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Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Karnataka Class 12 Commerce Accountancy Non Profit Organisations : There are certain organisations which are set up for providing service to its members and the public in general. Such organisations include clubs, charitable institutions, schools, religious organisations, trade unions, welfare societies and societies for the promotion of art and culture. These organisations have service as the main objective and not the profit as is the case of organisations in business.

Normally, these organisations do not undertake any business activity, and are managed by trustees who are fully accountable to their members and the society for the utilization of the funds raised for meeting the objectives of the organisation. Hence, they also have to maintain proper accounts and prepare the financial statement which take the form of Receipt and Payment Account; Income and Expenditure Account; and Balance Sheet.

At the end of for every accounting period (normally a financial year). This is also a legal requirement and helps them to keep track of their income and expenditure, the nature of which is different from those of the business organisations. In this chapter we shall learn about the accounting aspects relating to not-for-profit organisation.

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Syllabus for Class 12 Commerce Accountancy Non Profit Organisations

1. Meaning, Basic Concepts
2. Receipts and Payments Accounting
3. Fund Based Accounting
4. Preparation of Income and Expenditure Account 
5. Balance Sheet from Receipt and Payment 

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Meaning and Characteristics of Non-Profit Organisation
Non-Profit Organisations refer to the organisations that are for used for the welfare of the society and are set up as charitable institutions Accounting for Non-Profit Organisation 1 LEARNING OBJECTIVES After studying this chapter, you will be able to;
• Identiy the need for, and nature of accounting records relating to not-for-profit organisations;

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Financial statements of not-for-profit organizations mean that financial statements which are made by organizations whose aim is not to earn and distribute the profit. It means, these organizations do not involve in business activities but these organisations use all the surplus from their activities in achieving their Goal. Because, these organisations operate with the money of donation or sponsorship, so they have to keep accounts and show their financial results in the form of financial statements.

If any Not-for-Profit Organization do not make financial statements, it means, its activists are cheating with donors’ donations and use donation money for personal benefits. If you are donor, then before donation,  please check the financial statements of Not-for-profit Organisation from expert accountant. Only expert accountant or auditor can audit the financial statements and can bring many unknown loopholes.

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Receipts and Payments Accounting

Receipts and payments accounting means to record all cash and bank receipts and payments. We can maintain receipts and payments accounting by making receipts and payments account. It is prepared in non profit organisation. Its format is just like cash book of business. In debit side, we show all cash and bank receipts and in the credit side, we show all cash and bank payments.
Steps to Prepare Receipt and Payment Account :-

1st Step : To open Receipt and Payment Account

It starts by showing the opening balance of cash and bank in its debit side.

2nd Step : To Record the Transactions

We record only cash and bank related transactions in it.

 a) Debit side 

In the debit side, we record only all the incomes and receipts which is in the cash and bank form. For example, we have give temple space on rent and we get money. This will show in the debit side of receipt and payment account. We will not show donation in kind. For example, we get the clothes for poor children. Its value will not show in the debit side of receipt and payment account.

 b) Credit Side

 In the credit side, we record only all the all expenses and payments which is in the cash and bank form. For example, we have take office on rent and we give money. This will show in the credit side of receipt and payment account. We will not show any outstanding expense in it. For example, we have to given salaries to our employees but still end of year we did not pay. This is outstanding expense but we will show in receipt and payment account.

 3rd Step : Recording of Transfer to or From Bank.

 If any cash is transferred to bank or withdraw from bank, it is not recorded in receipt and payment account because we use only one column both cash and bank receipt and payment. If we are interested to make bank reconciliation statement. We have to make a bank account which will record all bank related transactions only.

4th Step : Closing of Receipt and Payment Account 

We take the difference of debit and credit side of this account. If debit side is more than credit side, we show the closing balance in the credit side. But it is the closing debit balance and it is shown as current asset in the balance sheet.

Important : You must include both capital and revenue nature items in it. In following screenshot, you are seeing that we have added both furniture payment and salaries and wages. buying of furniture with cash is our capital expenditure. Payment of salaries and wages are our revenue expenditures. We will include both type of payments because we have to maintain the accounts of cash and bank. We are interested that we had 1240 in the beginning of time but when we have seen our pocket at the end of year we have Rs. 915. What was happened in the year to bring difference in our pocket money. So, we have seen our each and every bill and started to record all the money which we receive through cash and bank. We also recorded all the payments which we have done through cash and through bank. Now, when we calculated our closing balance of this account, we are happy that our pocket money is matching with this account’s closing balance.

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Fund Based Accounting

Fund based accounting is used in not-for profit organizations, charitable trusts and NGOs. It means, to classify all the short and long term revenue sources in to different funds. After this, we record different transactions relating to fund in its fund account. With this, we can track the revenues and expenses of any specific fund account.

Now, we explain the Steps of Accounting in Fund based accounting

1st step : Classify the Funds 

In non profit organization, members do not bring the capital but they bring donation. Initial donation should be classify in different funds and fund accounts should be open. For example, we are have started a charitable trust for providing free education to orphan children. For this, we have got initial donation from our members. We can transfer this donation to different funds. We can make :

a) School Building Fund

b) Orphan Home Fund

c) Free Education Fund

d) General Expenses Fund

You can also classify more than above classification of fund.

2nd Step : Make the Budget 

Before using the fund, it is the duty of accountant to make the budget. For example, we have to make school building. So, what will be the total cost of building? What expenses will be paid for constructing the building. What amount will we get and from what sources will we get?

3rd Step : Actual Record of Future Revenues and Expenses 

Instead of making income and expenditure account, accountant should make the income and expenditure of each fund. With this, he can compare it with budget. So, future decision will become more easy.

4th Step : Measure the Performance of Fund 

If donated fund is used effectively and honestly, it is the best performance of Fund. For measuring, the performance of project, we also make our financial statement on the basis of different funds. For example, we will be interested to know what current and fixed assets have been bought from school fund. We are also interested to know that every Rupee is consumed for the project or not.

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

How to Prepare Income and Expenditure Account

 Income and expenditure account is prepared in non profit organisation whose aim is not to earn money for personal benefits but they distribute the profit for welfare activities. So, for showing the organisation different from for-profit organisation, they prepare income and expenditure account. It is prepared just like preparing of profit and loss account.

In the debit side, we show all the expenses whether they has been paid or not. In the credit side, we show all the incomes whether they have been received or not. One thing, we should remember that we will show only the expenses and incomes which are not the capital nature.

Now, you should learn its following steps

1st Step: Get the Raw Data

 Income and expenditure account is made on the basis of raw data which we get from trial balance. All revenue nature expenses and incomes are added in the income statement. In case, if we did not make the trial balance, we can make income and expenditure account on the basis of receipt and payment account. For charging the depreciation, you need opening balance of fixed asset which you can find from opening balance sheet. Now, we tell you what you have to take from receipt and payment account.

2nd Step: Show the Expenses and Incomes from Receipt and Payment Account 

Now, we have explaining, how you can convert the payments and receipts of receipt and payment account into the incomes and expenses of income and expenditure account.

a) Credit side of receipt and payment will be payment side. In this side, you have to leave capital nature expenses and closing balance. All other expenses payments will go to the debit side of income and expenditure account.

Remember : 

i) Please see the adjustment notes, if there are any advance expense, you have to deduct it from particular paid expense because, we did not show the expense which we have paid in advance but still, we did not take its service.

 ii) If there is any expense which is payable but still did not paid, will be added in the particular paid expense.

 b) Debit side of receipt and payment will be receipt side. In this side, you have to leave capital nature incomes and opening balance. All other income receipt will go to the credit side of income and expenditure account.

Remember :

 i) Please see the adjustment notes, if there are any advance incomes, you have to deduct it from particular receipt incomes because, we did not show the income in I/E Account which we have received in advance but still, we did not give its service.

ii) If there is any income which is which is receivable but still did not receive, will be added in the particular received income.

  3rd Step: Not Included Items in I/E Account 

 a) Any donation which we receive for any particular fund, we will not add in income and expenditure account. As per fund based accounting, we will treat it in that particular fund.

 b) Any legacy amount which will get from the will of any person will be capital receipt and will not shown in income and expenditure account.

 c) If we receive life membership fees, we will not add whole fees as income in income and expenditure account. For example, we have rule of 10 years as life time member and if a person donated 5,00,000 as life time membership, we will add only 50,000 per year in the income and expenditure account and balance will goes to the fund for life membership account in the balance sheet. 

 4th Step : Show Adjustments

 There are many adjustments which you have to do in the income and expenditure account whose information, you can not get from receipt and payment account. For example, you have to show depreciation of fixed assets in the debit side of income and expenditure account. You may show bad debt if there is any in the debit side of I/E account

5th Step : Find the Balance of I/E Account 

Compare debit and credit side of income and expenditure account. If credit side is more than debit side, it will be surplus over expenses. If debit side will more than credit side, it will be deficit.

Example : Following is given the receipt and payment account and adjustment. You have to make income and expenditure account. The car is bought at the end of year. So, there is no question of depreciation. We did not charge depreciation on freehold land.

Karnataka Class 12 Commerce Accountancy Non Profit Organisations

Balance Sheet from Receipt and Payment

Balance Sheet from Receipt and Payment can easily made from receipt and payment account because all most all the transactions of non profit organisation are in the form of cash. So, if we have previous year balance sheet and current year receipt and payment account, we can easily prepare balance sheet.
Now I am explaining its steps :

1st Step: Get the Raw Data.

First of you have to keep previous year balance sheet and current year receipt and payment account near to you. Both will be helpful for preparing balance sheet. In balance sheet, we show all the capital items which have been shown in the receipt and payment account and also bring previous year assets and liabilities.

2nd Step: Show the Asset and Liabilities from Receipt and Payment Account 

Now, we have explaining, how you can convert the payments of receipt and payment account into the assets of Balance sheet.

a) Credit side of receipt and payment account will be payment side. In this side, you have to take capital nature expenses and closing balance. All other revenue expenses payments should leave. Add new bought asset in the particular asset’s opening balance which we can take from previous year balance sheet. If any fixed asset has been sold, deduct it in same fixed asset. After this, deduct the depreciation.

Now, deduct the depreciation and show it in the fixed asset side.

For example we are taking one fixed asset 

 Furniture opening balance xxxx

 Add new bought           xxxx
————————————-
Total furniture             xxxx

Less sale of scrap furniture xxxx.
————————————–
 Value of furniture in business xxxx.

Less depreciation xxxx
———————————–
 Total furniture shows in b/s xxxx.
===========================

 b) Closing balance of receipt and payment account will be shown as current asset in the balance sheet. If you bought other current asset. Add it in the opening balance of current asset in it. If you sell the current asset, you should deduct this.

c) Payment to Creditors which will show in the payment side of receipt and payment account will be helpful for finding the closing balance of creditor. Closing balance of creditor will show in the current liability of balance sheet.

Opening balance of creditor from opening balance sheet XXXXX

Add New Credit  purchase  XXXXX

Deduct Cash paid to creditors XXXXX

—————————————————–
Closing balance of Creditor
===================================

d) Debit side of receipt and payment account will be receipt side. In this side, you have to take capital nature items. Receipt from debtor will be helpful to calculate the closing balance of debtor which will go to the current asset.

Opening balance of debtor from opening balance sheet XXXXX

Add New Credit  Sale XXXXX

Deduct Cash received from debtor XXXXX

Deduct Bad Debts XXXXX
—————————————————–
Closing balance of Debtors
===================================

e) All Advance received incomes will be our current liabilities in balance sheet.

f) All advance paid expenses will be our current asset in the balance sheet.

g) All received donation for special fund will be the long term liability in the balance sheet

h) Any legacy amount which will get from the will of any person will be capital receipt and will be show in long term liability.

i) The fund for life membership account  will goes to  the balance sheet’s liability side.

3rd Step: Not Included Items in Balance Sheet 

We leave opening balance, all operating incomes and expenses because all these will go to income and expenditure account.

4th Step : Show Adjustments

There are many adjustments which you have to do in the balance sheet whose information, you can not get from receipt and payment account. For example, we will make income and expenditure account from receipt and payment account and its surplus will be added in reserves and surplus in the liability side of balance sheet. We also show all the funds and capital funds in our new balancesheet by taking figures from previous year balance sheet. Except this, we also check previous year balance sheet if there is any fixed asset, current asset, current liability or fixed liability which we still did not write. Write them. If some proportion of liability paid, then decrease same before showing it in the balance sheet.

5th Step : Match  the Balance of Asset Side and Liability Side

After making the balance sheet, you should match its asset side and liability side. It must be equal.

In following screenshot, you will see that we have made income and expenditure account from receipt and payment account and then we have made balance sheet by taking figures from receipt and payment account and some adjustment. Capital fund is taken from previous year balance sheet.

for more details On Karnataka Class 12 Commerce Accountancy Non Profit Organisations syllabus check here Non Profit Organisations Syllabus

To download Karnataka Class 12 Commerce Accountancy Non Profit Organisations book check here Non Profit Organisations book

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