UNIT II

Business Income

Q1) Receipt and Payment Account of Shankar Sports club is given below, for the year ended March 31, 2017

1. Prepare Income and Expenditure Account and Balance Sheet with help of following Information:
2. Subscription outstanding on March 31, 2016 is Rs 1, 200 and Rs 2,300 on March 31, 2017, opening stock of postage stamps is Rs 300 and closing stock is Rs 200, Rent Rs 1,500 related to 2015 and Rs 1,500 is still unpaid.
3. On April 01, 2016 the club owned furniture Rs 15,000, Furniture valued at Rs 22,500
4. On March 31, 2016. The club took a loan of Rs 20,000 (@ 10% p.a.)

A1)

Balance Sheet as on December 31, 2016

Balance Sheet as on December 31, 2017

Note: 1. Some members of the organisation pay their subscription ( to become the member) in lump sum for the entire life. This amount is called Life Membership Fees. So, Life Membership Fees is a receipt of Capital nature or non-recurring amount since the members will not be required to pay the fee annually. Hence it is not credited to the Income and Expenditure account but added to the Capital Fund.
2. Since there is insufficient amount in Capital Fund, it will be shown in the Assets side of Balance Sheet.

Q2) State the meaning of Receipt and Payment Account. Write any four features of Receipt and Payment Account?

A2) Receipts and Payments Account is a summary of the Cash Book. All cash receipts are recorded on the Receipts side (i.e. Debit side) and all cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all cash and bank transactions both of capital and revenue nature. It not only records the cash and bank transactions relating to the current accounting period, but also the cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period.

This account only helps us to ascertain the closing balance of the cash and bank and helps in assessing the cash position of an NPO.

The main features of Income and Expenditure Account are:

1. It is prepared for an accounting period on the accrual concept following the matching principle. All expenses related to accounting year whether paid or not are recorded.
2. Only revenue items are considered, while the capital item is excluded.
3. All items both cash and non-cash (depreciation) are recorded.
4. Expenditure is recorded on the debit side and incomes on the credit side and ends with Surplus or Deficit as the case may be (difference between revenue and expenditure).

Q3) Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not-for-profit health organization. How should Belle record these funds?

1. Increase in assets and increase in revenue
2. Increase in assets and increase in liabilities
3. Increase in assets and increase in deferred revenue.
4. Decrease in assets and decrease in fund balance.

A3)

Option 2
Increase in assets and increase in liabilities
Explanation: Belle, a non-governmental NPO when receive Funds for its annual campaign, it will be a liability for them which will be recorded in balance sheet. And if Organisation pledge this fund to another non-governmental NPO , it will be an assets for Belle Non govt. Organisation which is to be recorded on the assets side of balance sheet.

Q4) Prize fund Rs.10000, Interest on prize fund investments Rs.1000, Prize paid Rs.2000, Prize fund investment Rs.8000. What will be its treatment?

1. Rs.20000 on liability side, Rs. 8000 on Assets side
2. Rs.1000 on liability side, Rs. 8000 on Assets side
3. Rs.1700 on liability side, Rs. 8000 on Assets side
4. Rs.9000 on liability side, Rs. 8000 on Assets side

A4) Option 4

Rs.9000 on liability side, Rs. 8000 on Assets side

Explanation: Calculation of balance sheet will be like this:- Prize fund – 9000 Add:- Interest on prize fund investment 1000 Less:- Prize paid 2000 Amount on Liability side = Rs. 9000 Prize fund investment Rs. 8000 will be shown on asset side.

Q5) A non-profit organization received Rs.10,000 as the entrance fee of a new member. If 20% of the fee has to be capitalized, what is the amount of fee needs to be shown in the income and expenditure account?

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

A5) Option 2

Rs.8000, Explanation: These are the fees collected from every member at the time of his admission into membership. It is paid only once by the new entrants on becoming a member of a society or a club. It is treated in two ways:- -if It is to be capitalized then it will be shown in to Balance sheet on the liability side. -If it is to be consider as revenue receipt then show it into income and expenditure account on the income side. Hence, Rs. 20% which means Rs. 2000 (10,000*20%) will be shown on the liability side of balance sheet and balance of Rs. 8000 is to be shown in income expenditure account on income side.

Q6) What steps are taken to prepare Income and Expenditure Account from a Receipt and Payment Account?

A6) The following steps are taken to prepare Income and Expenditure Account (I&E) from Receipts and Payment Account (R&P).

Step 1: All the revenue expenditures paid for the current accounting period are transferred from the Payments side of R&P to the Expenditure side of I&E.

Step 2: All the revenue receipts for the current accounting period are transferred from the Receipts side of R&P to the Income side of I&E.

Step 3: Expenses outstanding for the current period and expenses paid in advance (prepaid expenses) for the current period in the preceding accounting periods are to be added (adjusted) to their related expenses in the Step 1.

Step 4: Income outstanding (accrued income) for the current period and income received in advance for the current period in the preceding accounting periods are to be added (adjusted) to their related incomes in Step 2.

Step 5: Non-cash items like depreciation, appreciation for the current accounting period are to be adjusted in the I&E.

Step 6: After adjusting all the revenue items for the current accounting period, the Income and the Expenditure sides are totalled. If the sum total of the Income side exceeds (or is lesser than) the sum total of the Expenditure side, then the balancing figure is termed as surplus (or deficit).

Q7) What is subscription? How is it calculated?

A7) Subscription is the main source of income for an NPO besides entrance fees, donations, grants, etc. Subscriptions refer to the amount of money paid by the members on periodic basis for keeping their membership with the organisation alive. It is paid monthly, quarterly, half yearly or annually by the members.

It is shown in the debit side of the Receipt and Payment Account with the total amount received during the year that may be related to the current period and to the previous and next accounting period.

While calculating subscription for the current period, advance subscription received for the current period in the previous period and outstanding subscription for the current period are added to the subscription received during the current period. Whereas, on the other hand, advance subscription received for the next accounting period during the current period and outstanding subscription for the preceding period are deducted from the subscription received during the current period.

Calculation of Subscription

## This subscription is related to the current accounting period and is shown in the Income side of the Income and Expenditure Account.

Q8) 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

Dr.                                                                                                                                  Cr.

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%

A8)

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.

Q9) 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 year1200.

A9)

Start of Balance Sheet

Closing the Balance Sheet

Q10) 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

A10) 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

Q11) 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

A11) 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.

Q12) 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

A12) 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.

Q13) 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.

A13) 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. Organization recorded on the asset side of the balance sheet.

Q14) 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, 2020.

Stationery purchased in the year ended March 31, 2020 was Rs 75,000. Also, please present relevant items on the social balance sheet as of March 31, 2020.

A14)

Stationery Account

Balance sheet as of March 31, 2020

Q15) From the information below, we will calculate the amount of the subscription that will be credited to the 2019-2020 balance account.

A15)

Q16) Find out the cost of drugs consumed in 2019-20 from the following information:

A16)

Q17) 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.

A17)

Cricket Club Income and Expenditure Account

Year ended December 31, 2018

Balance sheet

As of December 31, 2018

Q18) Calculate the sports material to be debited to Income & Expenditure a/c. For the yr. Ended 31-3-2007 on the basis of the following information. Amount paid for sports material during the yr. Was Rs.19, 000

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

A18) Option 2

Rs.20700, Explanation: Amount to be debited to income and expenditure as Sports material consumption= Amount paid + Opening Stock -closing stock – opening creditors + Closing creditors. Amount to be debited to income and expenditure= 19000+7500-6400-2000+2600= Rs. 20,700

Q19) Calculate the amount of stationery to be posted to Income and Expenditure Account of Indian Cultural Society for the year ending 31st March, 2018 from the following information:

Stationery purchased during the year ended 31st March 2018 was Rs.75,000. Also, present the relevant items in the Balance Sheet of the society as at 31st March 2018.

A19)  Stationery Account

Balance sheet as on 31.03.2018

Q20) From the following information, calculate the amount of subscriptions to be credited to the income and expenditure account for the year 2017—18.

A20)

Q21) Find out the cost of medicines consumed during 2015-16 from the following information

A21)

Q22) From the following Reciepts and Payments Accounts of Cricket Club and the additional information given, prepare the Income and Expenditure Account for the Year ending 31-12-2018 and Balance sheet as on that date:

RECEIPTS AND PAYMENTS ACCOUNT for the year ending 31-12-2018

Additional Information:

1. Salary outstanding is Rs. 1000.
2. Opening Balance of Stock of Postage and Stationery and Cricket gods is Rs. 750 and Rs. 3210 respectively. Closing stock of the same is Rs. 900 and Rs. 2800 respectively.
3. Outstanding subscription for 2017 and 2018 is Rs. 6600 and Rs. 8000 respectively.

A22) Cricket Club Income and Expenditure account
for the year ended 31-12-2018

Balance sheet as on 31-12-2018

Q23) What is Capital Fund? How is it calculated?

A23) Capital fund is the excess of NPOs' assets over its liabilities. In other words, the excess of assets over the liabilities for a profit earning organisation is termed as capital and the same for an NPO is termed as capital fund. Any surplus or deficit ascertained from Income and Expenditure account is added to (deducted from) the capital fund. It is also termed as Accumulated Fund.

Calculation of Capital Fund

Q24) Explain the statement: “Receipt and Payment Account is a summarized version of Cash Book”.

A24)  Receipts and Payments Account is a summary of the Cash Book. This account is prepared by those organisations which maintain their books on cash basis. All cash receipts are recorded on the Receipts side (i.e. Debit side) and all cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all the cash and bank transactions both of capital and revenue nature. It not only records the cash and bank transactions relating to the current accounting period, but also cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period. This account only helps us to ascertain the closing balance of the cash and bank and helps in assessing the cash position of an NPO. It also forms the basis for the preparation of Income and Expenditure Account.

Similarities between Receipt and Payments Account and Cash Book

The following are the features of Receipt and Payment Account that are common to those of Cash Book:

1. Nature: It is a summarised version of the Cash Book. Similar to the Cash Book, the Receipt and Payment Account is also a Real Account.

2. Nature of Transactions: It records only cash and bank transactions similar to a Two-Column Cash Book. Transactions other than cash and bank like depreciation, loss/ profit on sale of assets, etc. are not recorded in this account.

3. No distinction between Capital and Revenue items: It records all the cash and bank receipts and payments of both capital and revenue nature. Likewise, the transactions recorded in the Cash Book are also of both capital and revenue nature.

4. Opening and closing balance: It begins with the opening balance of cash and bank and ends with the closing balance of the cash and bank (balancing figure) at the end of the accounting period.

5. Purpose: It reveals the cash position of an organisation. It helps to ascertain the total amount paid and received during an accounting period. Similarly, a Cash Book also helps us to assess the cash position of an organisation.

Thus, on the basis of the above-mentioned points and similarities, the statement 'Receipt and Payment Account is a summarised version of Cash Book' is justified.

Q25) “Income and Expenditure Account of a Not-for-Profit Organisation is akin to Profit and Loss Account of a business concern”. Explain the statement.

A25) Income and Expenditure Account (I&E) is similar to Profit and Loss Account (P&L), in the sense that the former is prepared by Not-for-profit-Organisations and the latter is prepared by profit earning organisations. Both the accounts are prepared on the accrual basis.

Similar to the P&L, all the expenses and losses pertaining to the current accounting period are recorded on the debit side (Expenditure side) and all the gains and income of the current accounting period are recorded on the credit side (Income side) of the I&E. The balancing figure of the I&E is surplus or deficit and that of the P&L is net profit or net loss. Both the accounts record only revenue items which are related to the current accounting period.

Similarities between Income and Expenditure Account and Profit and Loss Account

I&E Account of an NPO is akin to the Profit and Loss Account of a profit earning business in the following manners.

1. Nature of Account: Both the concerned accounts are nominal in nature.

2. Basis of Recording: Both the accounts record only revenue expenses and revenue income related to the current accounting period. The items of capital nature are not ignored while preparing these accounts.

3. Period: Transactions related to current year are recorded in Income and Expenditure account in the same manner in which profit and loss account is prepared. Transactions related to previous year or next year are excluded.

4. Adjustments: The treatment of adjustments like, outstanding expenses, prepaid expenses, income received in advance, income due but not received, depreciation, bad debts etc. is same as that in Profit and Loss Account. Thus, both the accounts are prepared on the accrual basis.

Q26) Distinguish between Receipts and Payments Account and Income and Expenditure Account.

A26)

Q27) Explain the basic features of Income and Expenditure Account 

A27) Income and Expenditure Account (I&E) Account is a Nominal Account and is prepared on the accrual basis. It records all transactions of revenue nature that are related to the current accounting period (whether outstanding or prepaid) for which the books are maintained. All expenses and losses are recorded on the debit side (Expenditure side) and all income and gains are recorded on the credit side (Income side) of I&E Account. The closing balance or the balancing figure of I&E Account is termed as surplus (or deficit), if the sum total of the Income side exceeds (is lesser than) the sum total of the Expenditure side.

The following are the basic features of Income and Expenditure Account

1. Nature: It is a Nominal Account. The debit side of I&E records all expenses and losses and the credit side records all incomes and gains related to the current accounting period.

2. Basis: It is prepared on the basis of Receipt and Payment Account (R&P). All the revenues items whether incomes or expenditures are transferred from R&P.

3. Excludes Capital Transactions: The transactions those are capital in nature are excluded from this account. For example, only profit or loss on sale of fixed assets is recorded but the total amount of sales is not recorded since sale of fixed asset is considered as a capital receipt.

4. Akin to Profit and Loss Account: Income and Expenditure Account (I&E) is similar to the Profit and Loss Account in the sense that while the former is prepared to ascertain surplus or deficit during an accounting period the latter is prepared to ascertain net profit or net loss incurred during an accounting period.

5. Records only Current Year’s items: This account records only those transactions that are related to current accounting year. In other words, transactions related to the preceding or succeeding accounting period are excluded even if these transactions are realised in the current period.

6. Adjustments: Various cash and non-cash items like, outstanding expenses, prepaid expenses, income received in advance, income due but not received, depreciation, bad debts, etc. can be adjusted in this account.

7. Balancing Figure: The balancing figure of this account is expressed in terms of either surplus (if incomes > expenses) or deficit (if expenses > incomes). The surplus balance, if any, is added to the Capital Fund, whereas, the deficit balance, if any, is deducted from the Capital Fund.

Q28) Show the treatment of the following items by a Not-for-Profit Organisation:

A28)  Annual Subscription

a) Subscriptions received during an accounting year (whether related to the current year or previous and subsequent year) are shown on the debit side of the Receipts and Payments Account.

b) Subscription amount related to the current accounting year only, whether received or yet to be received are shown on the credit side of the Income and Expenditure Account.

c) Subscriptions received in advance for the subsequent year are shown on the Liabilities side of the Balance Sheet.

d) Subscriptions due but not received are shown in the Assets side of the Balance Sheet.

Ii) Specific donation

a) The amount received for specific donation is shown on the debit side of the Receipts and Payments Accounts.

b) The amount received for specific donation is shown on the Liabilities side of the Balance Sheet as it is used for the specific purpose for which it is received.

Iii) Sale of fixed assets

a) The amount received from the sale of fixed assets are recorded on the debit side of the Receipts and Payments Account.

b) Profit (or loss) on the sale of fixed assets is credited (or debited) to the Income and Expenditure Account.

c) The book-value of the fixed assets sold is deducted from its respective assets on the Assets side of the Balance Sheet.

Iv) Sale of old periodicals

a) The amount received from the sale of old periodicals are shown on the debit side of the Receipts and Payments Account.

b) As the sale of old periodicals by any organisation is considered as revenue receipts, so it is shown on the credit side of the Income and Expenditure Account.

v) Sale of sport Materials

a) The amount received from the sale of sport materials are debited to the Receipt and Payments Account.

b) As the sale of sport materials by any sport club is considered as revenue income, so it is shown on the credit side of the Income and Expenditure Account.

Vi) Life Membership Fees

a) The amount paid by a person to become a member of an organisation is called life membership fees. As this is a receipt for an NPO, so it is debited to the Receipt and Payment Account.

b) Life Membership fees is not recurring in nature and received once for a whole life from a member. Thus, as Life Membership Fees are capital receipts, so these are added to the Capital Fund on the Liabilities side of the Balance Sheet.

Q29) Show the treatment of items of Income and Expenditure Account when there is a specific fund for those items.

A29) There are various sources of receipts like donations, subscriptions, government grants, etc. to an NPO. Some receipts are specific while others are general. While the former can only be used for the specific purpose for which they are received, the latter can be used for any purpose. For example, if donation is received for construction of buildings, then this donation is a specific donation and thereby can only be used for construction of the building. The specific receipts are not considered as revenue income for the NPO and hence are not shown in the Income and Expenditure Account. In fact, such receipts are considered as liabilities to the NPO as these amounts are received for specific purpose and cannot be used for any other purpose. Specific receipts are shown in the Liabilities side of the Balance Sheet, until and unless they are fully set off against the purpose for which they are received. On the other hand, if these amounts are invested outside the organisations (in the form of shares, debentures, etc.), then these are called funds like, match funds, prize fund, etc. The interest and income earned on such investments are not credited to the Income and Expenditure Account but in fact are credited to the respective Fund Account. Similarly, the expenses incurred for such funds are not debited to the Income and Expenditure Account but, in fact, are debited to the respective Fund Account. These special funds are shown in the Liabilities side of the Balance Sheet. In case, if the related expenses exceed the related receipts of the fund, then the difference is shown in the income and Expenditure Account.

Treatment

Explanation (a)

If the receipts exceed the expenses for specific purpose then the difference between the two is shown in the Liabilities side of the Balance Sheet

Explanation (b)

If the expenses exceed the receipts for the specific purpose then the difference between the two is shown in the Expenditure side of the Income and Expenditure Account.

Q30) From the following particulars taken from the Cash Book of a health club, prepare a Receipts and Payments Account.

A30)  Books of Health Club

Receipt and Payment Account

Q31) The Receipt and Payment Account of Harimohan charitable institution is given:

Prepare the Income and Expenditure Account for the Year ended on March 31, 2015 after considering the following:

A31)

Q32) From the following particulars, prepare Income and Expenditure account:

A32)

NOTE: As per the solution, Excess of Income over Expenditure is Rs 3,23,000; however, as per the book, it is Rs 3,07,000.

Q33)  Following is the information given in respect of certain items of a Sports Club. Show these items in the Income and Expenditure Account and the Balance Sheet of the Club:

A33)

Q34) How will you deal with the following items while preparing for the Bombay Women Cricket Club its income and expenditure account for the year ending 31.3.2017 and its Balance Sheet as on 31.3.2017:

Give reasons for your answers

A34)

Reason

Donation for construction of Pavilion is a donation for specific purpose.

Expenses on construction on Pavilion is a capital expenditure.

(b)

Reason

All funds received are treated as capital receipts and expenses related to any fund are deduced from the concerned funds.

(c)

Reason

Life Membership Fees are considered as capital receipts and are shown on the Liabilities side of the Balance Sheet, if nothing is specified about its treatment. But if it is to be treated as revenue item, then it is shown on the credit side of the Income and Expenditure Account.

Q35) From the following receipts and payments and information given below, Prepare Income and Expenditure Account and opening Balance Sheet of Adult Literacy Organisation as on December 31, 2017.

Information:

(i)    Subscription outstanding as on 31.12.2016 Rs 2,000 and on December 31, 2017 Rs 1,500.

(ii)   On December 31, 2017 Salary outstanding Rs 600, and one month Rent paid in advance.

(iii)  On Jan. 01, 2016 organisation owned Furniture Rs 12,000, Books Rs 5,000.

A35)