UNIT III

Accounts of Non-Trading Institutions

3.1 Accounting for Non-Profit Organisations- Income and expenditure accounts, Receipts and payment accounts

Meaning, Characteristics and Accounting of non-profits

A non-profit organization is an organization established for the purpose of social welfare and the promotion of social arts and culture. These are usually founded as charities with a motive for service. The trustee manages these organizations. Members of the organization elect a trustee. Non-profits raise funds from their members and the general public to achieve their goals.

The main motivation for these organizations is to provide services. But they may eventually benefit. In general, these organizations do not manufacture, buy, sell, or provide services for goods. Therefore, they do not need to prepare trading and P & L A / c. They credit the funds they receive to the Capital Fund or the General Fund A / c.

Accounting for non-profit organizations

As we know, non-profits do not trade goods or provide profitable services. However, they also need to keep good records of income, expenses, assets, and liabilities. Their main sources of income are donations, subscriptions and grants. Therefore, most of their transactions are done through cash or bank accounts.

Appropriate books, firstly because members and contributors are accountable, and secondly because the law requires the government to maintain adequate books so that they can manage grants appropriately. Must be maintained. Proper accounting also reduces the risk of fraud and embezzlement. In addition to your ledger and cash book, you also need to maintain an inventory ledger. The stock ledger also maintains a complete record of all fixed assets and consumables.

In non-profit accounting, instead of maintaining Capital A / c, these organizations maintain Capital Fund or General Fund A / c. They deposit surpluses, lifetime membership fees, donations, heritage, etc. into this account.

Non-profits are also required to prepare final accounts or financial statements at the end of the fiscal year in accordance with accounting principles. The final account for these organizations consists of:

Receipts and payments A / c: An overview of cash and bank transactions. This will help you create a balance sheet A / c and a balance sheet. You must also submit it to the Social Registration Bureau along with your balance sheet A / c and balance sheet.

Balance A / c: Similar to P & L A / c, check for any surplus or deficiency.

Balance Sheet: Create in the same way as the balance sheet for profit motivation concerns.

Example

Ashraya is an organization working to improve and improve the welfare of street children. It sponsors their food and clothing. We also provide basic education to children. Its sources of income are donations, subscriptions and government grants. Identify the type of organization that states the reason. Also mention the accounting procedures you should follow.

Solution:

Ashraya is a non-profit organization. It works for the well-being of children and society. The sources of income are donations, grants and subscriptions from members. Therefore, it is clear that it works for service purposes, not for commercial purposes.

However, non-profits also need to maintain proper accounting books. Financial statements help to win donations from current and future contributors. Financial statements also help you receive grants from various authorities.

Below are the financial statements they prepare at the end of the year.

1. Receipts and payments A / c
2. Balance A / c
3. Balance sheet

Characteristics or characteristics of non-profit organizations

Entity: There is a separate legal entity promoted by an individual.

Purpose: To promote cultural, educational, religious and professional purposes and to serve the general public.

Ownership: Established as a charity or trust. Therefore, it is owned by an individual or a group of individuals.

Financial Statements: Every year, we prepare financial statements that include balance sheets, balance sheets, and balance sheets.

Funds: The members and donors will provide the necessary items for operation as admission fees, membership fees, subscription fees, and donations. It is supplemented by surplus from the business.

Receipts and payment accounts: An overview of cash and bank transactions over a specific period. Created from a cashbook at the end of the fiscal year. All cash receipts are entered on the debit side and all cash payments are entered on the credit side.

Feature:

1. An overview of cash and bank transactions
2. You can infer that receipt and payment accounts are similar to cash accounts
3. No distinction is made between capital and revenue items, and all non-cash items are excluded.
4. Records all cash and banking transactions, whether related to the current period, the previous period, or the next period.

Format of Receipts and payment Account

Features:

1. This is a revenue account created to determine a surplus or deficit at the end of the accounting period.
2. Period costs and revenues are collated to determine a deficit or surplus.
3. Both cash and non-cash items are considered.
4. The surplus of this account will not be distributed to the members, but will be added to the capital stock.
5. Excess income for spending is in the black and excess expenditure for income is in the red.

Format of Income and Expenditure

Example 1:

Create a balance account for the same period from the following balance accounts for the year ending March 31, 2017 at People's Club.

Receipt and Payment Account

 The following information is available:

1. Unpaid salary
2. Unpaid entertainment expenses
3. Bank interest income
4. Incurred subscription
5. Capitalize 50% of admission
6. Furniture is depreciated at an annual rate of 10%

Solution:

Income and Expenditure A/C

Balance sheet overview

Balance preparation for non-trade or non-profit concerns is the same as balance sheet preparation for trading companies. You have all the liabilities and assets as of the date the organization created the balance sheet. Excess assets that exceed liabilities are called capital funds or general funds. Creating a balance sheet for non-profits.

Non-profit Balance Sheet: General Financial Resources

For non-profits, capital is accumulated during the year along with receipts and receipts of capital capitalized by further increasing the surplus or reducing the deficit. At the beginning of non-trading concerns, there is no formal capital fund. In such cases, the surplus earned that year constitutes a year-end capital fund.

Non-profit balance sheets are created in the same way as companies do. Organizational assets are recorded on the right and liabilities are recorded on the left. Non-profits do not use the term capital. Instead, general or cumulative funds are displayed on the balance sheet.

NPOs may also create special funds such as prizes and match funds. Its purpose is to meet the costs associated with the purpose for which it was created. The amount of income invested from these funds is generated only in the funds, not in the balance account.

Accounting for general financial resources and preparation of balance sheet

1. Creating a balance sheet begins with general financial resources. You need to add each surplus or deficit to the amount.
2. In addition, add a lifetime membership fee or heritage at this stage.
3. Place all fixed assets on the asset side of the balance sheet.
4. Introducing the amount paid in advance and the unpaid amount on the asset and liability side.
5. Post the closing balances of assets and liabilities to each side of the balance sheet.
6. To calculate the amount of a fund, subtract the value of total liabilities from the value of assets.

Let's understand the format of the non-profit balance sheet from the following figure, which we will consider in the below question.

Example 2

How do you view your subscription amount on your non-profit balance sheet from the following Receipt and Payment accounts and additional information?

Additional Information:

1. Unpaid subscriptions from the previous year Rs.2000
2. Unpaid subscriptions for this year Rs.1500
3. Subscriptions are Rs received in advance at the end of the previous year. 1000
4. Subscription is Rs received in advance at the end of this year. 1200

Solution:

Start of Balance Sheet

Closing the Balance Sheet

Example 3

Calculate sports material debited to Income & Expenditure a / c. Yearly. It ended on March 31, 2007, based on the following information. The amount paid for sports material during the year. It was Rs.19,000

1. Rs.20300            
2. Rs.20700
3. Rs.20000
4. Rs.20500

Solution:

Option 2. Rs.20700

Description: Amount debited to income and expenditure as consumption of sports materials = payment amount + starting inventory-ending inventory-starting creditor + ending creditor. Amount debited to income and expenses = 19000 + 7500-6400-2000 + 2600 = Rs. 20,700

Example 4

The non-profit has received Rs.10,000 as an admission fee for new members. If 20% of the fee needs to be capitalized, what is the amount of the fee that needs to be displayed in the balance account?

1. Rs.9000
2. Rs.8000
3. Rs.2000
4. Rs.5000

Solution:

Option 2 Rs.8000

Description: These are the fees collected from all members upon enrolment in membership. Once you become a member of society or a club, you will only be paid once by new entrants. It is treated in two ways: -when capitalized, it appears on the debt side's balance sheet. -If it is considered a receipt for income, it will be displayed in the income and expenditure account on the income side. Therefore, Rs. 20% means Rs. 2000 (10,000 * 20%) appears on the balance sheet on the debt side and the balance of Rs. 8000 is displayed in the income and expenditure account on the income side.

Example 5:

Prize Rs.10000, Prize Investment Interest Rs.1000, Prize Payment Rs.2000, Prize Investment Rs.8000. What will happen to that treatment?

1. Rs.20000, Rs on the debt side. 8000 on the asset side
2. Rs.1000, Rs on the responsible side. 8000 on the asset side
3. Responsible side Rs.1700, Rs. 8000 on the asset side
4. Rs.9000, Rs on the debt side. 8000 on the asset side

Solution:

Option 4. Rs.9000, Rs on the debt side. 8000 on the asset side

Description: The balance sheet calculation looks like this: -Prize-9000 Addition: -Interest 1000 deduction for prize investment: -Prize payment 2000 Debt side amount = Rupee. 9000 prize investment Rs. 8000 is displayed on the asset side.

Example 6

Bell, a non-governmental non-profit organization, received special pledged funding from a donor to another non-governmental non-profit medical organization during its annual campaign. How does Bell need to record these funds?

1. Increased assets and increased profits
2. Increased assets and increased liabilities
3. Increased assets and increased deferred income.
4. Decrease in assets and decrease in funds balance.

Solution:

Option 2. Increased assets and increased liabilities

Description: Bell, a non-governmental NPO, is responsible for the funds for the annual campaign and is recorded on the balance sheet. And if the organization pledges this fund to another non-governmental NPO, it becomes a property of the Bernon government. Organisation recorded on the asset side of the balance sheet.

Example 7

From the information below, we will calculate the amount of stationery that will be posted to the Income and Expenditure account of the Cultural Association of India for the year ending March 31, 2018.

Stationery purchased in the year ended March 31, 2018 was Rs 75,000. Also, please present relevant items on the social balance sheet as of March 31, 2018.

Solution:

                                                   Stationery Account

                                         Balance sheet as of March 31, 2018

Example 8

From the information below, we will calculate the amount of the subscription that will be credited to the 2007-2008 balance account.

Solution:

Example 9

Find out the cost of drugs consumed in 2015-16 from the following information:

Solution:

Example 10

From the following receipt and payment accounts for the Cricket Club and the additional information provided, prepare the balance sheet for the year ending December 31, 2018 and the balance sheet for that date.

                                    Receipt and Payment Accounts

                                    Year ending December 31, 2018

Additional Information:

1. Unpaid salary is rupees. 1000.
2. The initial balance of the stock of stamps, stationery and cricket gods is Rs. 3210 each for 750 rupees. The same closing price is Rs. 900 and rupees. 2800 each.
3. Unpaid subscriptions for 2017 and 2018 are Rs. 6600 and Rs. 8000 each.

     Solution:                   

                            Cricket Club Income and Expenditure Account

                                       Year ended December 31, 2018

                                               Balance sheet

                                   As of December 31, 2018

Key takeaways:

1. Organizations and businesses need to evaluate the trade-offs of becoming a tax-exempt non-profit organization or for-profit business.
2. Non-profit organizations represent a variety of organizations, including places of worship, campus societies, public school foundation boards, chambers of commerce, and non-governmental organizations.
3. The hybrid business model, successfully used by large companies like Tesla, has both non-profit and commercial weapons.
4. Instead of incorporating the entire segment of the business as a nonprofit, another route is when the nonprofit and the nonprofit choose to work together.
5. Partnerships between brands and nonprofits can be mutually beneficial.
6. Many nonprofits have much in common with commercial organizations and operate their businesses using similar business tactics and management techniques.
7. All nonprofits must maintain compliance with state agencies that regulate their base charities.

3.2 Meaning & Definition of Single-Entry System

Single entry system of book-keeping is not a system at all. It means recording transactions not according to well defined rules but according to mere convenience. Under the Double Entry System, a transaction must be recorded with both the aspects. If there is debit, there must be a credit and vice-versa. It is not under the single-entry system. Debit and credit may be completed in transactions, while no record at all may be there in respect of a number of transactions. Most transactions are recorded only once without completed double entry. It is all a matter of convenience. Accounts are not maintained. While there is no hard and fast rule; usually only the cash account, bank (sometimes the pass book is treated as sufficient for this purpose) and personal account (that is, account of customers and creditors) are kept. Generally, there will be no accounts to show purchases, sales, assets, incomes and losses and expenses.

Disadvantages: This Single-Entry system has the following disadvantages:

1. Since there is no trail balance, there is no proof of accuracy.
2. Profit or losses cannot be ascertained properly because of lack of information about purchases, sales, expenses, etc.
3. Since accounts relating to assets (furniture, office equipment, etc.) are not maintained, there is no control over such assets. This may result in wastages and misappropriation.
4. The Balance Sheet (called Statement of Affairs here) can be prepared only with difficulty and that loo without sufficient accuracy.
5. Useful comparison for the guidance of management cannot be made because relevant information will generally be missing.

Joint stock companies cannot keep books on the Single Entry System under law, but sole proprietorships and partnerships may, if they so wish, adopt this system. But unless the firm is very small, it is not desirable to do so.

How to ascertain profit? Ascertainment of-profit or loss under this system is really simple. “Suppose I start a business on 1st January, 2002 with Rs. 20,000. On 31st December 2002 I find that may capital is Rs. 25,000 (for finding out capital see below). This surely means that I have made a profit of Rs. 5,000, the capital could not have grown otherwise. But suppose I brought an additional Rs. 4,000 as capital during the year. This explains the increases in capital to this extent. This brings down the profit to Rs. 1,000. One thing more I must have drawn some money for private use. Suppose the figure is Rs.500 per month or Rs. 6,000 for the year. Had this money not been drawn, the capital would have been Rs. 31,000 and the profit earned would have been Rs. 7,000. The formula to find out profit, therefore, is:

HOW TO ASCERTAIN CAPITAL?

Capital is really assets minus liabilities. Under the Single Entry System also, capital is ascertained in this manner. Statement of Affairs (not at all different from balance sheet) is prepared and assets and liabilities put on the proper sides. The difference between assets and liabilities is capital. Personal account and cash account are usually maintained and hence the amount of sundry debtors, cash balance, bank balance and sundry creditors will be readily available. The amount of other assets can be ascertained only by physical inspection.

 CONVERSION METHOD

This Method is to be used when the summary of cash transactions are given: -

Under conversion method, Trading & Profit & Loss Account & Balance sheet can be prepared by converting the single entry system in to Double entry system. 

For converting single entry system in to Double entry system the missing items are to be found out by preparing the relevant ledger Account as discussed from points 1.5 to 1.10.

 STEPS FOR CONVERSION INTO DOUBLE ENTRY

If the books are maintained on Single Entry basis, they can be converted into double entry basis but with good deal of effort. Assuming that accounts of cash, bank, customers and suppliers have been maintained, the following steps will be necessary:

1. Take the statement of affairs at the end of previous year. Open all accounts (except those already opened) with proper balances.
2. Go through the cash book (or cash and bank accounts). Excepting transaction, with customers and suppliers (these transactions must have been posted already) others should be posted to proper accounts. Cash sales will be on the debit side of the Cash Book.
3. Credit Sales plus Cash Sales give you total sales. Examination of the credit side of the Cash Book will also reveal wages, carnage inwards, etc., which will be debited to the Trading Account. Thus all information to prepare Trading Account becomes available and gross profit will be ascertained.
4. This is put on the credit side of the Profit and Loss Account. Credit side of the Cash Book reveals expenses. These expenses after proper adjustments (for expenses prepaid or outstanding) will be debited to the Profit and Loss A/c.
5. Debit side of the Cash Book will reveal income (such as sale of old newspapers.) These will be put on the credit side of the Profit and Loss A/c. The profit and Loss A/c should also be debited with any depreciation which has to be written off. Thus net profit or net loss can be ascertained. Thus will be transferred to the Capital Account.
6. Preparation of Balance Sheet is easy. The previous Statement of Affairs will reveal the various assets. The assets adjusted for depreciation and disposal (see debit side of Cash Book) and new acquisition (see credit side of the Cash Book) will be put in the Balance sheet at the end of the year. The balance for cash, debtors, stock and creditors will be given as at the end of the year. These will put down in the Balance Sheet.
7. Capital will be as per previous Statement of Affairs adjusted for net profit or net loss and drawings (see credit side of Cash Book).

Opening Balance sheet/Statement of Affairs: if not given (For Ascertaining Opening Capital)

Cash/Bank A/c: If agreed summary is not given. To ascertain the closing Balance of Cash/Bank)

Total Debtors Account: To ascertain either Credit Sales or Closing Balance or Opening Balance of Debtors or Cash received from Debtors.

*All the relevant figures will be given in the question except any one of the above

The following items will not affect Total Debtors Account: -

a)     Cash sales

b)    Reserve for discount on Debtors

c)     R.D.D

d)    Bad Debt previously written off but now recovered.

e)     Bills receivable Honoured

f)       Bills receivable Dishonoured

g)    Bill receivable endorsed

h)     Bills receivable sent to bank for collection

Total Creditors Account: To ascertain either Credit Purchases or Closing Balance or Opening Balance of Creditors or Cash paid to Creditors.

*All the relevant figures will be given in the question except any one of the above

The following items will not affect total Creditors Account: -

a)     Cash Purchase

b)    Reserve for Discount on Creditors

c)     Bills Payable honoured

Note: - if bills receivable Endorsed it is debited to creditors A/c on dishonoured of B/R endorsed Creditor's A/c. is credited by debiting Debtors A/c.

Bills Receivable Account: To ascertain Either Opening Balance or Closing Balance or Bills Drawn.

*All the relevant figures will be given in the question except any one of the above

 Bills Payable Account: To ascertain Either Opening Balance or Closing Balance or Bills Accepted.

*All the relevant figures will be given in the question except any one of the above

Solved Examples:

Q.1 You are given

1)     The balance sheet of N. Swami on 31.12.2004

2)     Cash Transaction for the year up to 31.12.2005

3)     A Summary of the remaining transaction

 BALANCE SHEET AS ON 31/12/2004

Dr.   SUMMARY OF CASH TRANSACTION.                      Cr.

Other transaction: -

Sales (Credit) Rs. 40,760, Discount to Customer Rs.200, Purchased Rs. 30,000, Discount Received Rs.100, Closing Stock of Goods Rs. 5,300

Provide for depreciation on P&M @ 5% and Land and Building @ 2.5%

Prepare the Trading A/c, P&L A/c. and Balance sheet.

SOLUTION: -

Dr.     TRADING A/c.          Cr.

Dr.    PROFIT AND LOSS A/c.          Cr.

BALANCE SHEET AS ON 31/12/2007

WORKING NOTE: -

Dr.     DEBTORS A/c.          Cr.

Dr.          CREDITORS A/c.          Cr.

Q.2 Amar did not keep proper books of account. However, he gives you the following information relating 2007: -

Dr.   SUMMARY OF CASH TRANSACTION.                      Cr.

During the year Rs. 600 had to be written off as bad. Machinery is to be depreciated @ 15% p.a. Expenses owing are Rs. 800. Prepare Amar's Trading & profit & Loss Account & Balance sheet relating to 2007.

SOLUTION: -

Dr.     TRADING A/c.          Cr.

Dr.    PROFIT AND LOSS A/c.          Cr.

BALANCE SHEET AS ON 31/12/2007

WORKING NOTE: -

BALANCE SHEET AS ON 31/12/2006

Dr.             DEBTORS A/c.     Cr.

Dr.          CREDITORS A/c.          Cr.

Q.3. Ashutosh carries on small business, but he does not maintain a complete set of account books. He banks all receipts and makes all payments only by means of cheques. He maintains properly a Cash book, Sales Ledger, and Purchase Ledger. He also makes close of every accounting year. From such records you are able together following facts:

Receipts for the year ended 31.12.2011

PAYMENT MADE IN THE YEAR ENDED 31.12.2011.

From the above data, prepare Profit and Loss A/c for year ended 31st Dec, 2011 and Balance Sheet as on that date.

SOLUTION:

Dr.     TRADING A/c.          Cr.

Dr.     PROFIT AND LOSS A/c.         Cr.

BALANCE SHEET AS ON 31/12/2011

WORKING NOTE: -

BALANCE SHEET AS ON 01/01/2011

Dr.             DEBTORS A/c.     Cr.

Dr.          CREDITORS A/c.          Cr.

Dr.          CASH/BANK A/c.             Cr.

Q.4. Amisha did not maintain her books of accounts properly. From the following data supplied to you prepare Final Accounts for the year ended 31.12.11

SOLUTION:

Dr.     TRADING A/c.          Cr.

Dr.     PROFIT AND LOSS A/c.         Cr.

BALANCE SHEET AS ON 31/12/2011

WORKING NOTE: -

BALANCE SHEET AS ON 01/01/2011

Dr.             DEBTORS A/c.     Cr.

Dr.          CREDITORS A/c.          Cr.

Dr.          CASH/BANK A/c.             Cr.

Q. 5. You are given

a. Opening Balance Sheet as on 1.4.2013

b. Cash Account for the year ended 31.3.2014

c. Additional Information

Prepare Final Accounts of Mr. Sahil Khan

BALANCE SHEET AS ON 01/03/2013

Dr.          CASH/BANK A/c.             Cr.