Financial Statements of  Non Profit Organizations – CA Foundation, CPT notes, PDF

This article is about Financial Statements of Non Profit Organizations for CA foundation CPT students. we also provide PDF file at the end.

Financial Statements of Non Profit Organizations

Alternative names:

1. Final Accounts of Non-Trading Concern;
2. Receipt & Payment Account and Income & Expenditure Account

What we will study in this chapter:

1. We will study how the final accounts of charitable organizations like trust, society, clubs etc. are prepared and accounting for and meaning of items which are specific to them.
2. We will study what is included in the financial statements of such organisation.
3. We will use the same fundamental accounting principles and procedures studied in 1st chapter, because these are applicable everywhere.
4. We will also study the different ways in which questions are asked in the examination.

Such organisations are generally registered as Trust or Societies. If such an organisation is registered u/s 8 of the Companies Act, 2013, then it will have to prepare its Financial Statement as per Schedule III of the Companies Act, 2013 as covered in Chapter 25 Company Financial Statement.

INTRODUCTION

The charitable organizations like trust, clubs, schools, etc., which are non-trading/non-profit motive organizations prepares their financial statements (final accounts) in the following form:

(i) Income & Expenditure A/c (ii) Balance sheet.

Generally such organizations also prepares a Receipt & Payment A/c.

There are some accounts, which are specifically related to such organizations like donations, subscription, entrance fees, fund a/c etc. Also there are different ways in which question is asked in the examination.

Usual type of questions are:

(A)     Prepare Final a/c from Receipt & Payment (R&P) a/c and Other Information given

(B)     Prepare R&P a/c from I&E a/c and Other Information given

(C)    Prepare Final a/c from Trial Balance (TB) and Other Information given

These are also final accounts although of different type of entities, hence whatever is given in Chapter on final accounts is equally and more or less fully applicable here as well. Hence students are advised to study this chapter only after studying Final Account portion.

21.1   EXPLAIN INCOME AND EXPENDITURE ACCOUNT (l&E A/C)

♦        Income & Expenditure Account – is just like a profit & loss account.

♦        All the Expenses for that year i.e., related to that year, will be debited to it.

♦        All the incomes related to that year will be credited to it,

♦        If the credit side is more, the balance is known as “Surplus” (Profit) &

♦        If the debit side is more the balance is known as “Deficit” (Loss) which is then

♦    Transferred (Surplus is credited/Loss is debited) to the capital account of the Association/Trust which is known by different names such as Trust Fund/General Fund/Capital Fund etc.

Important Points:

Income is what is earned during the year and Expense is what is incurred during the year. When an amount is paid or received, is not important, while preparing an Income & Expenditure a/c. The items which are shown in Income & Expenditure a/c in this year may have been paid/received in this year or previous year (ie brought forward as opening prepaid/pre-received) or next year (i.e, carried forward as closing payable/receivable) (i.e. apply mercantile system/accrual concept).

Generally such organization may not have trading of goods etc. It may have some new items like donation, subscription, entrance fees, and expenses on the object of trust etc.

It is not necessary that balance of I&E a/c will be fully transferred to Trust Fund a/c (though usually done by authors in their books). Many organizations keep on accumulating it, then balance of I&E a/c will appear in balance sheet just like P&L a/c balance appears in balance sheet of corporate entities.

Simple Format of Income and Expenditure A/c.

Bhagat Singh College Sports Club, Delhi

Illustration 21.1: From the following data, prepare an Income and Expenditure Account for the year ended 31st December, 2011 of the Mayura Hospitals.

Receipt and Payments Account (For the year ended 31st Dec., 2011)

Additional information:

(i) Subscription in arrears as on 31-12-2010 Rs.3,200

(ii) Investments in 8% Govt. Securities were made on 1st July, 2011

Solution:

Income and Expenditure A/c for the Year Ended 31.12.2011

WORKING NOTES:

Subscription A/c

Salary A/c

Rent A/c

Important Points:

1. Govt. grant for Building will be credited to building fund a/c and will appear in Balance sheet.
2. Addition to/Purchase of Furniture, Equipment, Building and Investment will be debited to respective asset a/c and will appear in Balance sheet.

21.2 EXPLAIN BALANCE SHEET

♦    Balance sheet is prepared as usual, the only difference is that some new type of items may also be there in this case. Like funds a/c.

♦       Balance sheet shows the financial position of the entity as at a particular point of time.

♦       It shows what and how much entity owns (i.e. its assets) and

♦       How much it owes to others (i.e. its liabilities),

♦       The balance is the owners equity i.e. Capital fund/trust fund.

♦       It is not an account, hence does not have debit and credit side.

♦    On one side assets like fixed assets (building, furniture, etc), current assets (like stock, debtors, receivables, cash bank balance, advances, pre-paid etc.) and investments if any are shown.

♦    On the other side in addition to owners capital Le trust fund and reserves, the outside liabilities like loans taken, creditors, expenses payable etc. are shown.

♦       The two sides total must be same.

Important Points:

Even though balance sheet does not have debit and credit side, student should remember that asset side represent debit and capital and liability side represent credit. It will help in correctly preparing final accounts.

Generally Mercantile/accrual system is followed, as it is the proper and complete system to measure the performance of entity and to show its financial position. In your syllabus every where this is considered. Under this system, incomes are recognized when these are earned irrespective of whether amount is received or not. Similarly expenses are recognized when these are incurred or accrued irrespective of whether amount is paid or not. As a result we have to make adjustment for expenses outstanding (payable), prepaid, income outstanding (receivable) and advance-received etc.

Simple Format of balance sheet.

Bhagat Singh College Sports Club, Delhi Balance Sheet as at 31st March, 2011

Illustration 21.2: (Adopted from Nov. 1999) Mahaveer Sports Club gives the following information for the year ended March 31,2011.                                                        .                       .                             .

Provide Depreciation on:

Furniture and Fixtures @ 10% p.a. Sports Goods @ 20% p.a.         Library Books @10% p.a.-

Surplus for the year after providing above depreciation is Rs. 20,220.

You are required to prepare Clubs Opening balance sheet as on 1.4.2010 and Closing balance sheet as on 31.3.2011.

Solution:

Balance sheet on date 31.3.2011

Depreciation on addition during the year is charged for half of the year (i.e. for 6 month)

Balance sheet on date 31.3.2010 (1.4.2010)

21.3 DESCRIBE RECEIPT AND PAYMENT ACCOUNT (R&P A/C)

♦       Receipt & Payment Account – is a summarized cash book.

♦       All receipts in that year may be loan, a capital receipt or an income will be Debited to Receipt & Payment a/c.

♦       Income received in this year may be related to this year or previous year or next year.

♦    Similarly all payments made in this year may be for capital expenditure, repayment of loan, revenue expenditure etc. should be credited to Receipt & Payment A/c.

♦       The revenue expenditure paid in this year, may relate to this year or previous year or next year.

♦       Balance of this a/c is the closing cash and bank balance and will appear in the balance sheet.

Important Points:

Such organization are not doing business (some small incidental activity may be there) hence significant part of its transactions take place on cash. Credit transactions and adjustments will be quite insignificant. Hence it is customary for such organization to present receipt and payment a/c as part of final a/c.

Simple Format of Receipt and Payment A/c.

Receipts and Payments Account of Bhagat Singh College Sports Club, Delhi

for the year ended on 31 st March, 2011

Differentiation between Fund account and money

Fund word is used for Cash i.e. money in finance but when we talk of Fund a/c in accounts remember for ever that it is not money, rather it’s a notional account which gives information about the nature and purpose of receipt and has credit balance and appears on liability side. Money or cash has debit balance and hence appears on asset side. Just remind yourself of double entry say for donation or grant received for building fund.

Cash/Bank A/c Dr.                 —         : This is asset

To Building Fund A/c               —-        : This shows the nature and purpose of above receipt.

Illustration 21.3: (Adopted from Nov. 1998) The following informations were obtained from the books of Delhi Club as on 31.3.2011 at the end of the first year of the Club. You are required to prepare Receipts and Payments Account for the year ended 31.3.2011:

(i) Donations received for Building and Library Room Rs. 2,00,000.

(ii) Other revenue receipts:

(iii) Other actual payments:

Donations to the extent of Rs. 25,000 were utilized for the purchase of Library Books, balance was still unutilized. In order to keep it safe, 9% Govt. Bonds of Rs. 1,60,000 were purchased on 31.3.2011. Remaining amount was put in the Bank on 31.3.2011 under the term deposit.

Solution:

Delhi Club

Receipt and Payments A/c for the year ended 31st March, 2011

21.4 WHAT IS ENTRANCE FEES AND HOW IS IT ACCOUNTED FOR?

♦    The Associations collect entrance fees/admission fees from the new members at the time of their admission.

♦    It is different from the membership fees/subscriptions, which are received every year and hence treated as revenue income and transferred to Income & Expenditure account. But the entrance fees is received only once from a member, hence it can be treated as follows:

(a)  If the amount is just sufficient to recover the expenditure incurred while admitting any member then it will be treated as revenue income and transferred to Income & Expenditure account.

(b)  Otherwise the entrance fees can be Capitalized & transferred to the Trust Fund Account. OR;

(c)  Entrance fees may be treated as deferred Income and shown in the Balance Sheet under the head “Entrance Fees Account” & Part-part amount can be written off every year by transferring to Income & Expenditure A/c in proportion to the benefit extended to the members, estimated on some suitable basis.

Illustration 21.4 : 50 members joined the trust and paid entrance fees Rs.500 each. Pass journal entry and suggest treatment.

Solution:

Illustration 21.5 : 50 members joined the trust and paid entrance fees Rs.500 each. Against this Trust provides certain benefit to the members for the life. Pass journal entry and suggest treatment.

Solution:

Illustration 21,6 : 50 members joined the trust and paid entrance fees Rs.500 each. Against this Trust provides certain benefit to the members for a period of five years. Pass journal entry and suggest treatment.

Solution:

21.5 EXPLAIN ACCOUNTING OF MEMBERSHIP FEES AND SUBSCRIPTION

♦       These are usually charged yearly from the members hence are treated as revenue income and credited to I&E a/c.

♦       The amount received should be duly adjusted for outstanding and advances, so as to get the figure of income for the year.

♦    When number of members and the rate of membership fees/subscription is given then income = number of member × rate per member.

♦       Outstanding subscription i.e. subscription receivable will be shown on the asset side of balance sheet.

♦       Advance subscription i.e. unearned subscription will be shown on the liability side of balance sheet.

Illustration 21.7 From the following particulars, calculate the amount of subscription to be credited to the income and expenditure account for the year ended 31st March, 2011:

A sum of Rs. 25,500 was received as subscriptions during the year ended 31st March, 2011. Solution:

Important Points:

When figure of subscription income is known, by preparing above account we can get subscription received as balancing figure. Such accounts can be prepared for any other income account.

Alternatively above figure can be ascertained by preparing a statement.

Illustration 21.8 : (Adopted from Dec. 2000) Members of a club, are paying an annual subscription of? 500. On 31st March, 2010, subscriptions in arrears from 10 members and received in advance from 5 members. Subscriptions received during the year ended 31st March, 2011 from 446 members, including from 21 members for the year 2011-2012. Subscriptions in arrears as on 31st March, 2011 from 30 members.

Calculate the amount of subscriptions income for the year ended on 31st March, 2011 by preparing subscriptions a/c.

Solution:

Alternatively above figure can be ascertained by preparing a statement.

21.6 WHAT DO YOU MEAN BY FUND FOR SPECIFIC PURPOSE?

♦       The Trust/Association generally creates funds for various purposes.

♦    The funds are created by crediting the donations and fees etc., received for the purpose of that fund or by transfer from Income & Expenditure Account.

♦    Until the funds are utilized for the specified purpose, the same may be invested in Government Securities/ Bank Deposits etc.

♦    Then the income earned on such investments will be credited to that fund account and not to Income and Expenditure Account.

♦       The purpose of above is to keep proper control and utilise the money for the purpose for which it is intended.

♦       Fund a/c will appear on the liability side of the balance sheet.

♦       Whereas investment of the same fund will appear on the asset side of the balance sheet.

21.7  CLASSIFY FUNDS FOR SPECIFIC PURPOSE

The funds can be broadly divided into two types:

1. Funds for some Capital Expenditure.
2. Funds for meeting some Revenue Expenditure.

21.8  EXPLAIN ACCOUNTING OF FUNDS FOR CAPITAL EXPENDITURE

♦    In case of Funds for the purpose of some capital expenditure, when any amount is spent for that purpose, the same will be Debited to a separate Assets Account/Capital Expenditure Account.

♦       When such funds are utilized it results into an asset for the organization.

♦       e,g. Building Fund. The donations etc., are credited to Building Fund A/c

♦    Whereas expenses incurred for Building Construction are debited to Building A/c and the same will appear on the asset side of the balance sheet.

♦       Hence, in such cases the credit balance in fund account will keep on accumulating.

♦    When that asset is complete, an equivalent amount can be transferred debiting building fund a/c and crediting capital fund a/c. Student should do it only if so required by the question.

Illustration 21.9 : A society receives donations of Rs.5,00,000 for the construction of building. It has invested Rs.2,00,000 out of it and spent Rs.2,75,000 for the construction of building which is in progress. Interest on investment received for the year Rs.2,000. Pass journal entry and show how the figures will appear in balance sheet.

Solution:

Balance Sheet as at 31st March, 2011 (Extract only)

21.9 EXPLAIN ACCOUNTING OF FUNDS FOR REVENUE EXPENDITURE

♦       e.g. Price fund, Tournament Fund etc.

♦       The incomes, donations etc. received for a particular purpose are credited to that Fund a/c

♦       All expenditure incurred for that purpose are debited to that Fund a/c.

♦       The Balance if credit is shown in balance sheet and carried forward to next year,

♦    But if it is Debit (that means expenditure is more) then it will be transferred to Income & Expenditure a/c. (The Funds/Reserve Account should never show Debit balance).

♦    When such funds are utilized, it does not create any asset for the organization, e.g. Prices distributed or expenses incurred to organise tournament etc.

Illustration 21.10 : A society receives donations of Rs.3,00,000 for the distribution of prizes to rank holder students. It has invested Rs.2,50,000 out of it and spent Rs. 35,000 for the distribution of prizes. Interest on investment received for the year Rs. 3,000. Pass journal entry and show how the figures will appear in balance sheet.

Solution:

Balance Sheet as at 31st March, 2011 (Extract only)

21.10  EXPLAIN ACCOUNTING FOR INVESTMENT

♦       When organization has surplus funds, it can invest in securities or bank deposits etc.

♦       This investment apart from keeping money safe and liquid also gives incomes in the form of interest/dividend.

♦       When investments are unrelated to any specific fund then its income is credited to I&E a/c.

♦       When funds for specific purpose are not immediately usable, then the same may be invested.

♦       As and when need of fund arises for that purpose, investments are sold and proceeds used for that purpose.

♦       Income and profit/loss on such investments will be credited to related fund a/c and not to I&E a/c.

21.11  COMMENT ON FUND BALANCE AND ITS RELATED INVESTMENT BALANCE

♦    If there is Investment account against a particular fund then the credit balance in fund account should not be less than the investment a/c.

♦       When expenses incurred are more than the income on that fund then such situation will arise.

♦    Hence in such cases the excess expenses incurred on that activity can be debited to Income and Expenditure a/c instead of that fund a/c.

♦    The balance of Fund a/c, can be more than its Investment a/c that means remaining fund may be in the form of cash bank balance.

Important Points:

The fund word is commonly used to refer money (i.e. cash/bank balances which are assets and has debit balance). But fund a/c is not money in itself, rather it is the second effect (credit) of the money received, hence fund a/c always shows credit balance and appears on the liability side.

Illustration 21.11 : A society receives donations of Rs.3,00,000 for the distribution of prizes to rank holder students. It has invested Rs.2,50,000 out of it and spent Rs.63,000 for the distribution of prizes. Interest on investment received for the year Rs.3,000. Pass journal entry and show how the figures will appear in balance sheet.

Solution:

Balance Sheet as at 31st March, 2011 (Extract only)

*(excess 10,000 spent is out of general income)

21.12 SUGGEST ACCOUNTING OF GRANTS/SUBSIDIES

♦       Grants/Subsidies are received from Govt. or other local authorities to be used for the specified purpose.

♦       Accounting of such Grants/Subsidies will depend upon the purpose for which it is received.

♦    Grants/Subsidies may be for (1) Capital expenditure (i.e. for acquiring fixed assets) or (2) Revenue expenditure (i.e. for maintenance etc.).

♦       In the 1st case it will be credited to separate a/c & shown in the Balance sheet on the liability side.

♦    It can be deferred and credited to l&E a/c in proportion of depreciation charged on that asset or alternatively grant can be credited to the asset a/c itself consequently reducing depreciation.

♦       If there is fund a/c for such capital expenditure then it can be credited to that fund a/c.

♦    In the 2nd case, it will be credited as income in Income & Expenditure a/c because corresponding expense is also debited in income and expenditure a/c.

♦       Thus above accounting is in accordance with the matching principle.

Illustration 21.12 : A society receives grant of Rs.5,00,000 for the construction of building. Pass journal entry.

Solution:

It is a grant for capital expenditure and can be treated as follows:

1st Alternative: it is capitalized in the relevant fund:

2nd Alternative: it is capitalized as a separate item:

3rd Alternative: it is credited to the asset acquired:

4th Alternative: it is treated as a deferred income:

Illustration 21.13: A society receives Salary Grant from Government of Rs.1,00,000.50% of the Grant is used. Pass journal entry.

Solution:

It is a grant for revenue expenditure and hence credited to Income & Expenditure A/c:

21.13    SUGGEST TREATMENT FOR DONATION

Explain the accounting treatment of donation received for specific purpose in the case of charitable society. (May, 2007)

♦    Donations are the voluntary contribution provided by the well wishers for general or specific purpose.

♦    If donations are received for a particular purpose then it will be credited to that particular fund a/c say donation received for construction of building credited to Building fund a/c.

♦    Otherwise general donations will be credited to Income & Expenditure a/c.

♦    If question requires capitalisation, but does not specify the fund to which it should be credited, then credit such donation to trust fund a/c.

♦    Donation may be in kind then stock or fixed asset whatever is received will be debited and the credit will be as explained in above points.

21.14    EXPLAIN TREATMENT OF SCHOLARSHIP

♦    Scholarship is the monetary benefit given to students under certain schemes by Govt, or other authorities etc.

♦    When received scholarship a/c will be credited and when paid to student scholarship a/c will be debited and hence in general it will not appear in financial statement.

♦    In case of schools/colleges, there may be credit balance in Scholarship a/c which represents Scholarship received from Govt. etc. hut yet to be distributed to the students. This should be shown as liability in the Balance sheet.

♦    Debit balance in scholarship a/c may represent paid to student and recoverable from the concerned authority. This should be shown as an asset in the Balance sheet.

♦    But if college has its own scholarship then that debit balance will go to I&E a/c.

Illustration 21.14 : A College receives Scholarship from government for backward class scholars of Rs.l,00,000. The same is distributed to the concerned students. Pass journal entry.

Solution:

Here College is just acting as a distribution agent:

If before year end 1st step take place but not the 2nd then ^1,00,000 of scholarship will appear as liability in balance sheet. If before year end 2nd step take place but not the 1st thenX1,00,000 of scholarship will appear as asset in balance sheet.

Illustration: 21.15: A College gives Scholarship to merit rank holders amounting to Rs.l,00,000. Pass journal entry.

Solution:

Here College is distributing scholarship hence it is its expenditure:

21.15 HOW TO PRESENT INCOME AND EXPENDITURE OF SPECIAL ACTIVITIES/FUNCTIONS/ PROGRAM?

♦       Trust may organize various functions/activities like Charity show, sports functions etc.

♦    Income & Expenses on this account are generally netted & net balance is shown in the Income & Expenditure a/c.

♦    Basic objective of such functions is to raise funds for the organization and use such funds for the objects of the trust.

Illustration 21.16 : A society receives donations of Rs.50,000 for the charity show of music for raising the funds. It receives Rs.75,000 from the sale of tickets. It has spent Rs.63,000 for the program. Pass journal entry and show how the figures will appear in Income and Expenditure a/c.

Solution:

Income & Expenditure for the year ended 31st March, 2011 (Extract only)

21.16 HOW MISSING DATA RELATED TO ANY A/C CAN BE ASCERTAINED?

♦       For ascertaining the missing information, if any, the accounts as follows can be prepared.

♦    Whatever information of that a/c is available should be 1st entered and on balancing the account, we will get the missing information.

♦       It can be done by add less also, but it is advisable to prepare accounts.

21.17 DRAFT AN INCOME ACCOUNT

Any and every income account can be as follows:

Income A/c

Illustration 21.17 : (Adopted from June 1998) From the following particulars, calculate the amount of subscription to be credited to the income and expenditure account for the year ended 31st March, 2011:

A sum of Rs. 14,670 was received as subscriptions during the year ended 31st March, 2011.

Solution:

21.18 DRAFT AN EXPENSE ACCOUNT

Any and every expenses account can be prepared as follows:

Expense A/c

Illustration 21.18 : On the basis of the following information related to its many rented premises, calculate the amount that will appear against the item ‘Rent’ in the income and expenditure account for the year ended 31st March, 2011:

Solution:

21.19 DRAFT AN ACCOUNT OF CONSUMABLES LIKE STATIONERY, MEDICINES, SPORTS MATERIAL ETC.

Any and every such account can be prepared as follows:

Stationery Stock A/c

Important Points:

When opening Balance sheet is not given the same should be prepared to ascertain any missing information like opening balance of Trust fund etc.

Other a/cs. Like assets a/c, loan a/c, creditors a/c, goods a/c, etc. can also be prepared to ascertain missing data if any.

Illustration 21.19 : (Adopted from June 2003) On the basis of the following information, calculate the amount that will appear against the item ‘stationery consumed’ in the income and expenditure account for the year ended 31st March, 2011:

Solution:

Note: Alternatively you can prepare two accounts as explained below that will also show you amount of stationery purchased.

Creditors for Stationery A/c

Stationery Stock A/c

21.20 WHAT TYPE OF QUESTIONS ARE ASKED IN THE EXAM?

Generally there may be three types of questions:

(a)  Receipt payment a/c and Opening Balance sheet or other information is given from which Income & Expenditure a/c & Balance sheet is required to be prepared, or

(b)  Balance sheet & Income Expenditure a/c is given, from which Receipt & payment a/c is required to be prepared. or

(c)  Trial balance and other information is given from which Income & expenditure a/c & Balance Sheet is to be prepared.

21.21 HOW TO PREPARE FINAL A/c WHEN RECEIPT & PAYMENT A/c IS GIVEN AND NOT TRIAL BALANCE?

♦       R&P a/c is nothing but summarized cash book which contains most of the transactions, and

♦       Whatever is not yet received/paid will be given as information.

♦       Opening balance sheet or opening balances will also be given.

In normal and usual cases, the opening balances are 1st taken to the respective a/c. All transactions are entered in cash book and other books of entry and then posted to ledger accounts. Balances of such a/cs are extracted and written in trial balance from which final accounts are prepared.

♦    Same process to be followed here, take opening balances in the a/c (assets have debit balance and liabilities have credit balance)

♦    Receipt side items represent debit to cash bank a/c, now make credit posting to the a/c according to the nature of receipt.

♦    Similarly payment side items have been credited to cash bank a/c and now make debit to the a/c according to nature of payment.

♦       For other information (which is nothing but transaction) make double entry and post to the respective a/c.

♦    By balancing various accounts you will get missing information which may be either balance of an account or a transaction.

♦       In case balancing figure is a transaction then complete its double entry.

♦       Now balance of all this accounts will result into trial balance and consequently final a/c.

♦    But if you do everything in writing, it will require lot of time and hence prepare only those accounts as working which has more debits and credits in it, and

♦    For others think and give treatment directly to I&E a/c and balance sheet depending upon whether this a/c is an expense, income, asset or liability.

♦    Thus instead of completing full account book and preparing the trial balance, we go short cut and directly prepare the final accounts.

Always keep double entry in mind and use the basic accounting procedure anywhere and everywhere. This is the key to your success.

Illustration: 21.20 : (Adopted from May 2002) When Opening balance sheet. Receipt & Payment a/c and some information is given.

Smith Library Society showed the following position on 31st March 2010:

Balance sheet as on 31st March, 2010

The Receipt and Payment Account for the year ended on 31st March, 2011 is given below

You are required to prepare an Income and Expenditure Account for the year ended 31 st March, 2011 and a Balance Sheet as at 31st March, 2011 after making the following adjustments:

(a)    Membership Subscription included Rs. 10,000 received in advance.

(b)    Provide for outstanding rent Rs. 4,000 and salaries Rs. 3,000.

(c)  Books to be depreciated @10% including additions. Electrical Fittings and Furniture’s are also to be depreciated at the same rate.

(d)    75% of Entrance Fees is to be capitalised.

(e)  Interest on Securities is to be calculated @ 5% p.a. including purchases made on 1.10.2010 for Rs. 40,000.

Solution:

Income and Expenditure Account

Balance sheet on date 31.3.2011

Working notes:

Expenses outstanding A/c

Subscription A/c

Rent A/c

Salary A/c

Entrance fees A/c

Interest A/c

Calculation of interest on investment:

21.22 HOW TO PREPARE RECEIPT & PAYMENT A/C FROM INCOME & EXPENDITURE AND BALANCE SHEET?

♦       It is a reverse order question wherein final a/c is given and cash book (R&P a/c) is required to be prepared.

♦    The only change is that now in the working accounts prepared you will write figures of incomes and expenses and on balancing you will get receipt and payment.

♦    Expenditure side items represent debit to I&E a/c, now make credit posting to the concerned expenditure a/c.

♦    Similarly Income side items have been credited to I&E a/c and now make debit posting to the concerned Income a/c.

♦ Payment/receipt on a/c of fixed assets or loans etc. if any, can be similarly ascertained by preparing a/cs.

Illustration 21.21 : Income & Expenditure A/c and Opening & Closing Balance sheet is given.

Chail Cricket Club gives you the following information:

Income & Expenditure Account for the year ended Slat Dec., 2011

Balance Sheet

Prepare the Receipt and Payment Account of the Club for the year ended 31st Dec. 2011. Solution:

Important Points:

Expenses in which there is no opening or closing adjustment will be equal to payment and will appear as it is in Receipt & Payment a/c.

Similarly Income in which there is no opening or closing adjustment will be equal to receipt and will appear as it is in Receipt & Payment a/c.

For others figure of receipt or payment will be ascertained by preparing concerned account.

Receipt and Payment A/c

Working notes

Salary and Wages A/c

Miscellaneous Expense A/c

Honorarium to Secretary A/c

Equipment A/c

Fixed Deposit A/c

Subscription A/c

21.23 COMMENT ON FINANCIAL STATEMENTS OF EDUCATION INSTITUTIONS

Ans. Whatever is discussed earlier is equally applicable to Education Institutes as these are also not for profit organization. Some distinct features may be as follows:

♦       It can have item like scholarship.

♦       Sometimes it can have separate term fees a/c etc.

♦       Govt, grant for teacher’s salary, maintenance, etc. will be credited to I&E, etc.

♦       It may have income like tuition fees, exam fees, etc.

♦ It may run canteen, stationery shop, etc. for students.

Illustration 21.22: From the following balances and particulars of Republic College prepare Income & Expenditure Account for the year ended March 1999 and a Balance Sheet as on the date:

Adjustments:

(1) Materials & supplies consumed for:

Teaching 50,000, Research 1,50,000 Students Welfare 75,000 Games or Sports 25,000

(2) Tuition fee receivable from Government for Backward Class Scholars 80,000

(3) Stores selling prices are fixed to give a net profit of 10% on selling price.

(4) Depreciation is provided on straight-line basis at the following rates:

(i) Buildings 5% (ii) Plant & Equipment 10% (iii) Furniture & Fixtures 10% (iv) Motor Vehicles 20%.

Solution:

Income and Expenditure A/c for the Year Ended 31.03.99

Balance Sheet as on 31.03.99

College Stores A/c

Important Point:

Scholarship is not income for college when it is received from government, because it is payable to students & thus it is a liability. If credit balance in scholarship then it is shown in balance sheet on liability side. If debit balance of scholarship then it is not expense but it is receivable from government, if it is a Government scholarship. But this debit balance will be an expense if it is scholarship given by college itself.

21.24 WHAT IS FUND BASED ACCOUNTING? EXPLAIN BRIEFLY

What is “Fund Based Accounting” under non-profit organizations?                                   (Nov 2008)

♦  Fund based accounting is not to be confused with the fund a/cs, seen earlier, though it is used in the same context.

♦  Fund based accounting refers to a system which are followed by not for profit organization to keep their specific purpose funds separately so that it is not put to some other use.

♦  Here independent double entry books of account are maintained for each type of funds with their separate cash and bank a/c.

♦  Thus each fund is treated as a separate entity for accounting, keeping its separate assets, liabilities and bank a/cs etc.

♦  Transfer from one fund to another fund may require transfer of money also and entries will be passed in the books of account of both the funds.

♦  For management’s use separate final a/c of each fund will be prepared but for outsiders and statutory purposes a combined final accounts will be prepared comprised of all funds which are of that organization.

Illustration 21.23 : Institute of World Management furnishes you the following information in respect of its development fund for the year 2010-11:

Pass necessary Journal entries, Prepare a statement of changes in balances of development fund for the year 2010-11 and a balance sheet for development fund as on 31st March, 2011.

Solution:

Journal entries in the books of Development Fund of M/s Institute of World Management

For item 3 above following entry will be passed in the books of Unrestricted/General Fund.

For item 11 above following entry will be passed in the books of Unrestricted/General Fund.

Statement of changes in development fund/Development Fund A/c.

Cash/Bank A/c

Balance sheet of Development Fund as on 31.3.2011

EXAM PROBLEMS WITH SOLUTIONS FOR SELF-STUDY

Problem No. 1: (Dec. 1999)

From the following, find out the amount of subscriptions to be included in the income and expenditure account for the year ended 31st March, 1999.

Subscriptions were received during the year 1998-99 as follows:

Subscriptions outstanding as on 31st March, 1998 were Rs. 3,500 out of which Rs. 500 were considered to be irrecoverable. On the same date, subscription received in advance for 1998-99 were Rs. 2,000. Subscriptions still outstanding as on 31st March, 1999 amounted to Rs. 6,000.

Solution:

Problem No. 2: (Dec. 2000)

There are 450 members of a club, each paying an annual subscription of Rs. 500. On 31st March, 2000, subscriptions in arrears totalled Rs. 5,000. Subscriptions received during the year ended 31st March, 2001 amounted to Rs. 2,23,000 including Rs. 4,500 for the year 1999-2000 and Rs. 7,500 for the year 2001-2002.

Calculate the amount of subscriptions in arrears as on 31st March, 2001 by preparing subscriptions a/c.

Solution:

Problem No. 3: (Nov. 2009)

Om Shanthi Club has 500 Members with Annual Fee of Rs. 1,000 per Member. At the end of the accounting year, the Accountant noticed that 40 Members have not paid Annual Fee, and 70 Members had paid fee in advance. Help the Accountant to compute Cash Receipts of Annual Fee for the year.

Solution:

Subscription A/c

Problem No. 4: (Nov. 2012)

During the year ended 31st March, 2012, Sachin Cricket Club received subscriptions as follows :

There are 500 members and annual subscription is Rs. 1,500 per member.

On 31st March, 2012, a sum of Rs. 15,000 was still in arrears for subscriptions for the year ended 31st March, 2011. Ascertain the amount of subscriptions that will appear on the credit side of Income and Expenditure Account for the year ended 31st March, 2012. Also show how the items would appear in the Balance Sheet as on 31st March, 2011 and the Balance Sheet as on 31st March, 2012.

Solution:

Income & Expenditure Account (An extract) of Sachin Cricket Club For the year ended 31st March, 2012

Balance Sheet of Sachin Cricket Club as on 31st March 2011 (An extract)

Balance Sheet of Sachin Cricket Club as on 31st March 2012 (An extract)

Problem No. 5: (May 2014)

From the following extract of Receipts and Payments Account and the additional information, you are required to calculate the Income from Subscription for the year ending 31st March 2014, and show them in the Income & Expenditure Account, and the Balance Sheet of a Club.

An extract of Receipts and Payments Account for the year ended 31st March 2014

Information:

Solution:

1. Subscription A/c (to compute Subscription Income for the year)

2. Income and Expenditure Account for year ended 31.03.2014 (Extract)

3. Balance Sheet as on 31.03.2014 (Extract)

PREPARATION OF INCOME AND EXPENDITURE A/C AND BALANCE SHEET FROM RECEIPT AND PAYMENT A/C AND OTHER BALANCES AND

INFORMATION

Problem No. 6: (May 2010)

On the basis of the following information, prepare Income and Expenditure Account for the year ended 31st March, 2010:

Receipts and Payments Account for the year ended 31st March, 2010

(i)      Salaries paid includes Rs. 6,000 paid in advance for April, 2010. Monthly salaries paid were Rs. 21,000.

(ii)      Outstanding rent on 31st March, 2009 and 31st March, 2010 amounted to Rs. 5,500 and Rs. 6,000 respectively.

(iii) Stock of printing and stationery material on 31st March, 2009 was Rs. 340; it was Rs. 365 on 31st March, 2010.

(iv) Scooter was purchased on 1st October, 2009. Depreciation @ 20% per annum is to be provided on it.

(v)      Investments were made on 1st April, 2009.

(vi) Subscriptions due but not received on 31st March, 2009 and 31st March, 2010 totalled Rs. 14,000 and Rs. 12,800 respectively. On 31st March, 2010 subscriptions amounting to Rs. 700 had been received in advance for April, 2010.

Solution:

Income and Expenditure Account for the year ended 31st March, 2010

Working Notes:

Problem No. 7: (June 2000)

On 31st March, 1999 Writers Club a cultural association had the following assets and liabilities:

The following is the receipt and payment account for the year ended 31st March, 2000:

The club informs you that:

Membership fee for 1999-2000 due is Rs. 25,000; it includes Rs. 1,000 due from the member who has not yet paid also for 1998-99; provision for irrecoverable membership is to be made in respect of this member.

Income receivable on 31-3-2000 on ICICI bond is Rs. 30,000 and on government securities is Rs. 24,000.

Prepaid expenses on 31-3-2000 amount to Rs. 7,000.

Outstanding expenses on 31-3-2000 amount to Rs. 8,000.

Depreciation provision is to be Rs. 12,500.

Programme is an annual feature.

The club asks you to prepare: (a) Income and expenditure account for the year ended 31st March, 2000.

(b) Balance sheet as at 31st March, 2000.

Solution:

Income & Expenditure A/c

Balance Sheet As On 31.03.2000

Working Notes

By preparing this accounts we get missing information which may be a transaction (complete the double entry of same) or a balance of that account. Complete accounting for whatever information is available in the question. Then by balancing the account you will get missing information as a balancing information.

Membership Fees A/c [subscription]

Expenses A/c

Fixed Deposits A/c

Government Securities A/c

Fixed Asset A/c

Interest On Investment A/c

Problem No. 8: (Dec. 2003)

The following is the receipts and payments account of Jyoti Charitable Hospital for the year ended 31st March, 2003:

Additional information:

You are required to prepare income turd expenditure account for the year ended 31st March, 2003 and balance sheet as at that date.

Solution:

Income & Expenditure A/c [ P&L A/c ]

Balance Sheet As On 31.03.2003

Working Notes:-

Important Points:

By preparing this accounts we get missing information which may be a transaction (complete the double entry of same) or a balance of that account. Complete accounting for whatever information is available in the question. Then by balancing the account you will get missing information as a balancing information.

Subscription A/c

Medicine A/c

Creditors For Medicine A/c

Equipment A/c

Building A/c

Balance Sheet As On 31.03.2002

*** Investment is calculated from interest. Investment = 1,40,000/7 × 100 = 20,00,000.

Problem No. 9: (Nov. 1999)

Mahaveer Sports Club gives the following Receipts and Payments Account for the year ended March 31, 1998.

Provide Depreciation on:

Furniture and Fixtures @ 10% p.a. Sports Goods @ 20% p.a. Library Books @ 10% p.a.

You are required to prepare Clubs opening balance sheet as on 1.4.97, income and expenditure account for the year ended on 31.3.98 and balance sheet as on that date.

Solution:

Income and Expenditure Account

Balance sheet on date 31.3.1998

Balance sheet on date 31.3.1997 (1.4.1997)

Working notes:

Salary a/c

Newspaper a/c

Rent and Tax a/c

Electric charges a/c

Subscription a/c

Interest a/c

Problem No. 10: (May 2008)

Following is the Receipts and Payments Account of Mayur Club for the year ended 31st March, 2008:

Following additional information is provided to you:

(i)     The Club has 220 members. The annual subscription is Rs. 4,500 per member.

(ii)     Depreciation to be provided on Furniture at 10% p.a. and on Sports equipment at 15% p.a.

(iii) On 31st March, 2008, stock of sports material in hand (after members use during the year) is valued at Rs. 78,000 and stock of stationery at Rs. 3,150. Rent for 1 month is outstanding. Unexpired insurance amounts to Rs. 9,600.

(iv) On 31st March, 2007 the Club had the following Assets:

Note .’There was no liability on 31.3.2007 You are required to prepare:

(i) Income and Expenditure Account; and

(ii) Balance Sheet as at 31st March, 2008.

Solution:

Income & Expenditure A/c

Balance Sheet as on 31.03.2008

Working Notes:-

Balance Sheet as on 31.03.2007

Subscription A/c

Equipment A/c

Fixed Deposits A/c

Rent A/c

Insurance A/c

Sports Materials A/c

Stationery A/c

Workings:- Calculation of rent outstanding.

Rent for 1 month is outstanding, which implies that the rent paid is for 11 months. Rent outstanding =  = 13,500

Problem No. 11: (May 2011) (May 2010)

The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31 st March, 2011:

Additional information:

(i)   There are 450 members each paying an annual subscription of Rs. 500. On 1st April, 2010, outstanding subscription was Rs. 5,000.

(ii)     There was an outstanding telephone bill for Rs. 3,500 on 31st March, 2011.

(iii)  Outstanding sundry expenses as on 31st March, 2010 totalled Rs. 7,000.

(iv) Stock of stationery:

On 31st March, 2010               Rs. 5,000

On 31st March, 2011               Rs. 9,000

(v)  On 31st March, 2010 building stood in the books at Rs. 10,00,000 and it was subject to depreciation @5% per annum.

(vi) Investment on 31st March, 2010 stood at Rs. 20,00,000.

(vii) On 31st March, 2011, income accrued on the investments purchased during the year amounted to Rs. 3,750.

Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the Balance Sheet as at that date.

Solution:

Park View Club

Income and Expenditure Account

for the year ended on 31st March 2011

Balance Sheet as at 31st March 2011

Working Notes:

(1) Calculation of Opening Capital Fund

Balance Sheet as at 31st March 2010

(2) Calculation of subscriptions accrued during the year

Subscription A/c

(3) Calculation of stationery consumed during the year

Problem No. 12: (Nov 2004)

The Accountant of Diana Club furnishes you the following Receipts and Payments account for the year ending 30th September, 2003:

Additional Information:

(ix) Depreciation is to be provided @5% p.a. on the written down value of the club premises and @15% p.a. on car for the whole year.

You are required to prepare an Income and Expenditure account of Diana Club for the year ending 30th September, 2003 and Balance Sheet as on that date.

Solution:

Income and Expenditure Account of Diana Club

for the year ended 30th September, 2003

Balance Sheet of Diana Club as on 30th September, 2003

Working Notes:

1. Balance Sheet of Diana Club as on 1st October, 2002

2. Calculation of bar purchases for the year:

Bar Creditor A/c

3. Calculation of subscriptions accrued during the year:

4. Depreciation on club premises and written down value on 30th September, 2003:

5. Calculation of profit on sale of car:

6. 6. Depreciation on car and written down values on 30 September, 2003:

Note: The opening and closing balance of cash and bank shown in the Receipts and Payments Account (given in the question), include the bank balance as per cash book. Therefore, no adjustment has been made in the above solution on account of cheques issued, but not presented for payment of printing. This is a reconciliation item pending to be recorded by bank.

PREPARATION OF RECEIPT AND PAYMENT A/ C, INCOME & EXPENDITURE A/C AND BALANCE SHEET FROM INFORMATION

Problem No. 13: (Nov 2001)

Summary of Receipts and payments of Bombay Medical Aid Society for the year ended 31.12.2000 are as follows: Opening Cash balance in hand Rs.8,000, Subscription Rs. 50,000, Donation Rs. 15,000, Interest on Investments @ 9% p.a. Rs.9,000, Payments for medicine supply Rs.30,000, Honorarium to Doctors Rs.10,000, Salaries Rs. 28,000, Sundry Expenses Rs. 1,000, Equipment purchase Rs. 15,000, Charity show expenses Rs. 1,500, Charity show collections Rs. 12,500.

Additional information:

You are required to prepare Receipts and Payments Account and Income and Expenditure Account for the year ended 31.12.2000 and Balance Sheet as on 31.12.2000.

Solution:

Income and Expenditure A/c

Balance sheet on date 31.12.2000

Receipt and Payment A/c

Working note:

Balance sheet on date 1.1.2000