Chapter # 2 Accounting for Non – Profit

Earning Concerns

Principles of Accounting – XII

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Accounting for Non – Profit Earning Concerns

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WHAT THE EXAMINER USUALLY ASK?

Computation of cash balance. Computation of accumulated fund. Preparation of Final Accounts:

o Income and expenditure account. o Balance sheet.

Multiple Choice Questions (MCQs).

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Chapter # 2

ACCOUNTING FOR

NON – PROFIT EARNING CONCERN NON – PROFIT ORGANIZATION

Associations, charities, cooperatives, and other voluntary organizations formed to further cultural, educational, religious, professional, or public service objectives. Their startup funding is provided by their members, trustees, or others who do not expect repayment, and who do not share in the organization's profits or losses which are retained or absorbed. Approved, incorporated, or registered NPOs are usually granted tax exemptions, and contributions to them are often tax deductible. The basic purpose of non – profit organization is not to earn profit.

ACCOUNTING TERMS IN NON – PROFIT ORGANIZATION

Profit Organization Non – Profit Organization

Capital Accumulated fund

Cash book Receipt and payment account

Income statement Income and expenditure account

Net profit Surplus of income over expenditure

Net loss Deficit over income

DISTINCTION BETWEEN NON – PROFIT AND COMMERCIAL

ENTITIES

A Not-for-profit organization can be differentiated from a profit seeking organization on the following basis:

Basis Commercial Organization Non – Profit Organization

Primary Motive:

To carry on the activities for earning profits.

To provide services to the members or to the public at large. Profits earned out of any trading activities are used to further the service objectives.

Ownership: Proprietors of business are owners and hence, entitled to share the profits.

Subscribers to the membership of the Not-for-profit entity are called the members.

Distribution of Profit:

Profits are distributed among the owners.

Profits are not distributed among the members.

Result:

Result of the entity’s activities is called profit, which is the difference between sales and other incomes, if any, over the expenses. The profit either be withdrawn or retained in a business. Excess of expenses over incomes is called loss.

Result of the entity’s activities is called the surplus, which is the excess of income over expenses. It increases the Capital Fund and cannot be withdrawn by the members. The excess of expenses over incomes is called deficit.

Accounting Statements:

The accounting statements are prepared to serve the information needs of the users include all or some of the following: (i) Manufacturing Account (ii) Profit and Loss Account (iii) Balance Sheet.

The accounting statements prepared to serve the information needs of the users include: (i) Receipts and Payments Account, (ii) Income and Expenditure Account (iii) Balance Sheet.

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REVENUE RECEIPTS

These are the amounts received on a recurring business and include: (a) Annual membership subscriptions; (b) Donations, grants and legacies received regularly for general purposes; (c) Admission fees not capitalized; (d) Hall rent received from outsiders for the use of hall; (e) Receipts from sale of old newspapers and magazines; (f) Receipts from sale of refreshments, dinner coupons, & other social functions; (g) Interest received on investment, fixed deposit and loans advanced; (h) Any other item of the similar nature.

REVENUE PAYMENTS

These are the payments for amounts spent at regular intervals not resulting in the formations of fixed assets. Revenue payments include the following: (a) Payments for the salaries and wages; (b) Payments made for rent, taxes, insurance premium, electricity charges, printing, postage

and stationary charges and repairs. (c) Payments for travelling and conveyance. (d) Payments for purchase of refreshments, dinners; (e) Payments for organizing sport meets and tournaments; (f) Interest paid on loans and on bank overdraft; (g) Payments for other items of similar nature.

INCOME AND EXPENDITURE ACCOUNT

An account similar to a profit and loss account, prepared by an organization whose main purpose is not the generation of profit. It records the income and expenditure of the organization and results in either a surplus of income over expenditures or of expenditure over income.

ILLUSTRATION # 1: (Income and Expenditure Account & Balance Sheet)

2004 Regular & Private – BIEK A summary of receipts, expenditure account of Khairpur Sports Club for one year is given below:

Receipts Payments Opening balance 6,000 Salary 4,000 Subscriptions 40,000 Electric charges 1,000 Donations 15,000 Sports expenditure 1,000 Interest 1,000 Sports goods purchased 10,000 Charity show receipts 5,000 Books purchased 8,000 Other expenses 2,000 Charity show expenses 4,000 Investment 10,000 Closing balance 27,000 67,000 67,000 Additional Data:

(i) Subscription included Rs.1,000 for 2002 and Rs.500 for the year 2004. (ii) Accrued subscription Rs.2,500 for the year 2003. (iii) Outstanding salary Rs.2,000. (iv) Accrued interest income Rs.500.

On Jan. 1, 2003 the club had the following assets: (a) Sports goods Rs.4,000. (b) Books Rs.5,000. (c) Investment Rs.6,000.

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REQUIRED (i) Prepare Income and Expenditure Account for Dec. 31, 2003. (ii) Prepare balance sheet as on Dec. 31, 2003.

SOLUTION # 1:

KHAIRPUR SPORTS CLUB INCOME AND EXPENDITURE ACCOUNT

FOR THE PERIOD ENDED 31 DECEMBER 2003 Expenditure Income

Salaries expense (4,000 + 2,000) 6,000 Subscription (40,000–1,000–500+2,500)

41,000

Electric charges 1,000 Donations 15,000 Sports expenditure 1,000 Interest income (1,000 + 500) 1,500 Other expenses 2,000 Charity show receipts 5,000 Charity show expenses 4,000 14,000 Surplus over expenditure 48,500 62,500 62,500

KHAIRPUR SPORTS CLUB

BALANCE SHEET AS ON 31 DECEMBER 2003

ASSETS EQUITIES Current Assets: Liabilities: Cash 27,000 Salaries payable 2,000 Interest receivable 500 Unearned subscription 500 Subscription receivable 2,500 Total liabilities 2,500 Total current assets 30,000 Fixed Assets: Club Equity: Sports goods 14,000 Accumulated fund 22,000 Books 13,000 Add: Surplus 48,500 Investment 16,000 Total owner’s equity 70,500 Total fixed assets 43,000 Total assets 73,000 Total equities 73,000

Computation of Accumulated Fund: Cash (Openings) 6,000 Sports goods 4,000 Books 5,000 Investment 6,000 Subscription receivable 1,000 Accumulated Fund 22,000

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Practice questions

Question # 1: 2003 Private – BIEK The following is the receipts and payments account of Ajmeera Welfare Trust for 2002:

Receipts Payments Opening bank balance 16,500 Salaries expenses 26,000 Subscription fee 64,000 Repair expense 2,000 Rent revenue 6,000 Utilities expense 8,000 Other revenue 11,000 Other expense 21,000 Furniture 20,000 Closing bank balance 20,500 Adjustment data at December 31, are as follows:

(i) Accrued subscription fees Rs.3,000. (ii) Prepaid salaries Rs.2,000. (iii) Accrued utilities Rs.1,000. (iv) Depreciation on furniture Rs.1,000.

REQUIRED Income and Expenditure account. Question # 2: 2012 Private – BIEK The following are the receipts and payments accounts of Rahim Welfare Trust for 2011:

Receipts (Rs.) Payments (Rs.) Opening balance 46,200 Salaries 72,000 Subscription fees 178,000 Repairs expenses 6,400 Rent revenue 18,000 Utilities expenses 22,400 Other revenue 30,800 Other expenses 58,800 Furniture 56,000 Closing balance 57,400

273,000 273,000 Additional Data at December 31, 2011: i) Accrued subscription fees Rs.8,400. ii) Prepaid salaries Rs.5,600. iii) Accrued utilities expenses Rs.2,800. iv) Depreciation on furniture Rs.2,800. REQUIRED Prepare income and expenditure account for the year ended December 31, 2011. Question # 3: 2010 Regular & Private – BIEK The following are the receipts and payments account of Zaitoon Welfare Society for the year ended December 31, 2009.

Receipts Payments Cash balance 45,000 Salaries to ground men 15,000 Subscription 82,000 Repair expense 20,000 Rent revenue 30,000 Purchase of computer 18,000 Match income 40,000 Utilities expense 20,000 Bank loan 60,000 Purchase of furniture 30,000 Printing of match tickets 3,000 Additional Information on December 31, 2009.

(i) Accrued subscription Rs.3,000 & unearned rent Rs.5,000. (ii) Prepaid utilities Rs.4,000. (iii) Depreciation on equipment Rs.2,000. (iv) Accrued interest on bank loan @ 12.5% per annum.

REQUIRED Prepare Income and Expenditure Account.

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Question # 4: 2011 Private – BIEK The following information is provided by Hamid Sports Club: Furniture Rs. 25,000/- Utilities expenses Rs. 36,000/- Cash at bank Rs. 5,000/- Rent revenue Rs. 15,000/- Admission fee Rs. 40,000/- Other revenue Rs. 12,000/- Donation Rs. 24,000/- Salaries Rs. 22,000/- Additional Information at December 31, 2010:

(i) Prepaid salaries Rs.3,000/-. (ii) Accrued rent revenue Rs.5,000/-. (iii) Accrued utilities expense Rs.4,000/-.

REQUIRED Prepare Income and Expenditure Account for the year ended December 31st, 2010. Question # 5: 2013 Private – BIEK Following are the receipts and payments account of Pioneer Sports Club for the year 2012:

Receipts Payments Cash balance Rs.35,000 Staff salaries Rs.12,000 Subscription Rs.72,000 Repair expense Rs.8,000 Rent revenue Rs.20,000 Utilities expense Rs.10,000 Match income Rs.50,000 Purchase of computer Rs.25,000 Bank loan Rs.40,000 Purchase of furniture Rs.30,000 Printing of match tickets Rs.4,000 Additional Information on December 31, 2012:

i) Depreciation on fixed assets @ 10%. ii) Accrued interest on bank loan @ 12% per annum. iii) Accrued subscription Rs.6,000. iv) Unearned rent Rs.4,000. v) Prepaid utilities Rs.3,000

REQUIRED Prepare income and expenditure account for the year ended on December 31, 2012. Question # 6: 2011 Regular – BIEK Following is the information provided by Khalid Sports Club: Cash in hand Rs.5,000/-, Cash at bank Rs.50,000/-, Ground rent Rs.40,000/-, Entrance fees Rs.10,000/-, Miscellaneous expenses Rs.3,000/-, General expenses Rs.21,000/-, Potage and printing Rs.7,000/-, Closing cash balance Rs.2,000/-, Subscription Rs.35,000/-, Donation Rs.100,000/-, Taxes Rs.8,000/-, Secretary’s salary Rs.65,000/-, Utility expense Rs.9,000/-, Sale of tickets Rs.72,000/-. REQUIRED Prepare Income and Expenditure Account. Question # 7: 2008 Regular & Private – BIEK The following is the summary of receipts and payments of Moona Ramzan Welfare Society the year ended 31st Dec. 2007:-

Receipts Payments Cash opening balance 40,850 Purchase of computer 20,000 Donations 170,000 Staff salary 72,000 Membership fee 80,000 Office expenses 10,000 Other incomes 9,150 Office rent 48,000 Medicines, books for poor (free supply) 69,450 Sewing machines for widows (free supply) 40,000 Balance (ending) 40,550 300,000 300,000

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Other Information: (i) On 1st January, 2007 the society had the following assets:

Furniture Rs.60,000 and equipments Rs.65,000. (ii) Outstanding membership fee Rs.5,000. (iii) Non-current assets to be depreciated at 10%.

REQUIRED (i) Prepare Income and Expenditure Account for the year. (ii) Prepare Balance Sheet as on December 31, 2007.

Question # 8: 2009 Regular & Private – BIEK A summary of cash receipts and payments of Abdul Hadi Sports Club for the year ended December 31, 2008 is given below:

Receipts Payments Balance Jan. 1, 08 135,000 Purchase of equipment 93,750 Collection from matches 1,237,500 Stadium rent 225,000 Profit on sale of refreshment 236,250 Printing & stationary 48,750 Secretary’s expenses 108,000 Equipment repairs 34,500 Groundman’s wages 390,000 Miscellaneous expenses 49,500 Additional Information on December 31, 2008:

(a) On January 1, 2008, equipment inventory is valued at Rs.375,000. (b) Depreciation on equipment is charged @ 20% per year. (c) Prepaid rent is Rs.45,000. (d) Outstanding printing charges were Rs.24,750.

REQUIRED (i) Prepare Income and Expenditure Account for the year ended December 31, 2008. (ii) Prepare Balance Sheet as on December 31, 2008.

Question # 9: 2013 Regular – BIEK The following are the receipts and payments account of Waqas Welfare Society for the year ended Dec. 31, 2012:

Receipts Payments Cash balance Rs.100,000/- Salaries expenses Rs.20,000/- Subscription Rs.90,000/- Repair and maintenance Rs.10,000/- Match income Rs.50,000/- Utilities expenses Rs.60,000/- Rent revenue Rs.60,000/- Purchase of equipment Rs.40,000/- Additional Information on Dec. 31, 2012:

(i) Subscription received in advance Rs.5,000/-. (ii) Accrued subscription Rs.7,000/-. (iii) Rent unearned Rs.10,000/-. (iv) Prepaid utilities Rs.5,000/-. (v) Depreciation on equipment Rs.2,000/-.

REQUIRED Prepare Income and Expenditure account. Question # 10: 2012 Regular – BIEK The following data relate to Commerce Welfare Trust on March 31, 2012: Cash Rs.20,000; Bank Rs.40,000; Land Rs.200,000; Building Rs.300,000; Allowance for depreciation – Building Rs.10,000; Equipment Rs.50,000; Notes payable Rs.100,000.

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The Period – End Adjustment Data were as Follows: i) Subscription fees receivable Rs.45,000 and received in advance Rs.5,000. ii) Prepaid salaries Rs.6,000 and accrued taxes Rs.2,000. iii) Estimated depreciation on building Rs.10,000 and on equipment Rs.5,000.

REQUIRED a) Determine the amount of accumulated fund before adjustments. b) Prepare balance sheet (income and expenditure account showed surplus of Rs.29,000

for the period). Question # 11: 2007 Regular & Private – BIEK A summary of receipts and payments accounts of Ranipur Sports Club for one year is given below:

Receipts Payments Opening balance 12,000 Salary expense 8,000 Subscriptions 80,000 Electric charges 2,000 Donations 30,000 Sports expenditure 2,000 Interest 2,000 Sports goods purchase 20,000 Charity show receipts 10,000 Books purchased 16,000 Other expenses 4,000 Charity show expenses 8,000 Investment 20,000 Closing balance 54,000 134,000 134,000 Additional Data:

(1) Subscription included Rs.2,000 for the year 2005 and Rs.1,000 for the year 2007. (2) Accrued subscription Rs.5,000 for the year 2006. (3) Outstanding salary Rs.4,000. (4) Accrued interest income Rs.1,000.

On January 1, 2006 the club had the following assets: (a) Sports goods Rs.8,000. (b) Books Rs.10,000. (c) Investment Rs.12,000.

REQUIRED (1) Prepare Income and Expenditure Account for the year ended December 31, 2006. (2) Prepare balance sheet as on December 31, 2006.

Question # 12: 2006 Regular & Private – BIEK A summary of cash receipts and payments of a Professional Educational Institute for the year ended December 31, 2005 is given below:

Receipts (in Rs.) Payments (in Rs.) Opening balance 50,000 Salaries 120,000 Subscription income 600,000 Library books purchased 20,000 Tuition fees 100,000 Examination expense 50,000 Donations 60,000 Computer 10,000 Entry test fees 20,000 Printing & stationary 20,000 Postage & telegram 10,000 Utilities charges 15,000 Repair expense 5,000 Closing balance 580,000

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The Institute had the following Assets on January 1, 2005: Library books Rs.30,000; Building Rs.500,000; Computer Rs.40,000; Furniture and fixture Rs.20,000. Additional Information:

(i) Out of total subscription received, Rs.5,000 is for the year 2004, Rs.30,000 for 2006 & Rs.10,000 is outstanding for 2005.

(ii) Salary is outstanding Rs.30,000. REQUIRED

(i) Prepare Income and Expenditure account for the year ended December 31, 2005. (ii) Prepare balance sheet as on December 31, 2005.

Question # 13: 2002 Regular – BIEK The balances of a football club are given below:- ASSETS: Cash Rs.1,500; 10% Government securities Rs.2,000; Subscription receivable

Rs.500; Rent receivable Rs.1,000; Office equipment Rs.1,000; Sports equipment Rs.5,000; Building Rs.15,000.

EQUITIES: Salaries payable Rs.600; Ground rent payable Rs.400; 4% Loan (payable after 5 years) Rs.10,000; Accumulated fund ?

During the year cash receipts and payments are as under:- RECEIPTS: Cash balance Rs.1,500; Entrance fees Rs.1,500; Subscription Rs.19,000; Rent

revenue Rs.4,500; Donation Rs.2,000; Interest on securities Rs.200. PAYMENTS: Salaries expense Rs.16,000; Ground rent Rs.2,000; Sports equipment Rs.2,000;

Office supplies Rs.500; Interest expense Rs.400; Insurance expense Rs.500; Miscellaneous expense Rs.500.

Data for Adjustment: (1) Unused office supplies Rs.200. (2) Subscription and rent receivable Rs.1,000/- & Rs.500/- respectively. (3) Subscription and rent received in advance Rs.500/- & Rs.300/- respectively. (4) Ground rent payable Rs.500/-. (5) Depreciation on building, office equipment & sports equipment @ 10%. (6) Donation is a part of accumulated fund.

REQUIRED (a) Prepare income and expenditure account for the year ended June 30, 2001. (b) Prepare balance sheet as on June 30, 2001.

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MULTIPLE CHOICE QUESTIONS (MCQS)

1) Which of the following is generally considered as a non-profit oriented organization?

a) Charitable organization b) Corporation c) Audit firms d) Insurance companies 2) Non – profit organizations prepare all of the following accounts except: a) Receipts and payments account b) Income and expenditure account c) Balance sheet d) Income statement 3) Expenditures greater than incomes of a non – profit organization give rise to a: a) Loss b) Profit c) Surplus d) Deficit 4) Which of the following is to be recorded in an income and expenditure account? a) Purchase of fixed asset b) Profit on sale of fixed asset c) Sale of fixed asset d) None of them 5) The capital of a non – profit organization is generally known as: a) Equity b) Accumulated fund c) Cash fund d) Financial reserve 6) Subscription received but not yet earned is considered as: a) Asset b) Liability c) Income d) Expenditure 7) Rs.10,000 received as the annual membership subscription. Out of this, Rs.2,000 is

pertaining to the previous accounting period whereas Rs.1,000 is receivable at the end of the current accounting period. The amount of subscription that will be shown in the income and expenditure account for this accounting:

a) Rs.10,000 b) Rs.12,000 c) Rs.9,000 d) Rs.8,000 8) Income and expenditure account shows: a) Cash available to organization b) Closing capital of an organization c) Cash available in the bank account d) Surplus or deficit for current accounting

period 9) On what basis the receipts and payments account is prepared? a) Cash basis b) Accrual basis c) Both accrual and cash basis d) None of them 10) In non-profit accounting, the sale of old newspapers is generally considered as: a) Expenses b) Liability c) Income d) Capital receipt

11) Amount received from any source by way of gift in non-profit organization is

described as: a) Legacy b) Subscription c) Donation d) Life time membership

12) Excess of the income of a non-profit concern over its expenses is: a) Deficit b) Surplus c) Cash balance d) Income

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13) Income and expenditure account is equivalent to the: a) Receipt and payment account b) Balance sheet c) Cash book d) Profit and loss account

14) The credit balance at the end, in income and expenditure, shows: a) Surplus b) Deficit c) Both surplus and deficit d) Expenditure

15) Excess of expenditure over income is called: a) Deficit b) Surplus c) Both surplus and deficit d) Capital

16) Non-profit making organizations are established for: a) Profit b) Charitable or religious purposes c) Manufacturing goods d) Trading concern

17) Receipts and payments account is a summary of: a) Cash book b) Purchase book c) Sales book d) Purchase return book

18) Example of non-profit making organization is: a) Fan factory b) Sugar industry c) Government college d) Private college

19) This item is not an income in non-profit concern: a) Government grant b) Donation c) Interest on loan d) Subscription

20) In non-trading concerns, statement of affairs is used to mean the same as: a) Profit and loss account b) Bank account c) Balance sheet d) Trial balance

21) A Receipts and Payments Account is one: a) Which is accompanied by a balance sheet b) In which the profit is calculated c) In which the opening and closing cash balances are shown d) In which the surplus of income over expenditure is calculated 22) Non – profit earning concerns are established: a) For making profit b) For loss c) No profit or loss d) For trading

23) The income and expenditure account lists the club’s: a) Assets and liabilities b) Income and expenditures c) Revenues and assets d) Expenditures and assets

24) In non – profit organization, assets – liabilities = : a) Fixed assets b) Capital c) Accumulated fund d) Income