AHSEC - 12: Accounting for Not For Profit Organisation Important Notes for MAY' 2021 Exam | Revised and Reduced Syllabus

Class 12 Accountancy Notes

Unit – 1: Accounting for Not For Profit Organisation 

Unit – 1: Accounting for Not For Profit Organisation FOR 2021 EXAM

Q.1. What is Profit motive and Not-For-Profit Organisation? What are its features? 2007, 2008, 2015, 2016, 2020

Ans: Profit Motive organisation (Trading organisation): A profit motive organisation is one which is established and operated with the object to earn profit through buying and selling of goods and services.  Examples of these are sole trade business, partnership business, company etc.

Not-For-Profit Organisation: A Not-For-profit organisation is a voluntary association of persons which is set up and operated not for the purposes of earning profit but, for the welfare of the society or promotion of art, culture, sports and general public utility. Examples of these are schools, hospitals, Trade union, club and sports association. These organisations provide services to their members and to the public in general. Their main sources of income are membership fees, subscription, donation, grant-in-aid, legacy, etc.

Characteristics of Not-for-profit organisations: Following are the main characteristics or the salient features of Not for Profit organisations:                                                2016, 2018, 2020

a)      The main objective of not-for-profit organisations is not to make profit but to provide service to its members and to the society in general.

b)      The main source of income of these organisations is admissions fees, subscriptions, donations, grant-in-aid, etc.

c)       Financial statements of not for profit organisations include receipts and Payments A/C, Income and Expenditure A/c and Balance sheet.

d)      Revenue and expenditure of not-for-profit organisations are recorded on accrual basis of accounts.

e)      These organisations are managed by a group of persons elected by the members from among themselves for example trustee, managing committee, and governing body.

f)       Surplus or deficit of not-for-profit organisations are not distributed amongst the members but added with capital fund.

g)      A not-for-profit organisation normally creates fund for future operating expenses.

Q.2. What are various types of NPOs? Distinguish between not-for-profit organisation and profit motive organisation?         2019

Ans: Types of Not-for-profit organisation: A not-for-organisation is of two types:

a) NPO established by Public: These types of NPOs are established by public. Club, society, schools and colleges are examples of such organisations. The main aim of such NPOs is to provide service to its members and to the society in general. The main source of revenue of such organisation is membership subscription, donations etc.

b) NPO established by Government: These types of NPOs are established by the government to provide services in a specific state or areas. Hospital, sports association, schools and colleges are examples of such organisations.  These organisations are run with the help of grants from government.

Difference between Not – for profit organisation and Profit earning organisation           2019

Basis

Not-For-Profit Organization

Profit motive Organization

1.    Motive

Main Motive is to provide services to the society.

Main Motive is to earn profits by selling goods and services.

2.    Source of Revenue

Main sources of revenue are donations, subscriptions, grant-in-aid etc.

Main source of revenue is sale of goods and services.

3.    Distribution of profit

Surplus is added with the capital fund.

Profits is transferred to sole proprietor’s capital account or distributed amongst the partners.

4.    Financial Statements

Financial statements of an NPO include receipts and Payments A/C, Income and Expenditure A/c and Balance sheet.

Financial Statements of a profit motive organisation include Manufacturing A/C, Trading A/C, Profit and loss A/C and balance sheet.

5.    Management

It is managed by trustees, committees and governing bodies.

It is managed by sole proprietor, partners or managing directors, as the case may be.

6.    Capital fund and capital

The fund accumulated by an NPO for running the organisation is called Capital fund. The capital fund is built up out of surplus derived from income and expenditure account. It also includes donation, legacy and entrance fees to the extent capitalised.

But the sum of funds contributed by the owners including reserves and surplus is called capital or owner’s equity.

Q.3. What are various types of financial statements prepared by NPOs? Explain cash and accrual basis of accounts.

Ans: The type of financial statements that are generally prepared by not-for- Profit Organisations are:

1.       Receipts and Payments Account

2.       Income and Expenditure Account

3.       Balance Sheet

Cash Basis of accounting: Under cash of accounting revenues are recorded when received and expenses are recorded when paid. Receipts and payments account is prepared on cash basis.

Accrual basis of accounting: Under accrual basis of accounting revenues are recorded when earned and expenses are recorded when consumed. Income and expenditure is prepared on accrual basis.

********************************************

ALSO READ (AHSEC ASSAM BOARD CLASS 12):

1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES

2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)

3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)

4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)

5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)

6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS

********************************************

Q.4. What do you mean by Receipts and Payments Account? What are its features? Mention its merits and limitations.        99, 05, 09

Ans: Receipts and Payments Account: A Receipts and Payments Account is a summary of cash and bank transactions under various heads of a not-for-profit organisation, which is prepared at the end of the accounting year to show the closing balance of cash or bank. All cash receipts and payments are recorded in this account whether these belong to current year or next year or previous year or whether these are of revenue nature or capital nature. All Receipts are shown on the debit side of the account while all payments are shown on the credit side of the account. It starts with the opening cash and bank balances and closing balance of this account is cash in hand or at bank/overdraft.

Following are the main features of Receipts and Payments Account:     2013, 2017

a)      It starts with the opening balance of cash or bank and ends with the closing balance of cash or bank or both.

b)      It is a real account in nature.

c)       It is similar to cash book.

d)      It records only cash transactions and all non-cash transactions are ignored.

e)      It is the summary of all cash transactions of a particular year put under various heads.

f)       It records all cash receipts and payments of current year irrespective of the period they relate to i.e. previous/current/next year.

g)      It is prepared on cash basis of accounting.

h)      It records cash transactions of both revenue and capital nature.

Objectives/Advantages of Receipts and Payments Account: 2007, 2015

a)      The primary objective of preparing receipts and payments accounting is to show the cash position of an NPO at the end of the year.

b)      It is in summary form. It is possible to know receipts and payments during a period under different heads for the accounting year.

c)       The Receipts and Payments Account serves the purpose of trial balance and becomes the basis of preparing financial statements i.e. Income and Expenditure Account and Balance sheet for the organisation.

d)      It helps in forecasting the cash requirement of the organisation in future period.

e)      The balance of cash in hand and cash at bank can be determined at the end of the accounting year.

Limitations of Receipts and Payments account:                 2010

a)      It is prepared on cash basis of accounting. It does not record non-cash items like depreciation.

b)      It is only a summary of cash receipts and payments. It does not show details of each and every transaction.

c)       It records both the revenue and capital items. It does not show any surplus or deficit.

d)      It includes past, present and next year items. It does show particular incomes or expenses for a particular year.

e)      Information provided by this account may not be sufficient for proper management of the organisation.

Q.5. What do you mean by Income and Expenditure Account? What are its features? Distinguish between Receipts and Payments and Income and Expenditure Accounts?          99, 03, 08, 2016, 2017, 2018, 2019, 2020

Ans: Income and Expenditure Account: Income and Expenditure Account is a Nominal Account which is prepared at the end of the accounting period by a Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income over expenditure, or the deficit, i.e., excess of expenditure over income for a particular period. It records all expenses and losses on its debit side and all incomes and gains on its credit side. It includes only revenue items whether cash or non-cash but capital items are not shown in income and expenditure account.

Features of Income and Expenditure Account:

a)      It is a nominal account in nature which reveals either surplus i.e., excess of income over expenditure, or the deficit, i.e.  Excess of expenditure over income.

b)      It is prepared on accrual basis of accounting.

c)       It is similar to profit and loss account.

d)      In Income and Expenditure account, only revenue items are considered, while capital items are excluded.

e)      Both cash and non-cash items, such as depreciation, are recorded.

f)       There is no opening or closing balance in income and expenditure account.

g)      It includes items of current year only. Past and future year’s items are not shown.

Difference between Receipts and Payments Account and Income and Expenditure Account

Basic

Receipt and Payment Account

Income and Expenditure Account

1. Nature

It is a Real Account in nature.

It is nominal Account in nature.

2. Basis

It is prepared on cash basis of accounting.

It is prepared on accrual basis of accounting.

3. Balances

It starts with the opening balance and ends with the closing balance of cash or bank or both.

There is no opening or closing balance in income and expenditure account.

4. Recording

All receipts and payments are recorded in this account whether these are of revenue nature or capital nature.

It includes only revenue items whether cash or non-cash but capital items are not shown in income and expenditure account.

6. Non cash items

It ignores non-cash items like depreciation, credit purchase, credit sales etc.

It records non-cash items of revenue nature.

5. Period of items

All cash receipts and payments are recorded in this account whether these belong to current year or next year or previous year.

All incomes and expenses of present year only are recorded in this account.

7. Balance sheet

Generally, it is not followed by Balance Sheet.

It if followed by balance sheet.

Q.6. Explain the Treatment of the following Specific items in Receipts and Payments and Income and Expenditure accounts.                             2019

Ans: Treatment of Some Specific Items in Receipts and Payments accounts and Income and Expenditure account:

1. Subscription: It is a regular payment made by the members to the organisation. It is generally contributed annually. It is one of the main sources of income. It appears on the debit side i.e. Receipts side of the Receipts and Payments Account. Apart from amount for current year, it may include amount pertaining to previous year or advance payment for next years.                                               2019

Since it is a major source of income of the non-trading concern and is recurring in nature, therefore shown on the credit side of income and expenditure account. Subscription to be shown in income and expenditure account or subscription received during the year to be shown in receipts and payments account is calculated by preparing subscription account.

Subscription account

Date

Particulars

Amount

Date

Particulars

Amount

 

To Balance B/d (Arrear)

To Income and expenditure a/c (Subscription income for the year)

To Balance C/d (Advance)

 

 

By Balance B/d (Advance)

By Cash a/c (Subscription received during the year)

By Balance C/d (Arrear)

 

 

 

 

 

 

 

If numbers of members are given, then subscription income for the year can be calculated by multiplying number of members with their annual membership subscription.

2. Life membership fees: Membership, if granted to a person for the whole life, special fee is charged from him/her, this is called life membership fees. It is charged once in the life time of a member. It is a capital receipt for the organisation and hence shown as receipt in receipts and payments account.                       2019

Only recurring receipts (revenue receipt) are treated as income but life membership is non-recurring in nature. Therefore, the life membership fees is capitalized and added with capital fund in balance sheet but not shown in income and expenditure account.  2002

3. Endowment fund: Endowment fund is a specific fund which is created to ensure the long-term financial health of the not-for profit organisation. These types of funds are created by hospitals, universities etc. for long-term growth of the organisation. This fund is shown on liability side of the balance sheet.

It is a fund which provides permanent means of support for the organisation. Any contribution towards this fund is an item of capital receipt and hence shown as receipt in receipts and payments account.

Since it is a capital receipt, it is not shown in income and expenditure account. It is shown on the liabilities side of balance sheet.

4. Donation: Donation is the amount received from some person, firm, company or any other body by way of gift. It is also an important item of receipt. It can be of two types:                      2019

(a) Specific donation: It is a donation received for a specific purpose. Examples of such donations are: donation for library, donation for building, etc. It is treated as capital receipt. It is debited to receipts and payments account but not shown in income and expenditure account.

(b) General donation: It is a donation which is received not for some specific purpose. It can be of two types:

(i) General donation of big amount: It is treated as capital receipt. It is debited to receipts and payments account but not shown in income and expenditure account.

(ii) General donation of small amount: It is treated as revenue receipt. It is debited to receipts and payments account and shown as income in income and expenditure account.

5. Legacy: It is the amount which is received by organisations as per the will of a deceased person. It is treated as a capital receipt and hence debited to receipts and payments account. It is recorded in Receipts and payments account but not considered as income because it is non-recurring in nature. It is added with capital fund. However, legacy of small amount may be considered as income.                  2019

6. Sale of old newspapers/periodicals: Old newspapers/periodicals are sold and fetch some money. It is a source of revenue. This appears in the receipts and payments account and is considered as income and recorded in the credit side of the Income and Expenditure account. Selling old newspapers is a routine one and is justified to consider it as income.                 2002

7. Sale of old assets: The amount realized by the sale of old asset is shown only in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is shown in the income and expenditure account. If book value of assets sold is more than the sale value, then there is a loss on sale of asset and such loss is debited to income and expenditure account. Similarly, if book value of assets sold is less than the sale value, then there is a profit on sale of asset and such profit is credited to income and expenditure account.  2002, 2004

8. Sale of sports materials: The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account. But for other organisation it is treated as an asset. 2002, 2004

9. Payment of honorarium: Person may be invited to deliver lectures or artists may be invited to give their performance. Any payment made to these invitees is called honorarium. It is the revenue expense and is shown in the expenditure side of the income and expenditure account. It is credited in receipts and payments account.

10. Entrance fees: An Entrance fee is paid by the members at the time of enrollment. Generally it is paid every year and considered as revenue receipts. Hence, shown as income in income and expenditure account.

11. Government Grants: Government sometimes provides grants to the not-for-profit organisation which is of two types:

a) Maintenance grant: Maintenance grant is provided for the purpose of meeting day to day expenses of not-for-profit organisation. This grant is provided annually. This grant is debited in receipts and payments account and shown as an income in income and expenditure account.

b) Capital grant: This grant is provided for the purpose of acquiring fixed assets.  This is capital receipts and debited to receipts and payments account but not shown in income and expenditure account.

Q.7. What is Deferred Revenue Expenditure? What are its features? Give Examples.  2010

Ans: Deferred Revenue Expenditure: Expenditures which are of revenue in nature and incurred during one accounting period but its benefits are expected to be derived over a number of years, such expenditures are called deferred revenue expenditure. Such expenditure is written off to income and expenditure account over the period of benefits realised from such expenditure. Deferred expenditure to the extent not written is shown as an asset in balance sheet.

Features:

a)      These expenditures are not immediately written off in the year of actual expenditure but split over a period of certain years as per the decisions and policies of the management.

b)      These expenditures to the extent not written off are treated as assets and shown at the assets side of balance sheet.

Examples: Advertising suspense, Preliminary expenses, Loss on issue of debentures, Cost of issue of shares and debentures.

Q.8. What is Capital fund?                           2011, 2014, 2017

Ans: In case of non trading organisations, the fund accumulated by an NPO for running the organisation is called Capital fund. In simple words, capital fund can be defined as the excess of assets over liabilities of a non trading organisation. The capital fund is built up out of surplus derived from income and expenditure account. It also includes Specific donation, legacy, entrance fees and other collections to the extent capitalised.

********************************************

ALSO READ (AHSEC ASSAM BOARD CLASS 12):

1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES

2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)

3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)

4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)

5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)

6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS

********************************************

Q.10. What is fund based accounting and non-fund based accounting? What are various principles of fund based accounting? Distinguish between fund based and non-fund based accounting.      2016, 2017, 2020

Ans: Fund Based Accounting: In fund based accounting separate funds are maintained for specific activities of the organisation such as sports fund, prize fund, building fund, etc. All items related the specific funds are recorded fund wise and consolidation of these statements or accounts are presented in the financial results. In order to retain the fund for specific use, such fund is invested into separate account known as sinking fund investment account.

Principles of Fund Based Accounting:

a) In order to keep a record for the funds received or raised for a particular period, a separate fund account is opened which is shown on liability side of the balance.

b) Investment of specific funds is shown as an asset in balance sheet.

c) Incomes of specific funds investments are added and expenses from the funds are deducted with respective funds.

Non-fund based accounting: In non-fund based account, no separate funds are maintained for specific activities. In this accounting all the expenses are debited in profit and loss account and all the incomes are credited in profit and loss account. Balance of profit and loss account is profit or loss which is transferred to capital account.

Difference between fund based and non fund based accounting                             2018

(Points given in difference can also be stated as features)

Basis

Fund Based Accounting

Non fund based Accounting

Accounting base

It is based on cash basis of accounting.

It is based on accrual basis of accounting.

Followed by

This system is followed by not-for-profit organisations.

This system is followed by profit-motive organisation.

Funds

Specific funds are used for specific purposes except for general fund.

Funds can be used for any profit earning purpose.

Income and Expenses

Incomes are added and expenses are deducted with respective funds.

Incomes and expenses are shown in profit and loss account.

Balance of fund

Any balance left in specific fund after completion of specific purpose is transferred to capital fund.

Balance of incomes and expenditure is called profit or loss and this amount is transferred to capital account.

Q.11. What are various types of fund created by not-for profit organisation?

Ans: Various types of Funds:

a) General or Unrestricted fund: General funds are those which are created without any specific objective and can be utilised for any purpose of NPO. These types of funds are also called capital fund.

b) Special or Restricted fund: Funds which are created for any specific purpose and utilised for that specific purpose are called specific fund. These types of funds cannot be utilised for purpose other than the specific purpose for which it is created. Examples of Specific fund:

1) Tournament fund: Sports club and association create these types of funds for organising tournament.

2) Endowment fund: Endowment fund is a specific fund which is created to ensure the long-term financial health of the not-for profit organisation. These types of funds are created by hospitals, universities etc. for long-term growth of the organisation. This fund is shown on liability side of the balance sheet.

3) Prize fund: This fund is created for the purpose of distribution of prizes to the students or participants.

4) Fixed assets fund: This fund is created for the purpose of acquiring fixed tangible assets.

5) Annuity fund: This fund is created from the donations received for the purpose of regular annual payment to a respected person.

Q.12. Mention the steps involved in preparation of Income and Expenditure account (2018) and Receipts and Payments account.               2018

Ans: Steps in the Preparation of Income and Expenditure Account: Following steps may be helpful in preparing an Income and Expenditure Account from a given Receipt and Payment Account:

1. First, The opening and closing balances of cash and bank are ignored as they are not an income.

2. Second, Exclude the capital receipts and capital payments as these are to be shown in the Balance Sheet. Income and expenditure accounts include only revenue items.

3. Third, Consider only the revenue receipts to be shown on the income side of Income and Expenditure Account with due adjustments of income accrued and income received in advance.

4. Fourth, Take the revenue expenses to the expenditure side of the Income and Expenditure Account with due adjustments of prepaid expenses and outstanding expenses.

5. Last, Consider the following items not appearing in the Receipt and Payment Account that need to be taken into account for determining the surplus/ deficit for the current year :

(a) Depreciation of fixed assets.

(b) Profit or loss on sale of fixed assets.

(c) Opening and Closing Stock.

Steps in the preparation of Receipt and Payment Account:

1. Opening balances of cash in hand and cash at bank are entered on the debit side. In case there is bank overdraft at the beginning of the year, enter the same on the credit side of this account.

2. Total amounts of all receipts are shown on the debit side irrespective of their nature (whether capital or revenue) and whether they pertain to past, current and future periods.

3. Total amounts of all payments are shown on its credit side irrespective of their nature (whether capital or revenue) and whether they pertain to past, current and future periods.

4. Non-cash transactions are ignored while preparing receipts and payments account because they do not affect cash or bank balance.

5. Finally, find the difference between the total of debit side and the total of credit side of the account. If debits side is more than credit side, it represents closing balance of cash/bank. In case, however, the total of the credit side is more than that of the total of the debit side, then the difference will be shown as bank overdraft on the debit side.

Q.13. Mention the steps involved in preparation of Balance sheet of an NPO.

Ans:  The following procedure is adopted to prepare the Balance Sheet:

1. Calculate opening Capital/General Fund by preparing the opening balance sheet of the not-for-profit organisation. Surplus is added with opening capital fund and deficit, if any, deducted with opening capital fund. Further, entrance fees to the extent capitalised, legacies, life membership fees, etc. received during the year is added to find capital fund at the end.

2. All the fixed assets not sold/discarded/or destroyed during the year are shown on the assets side of the balance sheet after adding new additions to the assets and deducting depreciation (as per Income and Expenditure account).

3. Compare items on the receipts side of the Receipts and Payments Account with income side of the Income and Expenditure Account. This is to ascertain the amounts of:

(a) Subscriptions due but not yet received:

(b) Incomes received in advance;

(c) Sale of fixed assets made during the year;

(d) Items to be capitalised (i.e. taken directly to the Balance Sheet) e.g. legacies, interest on specific fund investment and so on.

4. Similarly compare, items on the payments side of the Receipt and Payment Account with expenditure side of the Income and Expenditure Account. This is to ascertain the amounts if:

(a) outstanding expenses; (b) prepaid expenses; (c) purchase of a fixed asset during the year; (d) depreciation on fixed assets; (e) stock of consumable items like stationery in hand; (f) Closing balance of cash in hand and cash at bank as, and so on.