.

Dr. Outstanding Salary Account Cr.

Date Particulars Amount Date Particulars Amount2001 Rs. 2001 Rs.

March 31 Salary 3,000 March 31 Balance b/f 3,000

March 31 Balance c/f 2,700 March 31 Salary 2,700

5,700 5,700

Balance b/f 2,700

Dr. Prepaid Salary Account Cr.

Date Particulars Amount Date Particulars Amount2001 Rs. 2001 Rs.

March 31 Balance b/f 4,000 March 31 Salary 4,000

March 31 Salary 1,500 Balance c/f 1,500

5,500 5,500

April 1 Balance b/f 1,500

TERMS INTRODUCED IN THIS CHAPTER

● Entity● Non-profit seeking entity● Receipt and Payment Account● Income and Expenditure Account● Surplus● Deficit● Entrance Fees

● Subscriptions

● Donations and Legacies

● Subscription in arrears or accruedsubscription

● Subscription paid in advance

● Accumulated/Capital/General Fund

● Special Funds

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SUMMARY WITH REFERENCE TOLEARNING OBJECTIVES

1. Not-for-Profit Organization is an entity to carry on activities of social and welfarenature and whose primary purpose is not profit-making.

2. Fund Accounting is a system of accounting that combines fiscal and accounting entity.

3. Appropriation is the process of authorizing the future payments from budgeted income.

4. Budget is the estimate of future income and expenditures and spells out fiscal andaccounting entities for controlling and reporting purposes.

5. Accounting entity is the budget head of expenditure and income.

6. General/Unrestricted Fund is the revenue income pooled in a fund from various sourcessuch as membership fees, gifts, contributions, grants, interest and dividend which canbe used for any activity.

7. Current Restricted Fund is grant, gift, contribution, donation, received to carry onspecific activities as specified in the agreement by the donor.

8. Endowment Fund is the contributions that require the entity to invest and maintainprincipal in perpetuity and only interest income to be used.

9. Plant/Assets Fund is created out of specific grants or general funds for acquisition ofassets such as land, building, machinery, furniture etc.

10. Debt Fund is meant for raising loan/debt/borrowings of long term nature.

11. Difference between profit–seeking and Not-for-profit seeking entities.

Profit-seeking entities undertake activities such as manufacturing, trading, bankingand insurance to bring financial gain to the owners.

Not-for-profit-seeking entities exist to provide services to the members or to the societyat large. Such entities might sometimes carry on trading activities but the profitsarising there from are used to further the service objectives.

12. Appreciation of the need for separate accounting treatment for non-profit organizations.

Since Not-for-profit-seeking entities are guided primarily by a service motive, thedecisions made by their managers are different from those made by their counterpartsin profit-seeking entities. Differences in the nature of decisions implies that thefinancial information on which they are based, must also be different in content andpresentation.

13. Explanation of the nature of the principal financial statements prepared by Not-for-profit organizations.

Not-for-profit organizations that maintain accounts based on the double-entry systemof accounting, generally prepare three principal statements to fulfill their informationneeds. These include Receipts and Payments Account, and Income and ExpenditureAccount and a Balance Sheet.

The Receipts and Payments Accounts is a summarized cashbook, which records allcash receipts and cash payments without distinguishing between capital and revenue

1

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 377

items, and between items relating to the current year and those relating to previousor future years.

The Income and Expenditure Account is an income statement which is prepared toascertain the excess of revenue income over revenue expenditure or vice versa, for aparticular accounting year, as a result of the entity’s overall activities. Although it isconsidered to be a substitute for the Profit and Loss Account of a profit-seeking entity,there are certain conceptual differences between the two statements, which have beendiscussed at length in the chapter.

The Balance Sheet is prepared at the end of the entity’s accounting year to depict thefinancial position on that date. It includes the Capital fund or Accumulated Fund,special purpose funds, and current liabilities on the left had or liabilities side, andfixed assets and current assets on the right hand or assets side.

14. Difference between the Receipts and Payments Account and the Income andExpenditure Account

Many differences exist between the Receipts and Payments Account and the Incomeand Expenditure Account, which are evident from the nature and purpose of twostatements.

While the former records both capital and revenue receipts and payments relating toany accounting year, the latter records only revenue items relating to the currentaccounting year. Non-cash expenses such as depreciation on fixed assets andoutstanding incomes and expenses are shown in the latter but omitted in the former.The Receipts and Payments Account has an opening balance while the Income andExpenditure Account does not. The closing balance of the former account representscash and bank balances on the closing date while in the latter account it indicatessurplus or deficit from the activities of the enterprise.

15. Conversion of a Receipts and Payments Account into an Income and ExpenditureAccount.

This essentially involves five steps namely (i) adjusting the revenue receipts on thedebit side to include outstanding incomes and incomes relating to the currentyear received earlier and to exclude amounts received in arrears or in advance; (ii)adjusting revenue payments on the credit side; (iii) identifying and showing non-cash expenses and losses on the debit side of the Income and Expenditure Account(iv) computing and showing profits/losses from trading and/or social activities onthe credit/debit side of the Income and Expenditure Account; and (v) ascertainingthe surplus or deficit as the closing balance of the Income and ExpenditureAccount.

16. Government Accounts for Not-for-Profit entities are maintained as per the accountingrules in force from time-to-time by Government of India. All accounts are maintainedin Consolidated Fund of India which has Revenue and Capital sub-sections both forreceipts and expenditures. Part II of the Account relates to Contingency Fund andPart III Public Account for Loans, Advances, borrowings and Public Debt. Allaccounting heads are classified into Major, Sub-major, Minor, Sub-minor,Detailed Head and Objects. All accounts are codified by following a four-digit codingsystem.

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EXERCISES

Objective type Questions

1. Fill in the blanks:

a. Fund Accounting is used by ___________________organizations.

b. Restricted Fund can be used for _____________________purpose only.

c. Endowment Fund is ______________________ fund.

d. General fund can be transferred to ___________________fund.

e. Appropriation is a budgetary head with a ________________ balance.

f. When expenditures are paid out of Current Restricted Fund, cash/bankis credited and _____________ is debited.

g. When cash is transferred, General Fund is debited, and ______is credited.

h. When endowment fund is used for specific purpose, the expense is

charged to _________ account.

i. A Receipts and Payments Account makes no distinction between

____________ and ____________ receipts and payments account.

j. The closing balance of the Receipts and Payments Account represents____________.

k. Expenditure is shown on the __________ side of the Income and ExpenditureAccount.

l. Amount received in respect of _________ or ___________ subscriptions shouldbe eliminated while preparing the Income and Expenditure Account.m._____________ represents the excess of assets over liabilities.

2. Multiple choice questions:

(a) Not-for-Profit Organization is

(i) Profit seeking in nature.

(ii) Not profit seeking but can earn surplus.

(iii) Earning money.

(iv) None of the above.

(b) Fixed Assets Fund is

(i) Endowment Fund.

(ii) Current Restricted Fund.

(iii) Current Unrestricted Fund.

(iv) Meant for accounting of assets and depreciation.

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 379

(c) Loan fund is for

(i) Paying the loan.

(ii) Raising the loan.

(iii) Payment of interest.

(iv) Loan transactions

3. Select one from the possible alternatives to make the following statements correct:

(i) Subscription received in advance during the accounting year is

(a) an income

(b) an expense;

(c) An asset;

(d) A liability.

(ii) Income and Expenditure Account shows a balance of:

(a) Cash in hand;

(b) Capital account;

(c) Net profit;

(d) Excess of revenue over expenditure or vice versa.

(iii) Donations received for special purposes should be:

(a) Credited to a separate fund account and shown in the Balance Sheet

(b) Treated as revenue;

(c) Treated as revenue unless the amount is large;

(d) Not recorded at all.

(iv) Subscription in arrears for the current year are shown:

(a) On the credit side of the income and expenditure account and the assetsside of a Balance Sheet;

(b) Debit side of the Profit and Loss Account and the liabilities side of a BalanceSheet;

(c) Only on the assets side of a Balance Sheet.

(v) The Receipts and Payments Account generally shows:

(a) A credit balance;

(b) Cash/Bank balance;

(c) Capital fund or accumulated fund;

(d) Surplus or deficit.

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4. State whether the following statements are true or false, giving reasons.

(a) A public library is a not-for-profit seeking accounting entity;

(b) A not-for-profit organization never undertakes trading activities;

(c) Outstanding expenses need not be adjusted, its accounts are kept on accrual basis;

(d) Entrance fee to a club is shown as a payment;

(e) Only capital expenses are shown in the Receipts and Payments Account.

(f) Donations received for construction of an auditorium by a club is to becredited to a separated building fund account.

5. Choose the correct answer from the alternatives given below:

(a) Second hand furniture worth Rs. 5,000 was purchased. It was repaired for Rs. 500and installed by to whom Rs. 100 was paid as wages. Thefurniture should be capitalized for:

(i) Rs. 5,000

(ii) Rs. 5,500

(iii Rs. 5,600

(b) Subscription received in cash during the year amounted to Rs. 4,000; the amountreceived in advance for the next year is Rs. 300; the amount outstanding for the currentyear is Rs. 200 and the amount received last year for the current year was Rs. 400. Theamount to the credited to the Income and Expenditure Account is:

(i) Rs. 4,000

(ii) Rs. 4,300

(iii) Rs. 4,200

(iv) Rs. 4,600

(c) At the beginning of the accounting year, a club has Rs. 18,000 assets; Rs. 5,000 liabilities;Rs. 1,800 debit balance of the Income and Expenditure Account. The opening CapitalFund is:

(i) Rs. 18,000

(ii) Rs. 11,200

(iii) Rs. 14,800

(iv) Rs. 24,800

(d) The opening balance of the Prize Fund of a sports club was Rs. 5,400. Further donationstowards this fund received during the accounting year amounted to Rs. 4,800. Duringthe year, Rs. 3,500 was spent on prizes and Rs. 400 was received as interest oninvestment of the Prize Fund. The closing balance of the Prize Fund is:

(i) Rs. 1,900

(ii) Rs. 10,200

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 381

(iii) Rs. 10,600

(iv) Rs. 7,100

(e) Salaries payable for the current year amount to Rs. 7,500 at the end of the year,outstanding salaries amount to Rs. 300. Salaries paid in advance last year pertainingto the current year amounted Rs. 500. Prepaid salaries for the next year amount to Rs.250. Total amount paid for salaries during the year is:

(i) Rs. 7,550

(ii) Rs. 7,500

(iii) Rs. 6,950

(iv) Rs. 6,550

Short Answer Questions

6. What is Fund Accounting?

7. What is Consolidated Fund of India?

8. Explain Endowment Fund.

9. What are encumbrances?

10. Define Public Fund Account.

11. Explain inter-fund transfer.

Long Answer Questions

12. What is an accounting entity? How are such entities classified?

13. The Receipts and Payments Account is a summarized cashbook explains

14. the statement.

15. The Income and Expenditure Account is another name for the Profit and

16. Loss Account. Do you agree with this statement? Given reasons.

17. Discuss the structure and codification of Accounts of Government of

18. India?

19. Enumerate the points of difference between Receipts and Payments

20. Account and an Income and Expenditure Account.

21. (a) What steps would you take to convert a Receipts and Payments

Account into an Income and Expenditure Account?

(b) List the steps to be followed to transform an Income and ExpenditureAccount into a Receipts and Payments Account.

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18. Explain the accounting treatment of the following items:

(a) Life membership subscription(b) Entrance fees

(c) Purchase of sports goods by a sports club(d) Donations received for the construction of a building by a public library

(e) Annual subscriptions received in arrears.

19. Explain briefly the following

(a) Not-profit seeking entity.

(b) Accumulated or capital fund

(c) Membership subscriptions.

20. What is Fund Accounting? What are the objectives of Fund Accounting?21. Explain different type of funds used in Fund Accounting.22. Explain the rationale of Fund Accounting and state the Accounting treatment of

different type of funds.

Problems23. Record the following transactions in the books of Jindal Public School.

Particulars Rs.

Grant received from Government 30,00,000

Fee collected from students 10,00,000

Building Fund raised 30,00,000

Salaries and allowances paid from General Fund 30,00,000Student Welfare Activities 10,000

Gold Medals and Prizes Fund 5,00,000

Interest received on Gold Medal Fund 25,000

Expenditure on Medals and Prizes 20,000

You are required to prepare the appropriate fund accounts and show them in theBalance Sheet.

24. From the under mentioned particulars relating to Life-Line Clinic, prepare thesubscriptions account for the year ending 31st march 2002.

(a) There are 200 members and the subscription payable is Rs 50 each p.a.(b) Subscription received during the year 20002 is as follows:

For 2001 Rs. 300For 2002 Rs. 9,300

For 2003 Rs. 400(c) Subscriptions outstanding at the end of

2001 Rs. 400

2002 Rs. 500

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 383

Salaries and wages 1,350Printing and stationary 320Purchase of sports 1,610equipmentPurchase of refreshments 1,350Rent of grounds 1,200Other expenses 200Balance c/f 1,170

7,300

Receipt and Payment Account for the year ending 31.3.2002

Dr. Cr.

Receipts Amount Payments AmountRs. Rs.

Balance b/f 340Entrance fees 1,000Subscriptions 5,450Sale of Refreshments 1,410

7,3000

(d) Subscription received in advance for 2002 in 2001 was Rs. 300

25. The following particulars of Hygiene Club have been provided and you are requiredto prepare:

(a) Salaries and Wages Account(b) Locker Rent Account

Salaries and Wages payable during the year 2002 amounted to Rs. 9,000. Salariesoutstanding on 1.1.2002 were Rs. 300 and that on 31.12.2002 was Rs. 550. Rs. 600 waspaid in 2002 as advance wages for 2003.

Locker Rent received during the year amounted to Rs. 3,200. Rent outstanding on1.1.2002 was Rs. 160 and that on 31.3.2002 was Rs. 230.

26. The Receipts and Payments Account of Aurobindo Sport Club is given below:

The following additional information has been provided.

(a) The stock of stationary on 1.1.2002 was Rs. 25 and at the end of the year it was Rs. 45.

(b) Outstanding subscription on 31.12.2002 was Rs. 230

Outstanding subscription on 1.1.2002 was Rs. 250Subscription paid in advance in 2001 for 2002 was Rs. 180

(c) The depreciation charge on sports equipment for the year was Rs. 200. You are requiredto prepare an Income and Expenditure Account for the year ending 31.12.2002.

27. From the following Receipt and Payment Account and additional information relatingto Khalid Social Club, prepare the Income and Expenditure Account for the year ending31.3.2002 and a Balance Sheet as on the date.(a) On 1.4.2001 the club owned sports equipment worth Rs. 1,200.

subscription in arrears on that date was Rs. 350.(b) Sports equipment is depreciated @ 10% p.a. on the reducing balance

basis.(c) On 31.3.2002 locker rent in arrears was Rs. 50, outstanding rent was

Rs. 120 and Rs. 250 was due for subscriptions.

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28. From the following Income and Expenditure Account and Balance Sheet of ClaytonTennis Club, Prepare a Receipts and Payments Account for the year ending 31.12.2002.

Khalid Social ClubReceipt and Payment Account for the year ending 31.3.2002

Dr. Cr.

Receipts Amount Payments AmountRs. Rs.

Balance b/f 1,650 Wages 450Entrance fees 1,300 Printting, postage and stationery 240Subscriptions for: Charity show expenses 1,0002000-2001 300 Investment in 10% Government 4,0002001-2002 2,500 secyrutues (1.7.2002)2002-2003 200 3,000 Electricity 370Locker Rent 150 Periodicals & Newpapeers 240Interest on investment 200 Sports Expenses 660Charity show receipts 1,400 Rent 600Sale of old newspapers 160 Blance c/f 300and periodicals

7,860 7,860

Clayton Tennis ClubIncome and Expenditure Account for the year ending 31.12.2002

Expenditure Amount Income AmountRs. Rs.

Remuneration to coach 12,000 Subscription 1,00,000Salaries & Wages 24,000 Surplus from cafeteriaRent 18,000 Receipts 20,000Secretary’s honorarium 15,000 Expenses 16,000 4,000Depreciation on sport equipment 6,000 Bank interest 2,000Miscellaneous expenses Repairs 9,000 Club hall rent 14,000Surplus 11,000

25,000

1,20,000 1,20,000

Clayton Tennis ClubBalance Sheet as at ———-

2001 Liabilities 2002 2001 Assets 2002

Capital fund 44,000 27,000 Sports 21,000Add: Surplus 25,000 EquipmentEntrance fees 10,000 6,000 Outstanding 10,000

44,000 79,000 subscription 3,000 Subscription in advance 2,000 Accrued rent 4,000 2,000 Outstanding liabilities for 3,000 10,000 Fixed deposit 40,000

Salaries 3,000 3,500 Cash at bank 5,750Repairs 5,000 Cash in hand 7.500

2,500 Rent 1,250

51,500 88,250 51,500 88,250

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29. The following information relates to Himalayan Maintaining Club

Income and Expenditure Account for the year ending 31.3.2002

Expenditure Amount Income AmountRs. Rs.

Salaries & wages 12,000 Admission fees 15,000Remuneration to trainers 15,600 Subscriptions 30,000General office expenses 16,400 Rent receivable 4,800Printing and stationary 3,200 Hire charges of equipment 3,300Deprecation on: Surplus from annual dinner:Building 1,500 Sale of tickets 7,200Furniture 500 Less expenses 5,900 1,300Equipment 4,000 6,000Surplus 1,200

54,400 54,400

Receipt and Payment Account for the year ended 31.3.2002

Receipts Amount Payments AmountRs. Rs.

Balance b/f 6,000 Salaries and wages (including 11,600Admission fees for: Rs. 600 for 2001-2002)2001-2002 4,0002002-2003 12,600 16,600 Remuneration to trainers 15,000

Purchase of equipment 16,000Subscription for: Printing and stationary 3,2002001-2002 3,600 General officer expenses 15,7002002-2003 27,400 (including prepaid insurance2003-2003 1,800 32,800 Rs. 200 and electric bill forRent 4,400 2000-2001 Rs. 300)Hire charges of equipment 3,000 Annual dinner 5,900Sale of annual dinner tickets 7,200 Balance c/f 2,600

70,000 70,000

30. From the following Trial Balance for the year ended 31.3.2002, and other relevantinformation of Apeejay School, prepare Income and Expenditure Account and theBalance Sheet.

Debit Amount Credit AmountRs. Rs.

School furniture 16,000 Creditor for supplies 4,000Science laboratory 40,000 School fees 1,50,000School library 50,000 Entrance fees 3,000School building 2,00,000 Hall rent 5,000Securities 1,00,000 Miscellaneous Receipts 1,500

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31. The governing board of Soclean Foundation decides to raise funds to build anendowment. The governing board of Soclean solicits gifts/contributions. The terms ofgifts specify that gifts will be invested and the return from the investment will be usedfor tree plantation in the city. The foundations furnishes to you the followinginformation:

ParticularsRs.Tree-guards received 2,00,000Contributions 3,00,000Opening balance of Endowment Fund 4,00,000Investment in Government Securities 4,00,000Interest received during the year 40,000Tree saplings purchased 10,000Wages and salaries 15,000Watering charges 2,000Gifts made to other Voluntary Organisations 1,000Value of investment at the end of the year 7,00,000

From the information given above prepare a Statement of Changes in EndowmentFund of Soclean Foundation as it would be shown in the financial statements for theyear ended on 31st March, 2002.

ANSWERS

1. Objective Type Questions(a) not-for-profit(b) Specific(c) Journal

Staff salaries 1,60,000 Grant received 30,000Office stationary 10,000 General Fund 3,60,000General school expenses 6,000 Donation Received for 40,000Annual function expenses 2,000 computeCash in hand 500 Sale of old school furniture 7,000Cash at bank 16,000

6,00,500 6,00,500

Additional Information:Fees still receivable Rs. 6,000Salaries still payable Rs.14,000On 1 Oct 2001 not yet recordedFurniture sold carries a book value of Rs.10,000Depreciation charged:School furniture 10% p.a.Science laboratory 20% p.a.School library 10% p.a.

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STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 387

(d) Any other(e) Debit(f) Restricted Fund(g) Endowment Fund(h) Cash(i) Endowment Fund(j) Cash/Bank Balance(k) Debit(l) Outstanding/Prepaid(m) Capital Fund/Equity Fund/Corpus Fund

2.(a) (ii)(b) (iv)(c) (iv)

3.(i) a(ii) d(iii) a(iv) a(v) b

4.(a) True, because it exists to serve the needs of the reading public.(b) False, a not-profit organization may undertake trading activities to further its

service objectives(c) False, outstanding expenses relate to the current accounting year and must be

added to the cash expenses.(d) False, entrance or admission fees represent amounts which members of not-for-

profit organizations are required to pay at the time of their admission. It is thusan item of receipt from the viewpoint of the organizations.

(e) False, both capital and revenue expenditures are shown in the Receipts andPayments Account if they are received in cash.

(f) True, as the donation is received for a special purpose and may be utilized for theconstruction of the auditorium only, it should be created to Building Fund Accountand not to the Income and Expenditure Account.

5.(a) (iii)(b) (ii)(c) (iii)(d) (iv)(e) (ii)

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25. Subscriptions credited to the Income and Expenditure Account Rs. 10,000. closingbalance of subscription account Rs. 400 (Credit) and Rs. 500 (Debit)

26. (a) Salaries and Wages paid during the year- Rs. 9,410(b) Locker rent credited to the Income and Expenditure Account Rs. 3,270

27. Excess of income and expenditure Rs. 2,310 Total of Balance Sheet Rs. 5,830 (openingcapital fund Rs. 3,200; subscription for 2001-2002 Rs. 2,750; subscription outstandingon 31.3.2002 Rs. 300)

28. Total of the Receipts and Payments Account Rs. 1,45,500 (subscription received in2002 Rs. 95,000; rent received Rs. 19,250, fixed deposits during the year Rs. 30,000.

29. Closing cash in hand and at bank Rs. 11,510, total of Balance Sheet Rs. 85,260 (openingcapital fund Rs. 80,800)

30. Total of opening Balance Sheet Rs. 68,600. Total of closing Balance Sheet Rs. 74,100(opening capital fund Rs. 68,300)

31. Balance sheet 4,33,900, Deficit 4,100