NON PROFIT ORGANIZATIONS

This chapter is concerned with the preparation of financial statements of non-profit making organizations and whose objectives are to provide services to their members or the pursuit of one or a number of activities rather than the earning of profit. Since running organizations involves cash and other assets and liabilities, there’s need to also keep records of all activities (transactions). The main purpose of such organizations is to provide social amenities to its members such as games of tennis, soccer, etc

SUB-TOPICS

1. The receipts and payments account

2. Income and expenditure account

3. The balance sheet

RECEIPT AND PAYMENTS

The receipts and payments account is effectively the cash book. It is a summary of cash receipts and cash payments. Smaller clubs and charities with no other assets (apart from cash) and no liabilities will use the receipts and payments account as a financial statement. No balance sheet is produced.

		ARMSTRONG Body Building Club
•
•		Receipts and payments account for the year ended
•		31 December 20X4
•
•	Receipts			Payments
•	K		K
•
•
	Balance b/f	200	Bar purchases	160
•	Subscriptions	6,450	Rental	720
•	Bar Sales	240	Care takers wages	1,800
•	Donations	150	Printing & postage	22
•			Heat & light	60
•			Repairs	15
•			Balance c/d	4,263
•				_____
		_____
•				7,040
		7,040
•
•	Balance b/d	4,263

The receipts side is same as debit and payments side credit of the cash book.

INCOME AND EXPENDITURE

ACCOUNT

Organizations apart from cash asset may have other assets and liabilities. Therefore, the receipts and payments account may be inadequate to be used as a financial statement, because it does not show the other assets and liabilities.

BALANCE SHEET

The receipts and payments account does not also show whether the member’s contributions are being used effectively. To reveal a complete picture of assets and liabilities a Balance Sheet must be prepared. To show any increase or decrease in capital the income and expenditure account is prepared.

TERMS USED
IN COMPARISON WITH TRADING ORGANISATIONS

•	Profit making organisations		Not for profit making
	Organisations
•	(i)	Cash book	Receipts and
	payments account
•	(ii)	Income statement	Income and
	expenditure account
•	(iii)	Profit or loss	Surplus or deficit
•	(iv)	Capital	Accumulated fund
•

Income and expenditure account is the same as income statement for trading organisations.

----------------

TRADING ACTIVITIES
WITHIN THE
NOT-FOR- PROFIT ORGANISATION

The main source of income for non-trading organizations is subscriptions from members. However, they may engage in profit ventures like owning a bar.

• In such a case a separate bar income statement will be prepared to determine profit or loss arising from it, and transferred to income and expenditure account.
• For other profit ventures such as dinner dance or fete income and expenses are netted and the resultant profit or loss also transferred to income and expenditure account.

Example
Bar income statement.

Armstrong Body Building Club

Bar Income Statement

K

K

Bar Sales

240

• Less cost of sales:

•	Bar opening inventory	30
•	Bar purchases	160
•		___
•		190
•	Less: Bar closing inventory		(80)
•				(110)
•		130
•	Less: Bar man’s wages	(70)
•
	___

Net profit (transferred to income and expenditure account) 60

ACCUMULATED FUND

• In a trading organization it is known as capital. In most cases it may not be given. It should be calculated by identifying assets and liabilities given at THE BEGINNING OF TRADING PERIOD, Thus:
  
  Accumulated fund = Assets – Liabilities

Example:
Accumulated Fund

The North East Rotary Club had the following assets and liabilities as at 1 January 20X1, the beginning of the year. Cash and Bank balances K210, Equipment at valuation K975, Subscriptions in arrears K65, Subscriptions in advance K10, Owing to suppliers of competition prizes K58 and Inventory of competition prizes K38.

Required:

Calculate the accumulated fund as at 1 January 20X1, to be included in balance sheet.

Solution:

•	Assets:		K	K
• Cash and bank balance		210
•	Subscriptions in arrears	65
•	Equipment	975
• Inventory of competition prizes		38
•				1288
•

Liabilities:

•	Subscriptions in advance	10
•	Owing to suppliers	58
•			68
• Accumulated fund at 1 January 20X1		1220

SUBSCRIPTION

This may be the main source of income for not profit making organisations. N.B. Members who have not paid the subscriptions and their membership has not lapsed are considered as receivables because they have not paid the institution and yet they have been enjoying the services. This is called subscriptions in arrears. Subscriptions in arrears should be included as part of income (subscriptions) in the year they are not paid and shown as current asset in the balance sheet.

LIFE MEMBERSHIP

Life membership means members pay a substantial amount now and enjoy the club facilities for the rest of their lives. This amount should not be treated as subscription income in the year it is paid, but should be spread over the life period of members. A life membership account should be opened:

o Dr. Cash account

o Cr. Life membership account

o The balances on life membership will be shown in balance sheet as non-current liability.

LIFE MEMBERSHIP

o Life period could be estimated by the organisations based on may be age. In this way, life membership will be treated the same way non current assets are treated with depreciation.

o If a member outlives life membership contribution, the organisation will decide whether the members will continue paying or be exempted completely.

LIFE MEMBERSHIP

o Some organisations may take advantage of life membership fund by investing it to generate income in form of interest.

o In this case the investment will remain fixed over a period of years and will be shown as non current asset in balance sheet.

o Annual interest generated on the investment will be considered as annual subscription and credited to subscription account.

North East Rotary Club

The following is a summary of the receipts and payments of North East Rotary Club during the year ended 31 December 20X1.

North East Rotary Club

Receipts and payments accounts for the year ended

			31 December 20X1
	Dr
						Cr.
•
•
	Cash and bank balance	210		Secretarial expenses	163
•	Sales of competition tickets	437		Rent	1402
•	Members subscriptions	1987		Visiting speakers expenses	1275
•	Donations	177		Donations to charities	35
•	Refund of rent	500		Prizes for competitions	270
•	Balance c/d	13		Stationery & printing	179
•					____
		____
•			3,324			3,324
•				Balance b/d	13

North East Rotary Club

The following valuations are also available:

•	As at 31 December	20X0	20X1
•		K	K
• Equipment (original cost K1,420)		975	780
•	Subscriptions in arrears	65	85
•	Subscriptions in advance	10	37
• Owing to suppliers of competition prizes 58			68
• Inventory of competition prizes		38	46

North East Rotary Club

Required:

A. Calculate the value of the accumulated fund of the club as at 1 January 20X1.

B. Reconstruct the following accounts for the year ended 31 December 20X1.

> the subscription account

> the competition prizes account

C. Prepare an income and expenditure account for the club for the year ended 31 December 20X1 and a balance sheet as at that date.

SOLUTION

Accumulated fund

Assets:

	210
•	65
•	975
•	38
•
• Cash and bank balance
Subscriptions in arrears
Equipment
Inventory of competition prizes

1288

Liabilities:

•	Subscriptions in advance	10
•	Owing to suppliers	58
•		68
• Accumulated fund at 1 January 20X1		1220
•

SUBSCRIPTION ACCOUNT

•	(i)		Subscription account
•
•	Dr.	K			K Cr.
•
•
	Balance b/d		65	Balance b/d	10
•	Income & exp.			Cash	1987
•	account		1980
•
•	Balance c/d		37	Balance c/d		85
•			2082		2082

COMPETITION A/C

•	Competition prizes account
• (ii)	Dr.			Cr.
•
•
	Balance b/d	38	Balance b/d	58
•	Bank	270	Cost of prizes given to
•			income and expenditure
•			account (Bal. Fig)	272
•	Balance c/d	68	Balances c/d	46
•
•
		376		376
•
•	Balance b/d	46	Balance b/d	68

North East Rotary Club

•				Income and Expenditure account for the year
•				ended 31 December 20X1
•
•	Income					K
			K
•		Subscriptions		1980
•		Ticket sales		437
•		Less cost of prizes		(272)
•		Profit on competition		165
•		Donations			177
•				2322
•
•		Expenditure
•		Secretarial expenses		163
•		Rent (1402 – 500)		902
•		Speakers expenses		1275
•		Donations to charities		35
•		Stationery and printing		179
•		Depreciation				195
•						(2749)
•		Deficit				(427)

North East Rotary Club

•	Balance sheet as at 31 December 20X1
•
•	Non current assets	Cost	Dep.	N.B.V.
•	Equipment	1420	640	780
•
•	Current assets
•	Inventory of prizes		46
•	Subscriptions in arrears		85
•				131
•
•	Total assets			911
•

Financed by:

Accumulated fund at 1 January 20X1 1220

•	Less deficit	(427)
•			793

Current liabilities

•	Payables for prizes	68
• Subscriptions paid in advance		37
•	Bank overdraft	13
•			118
•		911

CHAPTER SUMMARY

o The receipts and payments accounts only shows the cash position of the organization. It is just a summary of cash receipts and payments. It may be the source of information for the income and expenditure account.

o The income and expenditure account is prepared to determine surplus (profit) or deficit (loss). It is prepared on matching or accruals concept.

o The main source of income for clubs is subscription. Subscription should be adjusted for arrears and prepayments.

o Accumulated fund is same as capital in trading organizations and is calculated thus Assets – liabilities.

o Any trading activities should be shown separately and profit or loss is what is shown in income and expenditure or netting off within the income and expenditure account.