Chapter 1 Accounting for Not for Profit Organisation Solutions
Question - 11 : - Explain the basic features of Income and Expenditure Account and of Receipt and Payment Account.
Answer - 11 : -
Income and Expenditure Account (I&E) Account is a Nominal Account and is prepared on the accrual basis. It records all transactions of revenue nature that are related to the current accounting period (whether outstanding or prepaid) for which the books are maintained. All expenses and losses are recorded on the debit side (Expenditure side) and all income and gains are recorded on the credit side (Income side) of I&E Account. The closing balance or the balancing figure of I&E Account is termed as surplus (or deficit), if the sum total of the Income side exceeds (is lesser than) the sum total of the Expenditure side.
The following are the basic features of Income and Expenditure Account
1. Nature: It is a Nominal Account. The debit side of I&E records all expenses and losses and the credit side records all incomes and gains related to the current accounting period.
2. Basis: It is prepared on the basis of Receipt and Payment Account (R&P). All the revenues items whether incomes or expenditures are transferred from R&P.
3. Excludes Capital Transactions: The transactions those are capital in nature are excluded from this account. For example, only profit or loss on sale of fixed assets is recorded but the total amount of sales is not recorded since sale of fixed asset is considered as a capital receipt.
4. Akin to Profit and Loss Account: Income and Expenditure Account (I&E) is similar to the Profit and Loss Account in the sense that while the former is prepared to ascertain surplus or deficit during an accounting period the latter is prepared to ascertain net profit or net loss incurred during an accounting period.
5. Records only Current Year’s items: This account records only those transactions that are related to current accounting year. In other words, transactions related to the preceding or succeeding accounting period are excluded even if these transactions are realised in the current period.
6. Adjustments: Various cash and non-cash items like, outstanding expenses, prepaid expenses, income received in advance, income due but not received, depreciation, bad debts, etc. can be adjusted in this account.
7. Balancing Figure: The balancing figure of this account is expressed in terms of either surplus (if incomes > expenses) or deficit (if expenses > incomes). The surplus balance, if any, is added to the Capital Fund, whereas, the deficit balance, if any, is deducted from the Capital Fund.
Receipts and Payments Account is a summary of the Cash Book. All the cash receipts are recorded on the Receipts side (i.e. Debit side) and all the cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all the cash and bank transactions both of capital and revenue nature. It not only records the cash and bank transactions relating to the current accounting period but also cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period.
The following are the features of Receipt and Payment Account.
1. Nature: It is a Real Account. It is a summarised version of the Cash Book.
2. Nature of Transactions: It records only cash and bank transactions. Transactions other than cash and bank like depreciation, loss/ profit on sale of assets, etc. are not recorded in this account.
3. No distinction between Capital and Revenue items: It records all cash and bank receipts and payments of both capital and revenue nature.
4. Opening and closing balance: It begins with the opening balance of cash and bank and ends with the closing balance of the cash and bank (balancing figure) at the end of the accounting period.
5. Purpose: It reveals the cash position of an organisation. It helps to ascertain the total amount paid and received during an accounting period.
Question - 12 : - Show the treatment of the following items by a Not-for-Profit Organisation:
(i) Annual subscription
(ii) Specific donation
(iii) Sale of fixed assets
(iv) Sale of old periodicals
(v) Sale of sports materials
(vi) Life membership fee
Answer - 12 : -
i) Annual Subscription
a) Subscriptions received during an accounting year (whether related to the current year or previous and subsequent year) are shown on the debit side of the Receipts and Payments Account.
b) Subscription amount related to the current accounting year only, whether received or yet to be received are shown on the credit side of the Income and Expenditure Account.
c) Subscriptions received in advance for the subsequent year are shown on the Liabilities side of the Balance Sheet.
d) Subscriptions due but not received are shown in the Assets side of the Balance Sheet.
ii) Specific donation
a) The amount received for specific donation is shown on the debit side of the Receipts and Payments Accounts.
b) The amount received for specific donation is shown on the Liabilities side of the Balance Sheet as it is used for the specific purpose for which it is received.
iii) Sale of fixed assets
a) The amount received from the sale of fixed assets are recorded on the debit side of the Receipts and Payments Account.
b) Profit (or loss) on the sale of fixed assets is credited (or debited) to the Income and Expenditure Account.
c) The book-value of the fixed assets sold is deducted from its respective assets on the Assets side of the Balance Sheet.
iv) Sale of old periodicals
a) The amount received from the sale of old periodicals are shown on the debit side of the Receipts and Payments Account.
b) As the sale of old periodicals by any organisation is considered as revenue receipts, so it is shown on the credit side of the Income and Expenditure Account.
v) Sale of sport Materials
a) The amount received from the sale of sport materials are debited to the Receipt and Payments Account.
b) As the sale of sport materials by any sport club is considered as revenue income, so it is shown on the credit side of the Income and Expenditure Account.
vi) Life Membership Fees
a) The amount paid by a person to become a member of an organisation is called life membership fees. As this is a receipt for an NPO, so it is debited to the Receipt and Payment Account.
b) Life Membership fees is not recurring in nature and received once for a whole life from a member. Thus, as Life Membership Fees are capital receipts, so these are added to the Capital Fund on the Liabilities side of the Balance Sheet.
Question - 13 : - Show the treatment of items of Income and Expenditure Account when there is a specific fund for those items.
Answer - 13 : -
There are various sources of receipts like donations, subscriptions, government grants, etc. to an NPO. Some receipts are specific while others are general. While the former can only be used for the specific purpose for which they are received, the latter can be used for any purpose. For example, if donation is received for construction of buildings, then this donation is a specific donation and thereby can only be used for construction of the building. The specific receipts are not considered as revenue income for the NPO and hence are not shown in the Income and Expenditure Account. In fact, such receipts are considered as liabilities to the NPO as these amounts are received for specific purpose and cannot be used for any other purpose. Specific receipts are shown in the Liabilities side of the Balance Sheet, until and unless they are fully set off against the purpose for which they are received. On the other hand, if these amounts are invested outside the organisations (in the form of shares, debentures, etc.), then these are called funds like, match funds, prize fund, etc. The interest and income earned on such investments are not credited to the Income and Expenditure Account but in fact are credited to the respective Fund Account. Similarly, the expenses incurred for such funds are not debited to the Income and Expenditure Account but, in fact, are debited to the respective Fund Account. These special funds are shown in the Liabilities side of the Balance Sheet. In case, if the related expenses exceed the related receipts of the fund, then the difference is shown in the income and Expenditure Account.
Treatment
(Tournament/Match/Prize, etc.) Fund Account
| Dr. | Cr. | |
| Date | Particulars | L.F. | Amount | Date | Particulars | L.F. | Amount |
| | Expenses (expenses incurred like, match expenses, tournament expenses) | | | | Balance b/d | | |
| | | | | | Incomes (income or interest earned on funds invested in the form of donation, interests, dividends, etc.) | | |
| | Balanace c/d (see explanation) | | (a) | | Income and Expenditure A/c (see explanation) | | (b) |
| | | | | | | | |
| | | | | | | | |
Explanation (a)
If the receipts exceed the expenses for specific purpose then the difference between the two is shown in the Liabilities side of the Balance Sheet
Balance Sheet
Explanation (b)
If the expenses exceed the receipts for the specific purpose then the difference between the two is shown in the Expenditure side of the Income and Expenditure Account.
Income and Expenditure A/c
What is Receipt and Payment Account? How is it different from Income and Expenditure Account?
Answer - 14 : -
Receipts and Payments Account is a summary of the Cash Book. All the cash receipts are recorded on the Receipts side (i.e. Debit side) and all the cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all cash and bank transactions both of capital and revenue nature. It not only records cash and bank transactions relating to the current accounting period, but also cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period.
Distinguish between Receipts and Payments Account and Income and Expenditure Account
| Basis of Difference | Receipts and Payments Account | Income and Expenditure Account |
| 1. Nature | It is a summary of cash and bank transactions | It is a summary of current year income and expenses |
| 2. Revenue and Capital | It records transactions related to both revenue and capital nature. | It records transactions related to revenue nature only. |
| 3. Debit Side | Debit side of this account records cash and bank receipts during an accounting period. | Debit side of this account records expenses and losses incurred in the current accounting period. |
| 4. Credit side | Credit side of this account records payments in cash and through cheques. | Credit side of this account records income and gains earned in the current accounting period. |
| 5. Type of account | It is a Real Account | It is a Nominal Account |
| 6. Period | It records receipts and payments made during the year that may be related to the current accounting period or the preceding period and the succeeding accounting period. | It only records income and expenditure made during the current accounting period. |
| 7. Object | This account depicts the cash position of an NPO. | This account shows the net result in terms of surplus or deficits due to the business activities during the year. |
| 8. Opening Balance | This account begins with the opening balance of cash in hand and cash at bank or overdraft. | Usually, it has no opening balance, but sometimes surplus or deficits forwarded from the last accounting period (if not added to the Capital Fund) can be shown as the opening balance of this account. |
| 9. Closing balance | The balancing figure of this account is expressed in terms of the closing balance of cash in hand and cash at bank or overdraft. | The balancing figure is expressed in terms of either surplus (if incomes > expenses) or deficit (if expenses > incomes). |
| 10. Depreciation | It does not include non-cash items like depreciation, appreciation, etc. | It includes non-cash items like depreciation, bad-debts, provisions, etc. in order to ascertain the actual net profit or net loss. |
| 11. Adjustment | Receipts and Payments during the year can be adjusted before preparation of the financial statements. | Adjustments regarding both cash and non-cash transactions can be made. |
| 12. Transfer of Balance | The opening balance of this account is brought forward from the last year's Receipts and Payments Account and the closing balance of this account is carried forward to the subsequent year's Receipts and Payments Account and is shown in the Balance Sheet of the current accounting period. | If the closing balance of this account is surplus then it is added to the Capital Fund in the Balance Sheet. If the closing balance is deficit then it is deducted from the Capital Fund in the Balance Sheet. |
| 13. System | It is prepared on the cash basis. | It is prepared on the accrual basis. |
Question - 15 : - From the following particulars taken from the Cash Book of a health club, prepare a Receipts and Payments Account. | Particulars | Rs |
| Opening balance: | |
| Cash in Hand | 5,000 |
| Cash at Bank | 25,000 |
| Subscriptions | 1,65,000 |
| Donations | 35,000 |
| Investment Purchased | 80,000 |
| Rent Paid | 20,000 |
| General Expenses | 21,500 |
| Postage and stationery | 2,000 |
| Courier charges | 1,000 |
| Sundry Expenses | 2,500 |
| Closing Cash in Hand | 12,000 |
Answer - 15 : -
Books of Health Club
Receipt and Payment Account
The Receipt and Payment Account of Harimohan charitable institution is given:
Receipt and Payment Account for the year ending March 31, 2015
| Receipts | Amount Rs | Payments | Amount Rs |
| Balance b/d: | | Furniture | 3,000 |
| Cash at Bank | 22,000 | Investments | 55,000 |
| Cash in Hand | 8,800 | Advance for building | 20,000 |
| Donations | 32,000 | Charities | 60,000 |
| Subscriptions | 50,200 | Salaries | 10,400 |
| Endowment Fund | 60,000 | Rent and Taxes | 4,000 |
| Legacies | 24,000 | Printing | 1,000 |
| Interest on Investment | 3,800 | Postage | 300 |
| Interest on Deposits | 800 | Advertisements | 1,100 |
| Sale of old newspapers | 500 | Insurance | 4,800 |
| | | Balance c/d: | |
| | | Cash at Bank | 32,000 |
| | | Cash in Hand | 10,500 |
| | 2,02,100 | | 2,02,100 |
| | | | |
Prepare the Income and Expenditure Account for the Year ended on March 31, 2015 after considering the following:
(i) It was decided to treat Fifty per cent of the amount received on account of Legacies and Donations as income.
(ii) Liabilities to be provided for are:
Rent Rs 800; Salaries Rs 1,200; advertisement Rs 200.
(iii) Rs 2,000 due for interest on investment was not actually received.
Answer - 16 : -
Books of Harimohan Charitable Institution
Income and Expenditure Account
Question - 17 : - From the following particulars, prepare Income and Expenditure account: | Details | Amount Rs |
| Fees collected, including Rs 80,000 on account of the previous year | 5,20,000 |
| Fees for the year outstanding | 30,000 |
| Salary paid, including Rs 5,000 on account of the previous year | 68,000 |
| Salary outstanding at the end of the year | 3,000 |
| Entertainment expenses | 8,000 |
| Tournament expenses | 25,000 |
| Meeting Expenses | 18,000 |
| Traveling Expenses | 7,000 |
| Purchase of Books and Periodicals, including Rs 31,000 for purchase of Books | 40,000 |
| Rent | 15,000 |
| Postage, telegrams and telephones | 6,000 |
| Printing and Stationery | 18,000 |
| Donations received | 25,000 |
Answer - 17 : - Income and Expenditure Account
Question - 18 : - Following is the information given in respect of certain items of a Sports Club. Show these items in the Income and Expenditure Account and the Balance Sheet of the Club: | Particulars | Rs |
| Sports Fund as on 1.4.2015 | 35,000 |
| Sports Fund Investments | 35,000 |
| Interest on Sports Fund | 4,000 |
| Donations for Sports Fund | 15,000 |
| Sports Prizes awarded | 10,000 |
| Expenses on Sports Events | 4,000 |
| General Fund | 80,000 |
| General Fund Investments | 80,000 |
| Interest on General Fund Investments | 8,000 |
Answer - 18 : -
Books of Sports Club
Income and Expenditure Account
Question - 19 : - How will you deal with the following items while preparing for the Bombay Women Cricket Club its income and expenditure account for the year ending 31.3.2017 and its Balance Sheet as on 31.3.2017: | | Rs |
| (a) | Donation received during the year for the construction of a permanent Pavilion | 12,25,000 |
| | Expenditure incurred up to 31.3.2017 on its construction | 10,80,000 |
| | The total estimated expenditure on construction of Pavilion being | 25,00,000 |
| | | |
| (b) | Tournament Fund: | |
| | Balance as on 1.4.2016 | 10,700 |
| | Subscriptions for tournament received during the year | 65,800 |
| | Expenditure incurred during the year on conducting tournaments | 72,400 |
| | | |
| (c) | Life Membership fee received during the year | 28,000 |
Give reasons for youranswers
Answer - 19 : -
(a)
Books of Bombay Women Cricket Club
Balance Sheet
as on March 31, 2017
Reason
Donation for construction of Pavilion is a donation for specific purpose.
Expenses on construction on Pavilion is a capital expenditure.
(b)
Balance Sheet
as on March 31, 2017
Reason
All funds received are treated as capital receipts and expenses related to any fund are deduced from the concerned funds.
(c)
Balance Sheet
as on March 31, 2017
Reason
Life Membership Fees are considered as capital receipts and are shown on the Liabilities side of the Balance Sheet, if nothing is specified about its treatment. But if it is to be treated as revenue item, then it is shown on the credit side of the Income and Expenditure Account.
From the following receipts and payments and information given below, Prepare Income and Expenditure Account and opening Balance Sheet of Adult Literacy Organisation as on December 31, 2017.
Receipt and Payment Account for the year ending
as on December 31, 2017
Information:
(i) Subscription outstanding as on 31.12.2016 Rs 2,000 and on December 31, 2017 Rs 1,500.
(ii) On December 31, 2017 Salary outstanding Rs 600, and one month Rent paid in advance.
(iii) On Jan. 01, 2016 organisation owned Furniture Rs 12,000, Books Rs 5,000.
Answer - 20 : -
Books of Adult Literacy Organisation
Income and Expenditure Account
as on Dec. 31, 2017
Balance Sheet
as on Dec. 31, 2017