CHAPTER FOURTEEN - ACCOUNTING FOR NOT-FOR-PROFIT ORGANISATION

14.0 Learning Objectives……………………………………………………………….
14.1 Introduction……………………………………………………………………….
14.2 Receipts and Payments Accounts………………………………………………….
14.3 Income and Expenditure Account…………………………………………………
14.4 Membership Subscription………………………………………………………….
14.5 Bar Income Statement …………………………………………………………….
14.6 Life Membership…………………………………………………………………..
14.7 Accumulated Fund………………………………………………………………..
14.8 Summary………………………………………………………………………….







CHAPTER FOURTEEN
ACCOUNTING FOR NOT-FOR PROFIT ORGANISATIONS

14.0  Learning Objectives

After you have studied this chapter, you should be able to:
• State the difference between a Receipts and Payments Account and an Income and Expenditure Account
• Explain the difference between the final accounts of not-for profit organizations and those of sole traders and partnerships  • Prepare Receipts and Payments Account
• Prepare Income and Expenditure Account
• Prepare subscription account making the necessary adjustment entries with respect to amounts in arrears and payments in advance.
• Prepare the accumulated fund of a not-for profit organisation

14.1  Introduction
There are many types of not-for profit organisations. They include government owned hospitals and voluntary health and welfare organizations. In Ghana and Nigeria most citizens depend heavily on such entities for religious, educational, social and recreational needs. Examples of other not-for profit organisations include the following:
• Private and community foundations
• Professional associations
• Research and scientific organisations
• Social and country clubs
• Trade associations
• Labour organizations •  Political parties.

It is not only profit making organisations that need accounts.  Organisations set up for purposes other than profit, also need to tell their stakeholders how they have dealt with the funds they have contributed.
The legal status of such entities is usually spelt out in club rules or regulations. Students must however remember that external financial information provided by such organisations must be in conformity to generally accepted accounting principles.

The accounts of clubs, societies and charitable organisations may consist of the following:
• Receipts and Payment Account
• Income and Expenditure Account and
• Statement of Financial Position

14.2  Receipts and Payments Account
This is a statement of cash actually received and paid during a given period. Receipts being debited and payments credited. It is, in effect, a summary of the cashbook, and therefore shows the opening and closing balances of cash in hand, and receipts and payments of any kind and on any account made during the period.  Illustration 14.1
An example of a receipts and payments account is shown below:
Receipts ¢’000   Payments ¢’000
Bank balance 1/6/2001     118,000   Printing & stationary    228,000
Sponsored walk       23,000   Management expenses    109,000
Subscription     580,000   Caterer for president ball    113,250
Sundry income       57,000   Electricity and water      78,500
Sale of club’s manual     230,000   Bar creditors    278,500
Sale of equipment     254,000   Bank balance 31/5/2002    454,750
 1,262,000   1,262,000

14.3  Income and Expenditure Account
Income and Expenditure Account of the club is the equivalent of the Income statement of a trading concern.  It contains only revenue items, being debited with all expenditure, and credited with all incomes of a period, whether or not it has actually been paid or received within that period. The final balance of an Income and Expenditure Account represents the excess of income over expenditure or the excess of expenditure over income, as the case may be, for the period. This balance is similar to the net profit or loss of a trading concern.

Readers must note that an Income and Expenditure Account differs from the Receipts and Payments Account. The latter records only cash movements, the former takes into consideration non-cash adjustments for amounts owing and owed at the period end and for depreciation. It also recognises the accounting distinction between revenue and capital expenditure. The important point that students must note is that the Income and Expenditure Account is prepared on an accrual basis.

14.4  Membership subscription:
A club or society receives payments from members for benefits, which members have enjoyed. Annual membership subscriptions of clubs and societies are usually payable one year in advance. Such payment in advance by members is shown as liability in the statement of financial position. This is because the year‟s membership has still to run as at the date of statement of financial position. A large number of club subscriptions in arrears may never be received and the statement could be distorted, since such amounts are usually shown as assets.

Illustration 14.2
The Mambo Youth Club presented the following Receipts and Payments Account for the period of 1st January 2001 to 31st December 2001.


Extracts from the membership subscription book revealed that subscriptions owing by members amounted to ¢80,000 on 31st December 2000 and ¢120,000 on 31st December 2001. The accounts clerk recorded subscription of ¢21,500 and ¢109,000 in respect of subscriptions that have been paid by members in advance for 2001 and 2002 respectively.



The subscription account will be prepared as follows:
Subscription Account for the year ended 31st Dec. 2001
¢,000   ¢'000
Balance b/f       80,000   Bal b/f          21,500
Income & Expenditure a/c     532,500   Receipts & Payment a/c        580,000
Balance c/f     109,000   Balance c/f        120,000
    721,500        721,500

Balance b/f     120,000   Balance b/f        109,000

By carrying forward subscription in advance, the accountant is applying the matching concept. This is because the payment of ¢109,000 in 2001 represents income meant for 2002 accounting year. This must therefore be removed from the current year‟s Income and Expenditure account, hence the debit carry forward.
From the above solution subscription in arrears have been treated as an asset. This will hold true as a result of the accrual concept since the subscription in arrears are income that have been earned for the accounting year of 2001 but for which cash has not been received.
In practice however, subscriptions in arrears are often excluded from the statement of financial position on grounds of the prudence concepts. This is due to the fact that subscriptions that are owed by members for a long time end up not being paid eventually. In examination environment, however, readers are reminded to follow the policy of the club or society as provided by the examiner.
14.5  Bar Income Statement
It is not uncommon for clubs to engage in other income generating activities to raise additional revenue for the effective running of the club. These other activities are done with the sole aim of making profit. For instance the aim of a local trade union is not to make profit but the union may operate a bar alongside its activities with the object of making profit. The profit will not be distributed among the members but rather used for the purpose of the union.
If a club has a bar, a separate Income Statement will be prepared for its trading activities.  The net profit from the bar activities is then included as income in the Income and Expenditure Account. Any loss on the bar activities will be shown in the expenditure side of the Income and Expenditure Account.
14.6  Life Membership
Subscriptions are often received from life members.   Life members pay a once and for all subscription which entitles them to membership facilities for the rest of their lives. The once and-for-all payments from life members are not income relating to the year in which they are received by the club, because the payment is for the life of the members, which can of course last a very long time to come. In practice, if life member‟s subscriptions are small, they are credited to income as received but if they are significant in amount, then they should be credited in equal proportion over the estimated active club membership of such members.
14.7  Accumulated fund
This represents the opening capital of a not-for profit making organisation. It has the same meaning ascribed to the capital accounts of a sole trader and partnership and is calculated as the difference between total assets and liabilities. It is usually common to see most not-for profit organisations keeping accounts on single entry basis. For this reason the procedure for preparing the accumulated fund of a not-for profit organisation is the same as that of statement of affairs as obtained under incomplete records and single entry.
Illustrative 14.2
The following is the Receipts and Payments Account for the Victorosky Fun Club for the year ended 31st October 2005.
RECEIPTS ¢‟000 PAYMENTS ¢‟000
Subscription 1,643,560 Printing & stationery 59,160
Sponsored walk 478,802 Bar steward‟s salary 69,600
President‟s Ball collections 408,000 Caterer for President‟s ball 250,000
Sundry income 75,000 Light, cleaning etc. 32,640
Bar takings 510,000 Petty cash 65,000
Sale of equipment 7,923 Bar creditors 280,500
Raffle  183,030 Investment in ABC limited 450,000
  Donation  50,000
  Sundry President‟s ball exp. 5,275
  Prizes for raffle 21,600
  Building project (materials) 839,000
  Rent  360,000
  Secretary‟s salary 120,000
  Sundry bar expenses 3,360
  Bank charges 36,000
  Hiring of hall for Pres. Ball 20,000
  Building project (wages) 525,000
  Insurance 18,000
  New equipment 67,800 The following additional information has been given:
1. Current Assets and Liabilities were:
          2004  2005
  ¢‟000  ¢‟ 000
Bar inventories  27,000  36,000
Bar payables  18,000  33,000
Subscriptions in arrears  240,000  360,000
Subscriptions in advance  150,000  210,000
Light and cleaning owing  4,200  6,800
Insurance prepaid  4,200  5,200
Petty cash float  3,000  1,000
Cash in hand  15,565  14,340
Bank balance  246,500  281,105

2. The petty cash float is used exclusively for telephone and postages.
3. The club started constructing its club House during the year. The project will take four years to complete. Amount owed for building materials supplied at 31st October 2005 was ¢511,500,000. Wages owed for October 2005 was ¢175,000,000. Inventories of materials at the end was ¢220,500,000
4. Tickets for the President‟s Ball were sold at ¢300,000 each. The Club engaged the services of a caterer who agreed to charge on the number of plates served under the following conditions:
• Below 1,500 plates, amount to be charged per plate was ¢250,000.
• From 1,501 to 2,000 plates, amount to be charged per plate was ¢220,000.
• Above 2,000 plates, amount to be charged per plate was ¢200,000.  Of the 2,400 tickets sold, 90% attended the function and were served
5. Depreciation of equipment is to be calculated at 10% per annum on written down value. The
Club‟s equipment which was disposed of during the year had a net book value of ¢9,905,000 on 1st November 2004.
6. Subscriptions in arrears for more than one year are to be written off.
7. An amount of ¢1,000,000,000 is to be transferred from accumulated fund to building fund.
8. Investment in ABC limited is expected to be held for at least five years.
9. Included in subscription is an amount of ¢192,000,000 in respect of 2004.
10. Rent paid represents one and half years to 30th April, 2007.
Required:
(a) Accounts showing the profit or loss on Bar operation and President‟s Ball (b) The accumulated fund as at 1st November 2004.
(c) The Income and Expenditure Account of Victorosky Fun Club for the year ended 31st October 2005 and Statement of financial position as at that date.

Solution to illustration question
(a) Victorosky Fun Club
(i)President ball Income statement for the year ended 31st December 2005
  ¢'000  ¢'000
Sale of tickets (2,400@¢300,000)    720,000
Less: Cost of meals served [2,400x90%@¢200,000]  432,000

    288,000
Less Expenses:   
Hiring of Hall  20,000  
Sundry Expenses  5,275   25,275
Profit to I & E a/c 
(ii) Bar Comprehensive Income Statement for the Year Ended 31st October, 2005
  ¢'000  ¢'000 
Takings   510,000 
Less cost of sales:     
Opening inventories  27,000   
Add Purchases(w1)  295,500   

  322,500   
Less Closing Inventories  36,000  286,500 

    223,500  
Less Expenses:     
Stewards salary  69,600    
Sundry expenses  3,360   72,960  
Profit to I & E a/c 

(b) ACCUMULATED FUND AS AT 1ST NOVEMBER, 2004
Assets  ¢'000  ¢'000
Equipment    9,905
Cash in hand    15,565
Bank    246,500
Inventories    27,000
Subscriptions    240,000
Prepaid insurance    4,200
Petty cash    3,000
Less Liabilities    546,170
Bar creditors  18,000 
Light & Cleaning owing  4,200 
Subscriptions  150,000  172,200
ACCUMULATED FUND 

Victorosky Fun Club
Income and Expenditure Account for the year ended 31st October 2005.
INCOME:  ¢'000  ¢'000
Subscription W2    1,751,560
Sponsored walk    478,802
Sundry income    75,000
Raffle (¢183,030-¢21,600)    161,430
Profit on Bar Trading    150,540
Profit on President Ball    262,725
    2,880,057
Expenditure:   
Bank charges  36,000 
Insurance (¢4,200+¢18,000-¢5,200)  17,000 
Printing & stationary  59,160 
Light & cleaning (6,800+32,640-4,200)  35,240 
Telephone & Postages W3  67,000 
Depreciation (10% @¢67,800)  6,780 
Donation  50,000 
Secretary's Salary  120,000 
Rent [12/18@¢360,000]  240,000 
Bad debt W1  48,000 
Loss on sale of equipment (¢7,923-¢9,905)  1,982  681,162
     

Victorosky Fun Club
Statement Of Financial Position As At 31st October, 2005
ASSETS EMPLOYED  ¢'000  ¢'000  ¢'000
NON-CURRENT ASSETS:     
Equipment at cost         67,800 
Less depreciation           6,780        61,020
Building project (w 5) 
        ,891,020
Investment in ABC Shares          450,000

        ,341,020
Current Assets:     
Stock (¢220,500+¢36,000)       256,500 
Debtors- President's ball  (w4)        312,000 
Subscription in arrears       360,000 
Insurance prepaid           5,200 
Rent prepaid       120,000 
Bank balance       281,105 
Cash (¢14340+¢1,000)         15,340 

     1,350,145   Current Liabilities:     
Creditors: Building project  511,500   
Bar  33,000
           Caterer (¢432,000-¢250,000)  182,000   
Subscription in advance     210,000   
Light & cleaning owing                         6,800   
Wages outstanding  175,000    
Net current Assets
Net Assets
     
Financed by:     
Accumulated Fund (6)          373,970
Excess of income over expenditure       1 ,198,895 WORKINGS
1 Bar Purchases:      ¢'000
Payables 2005  33,000
Receipts & Payment a/c  280,500

  313,500
Less creditors 2004  18,000
  295,500

2 Subscription Account 
          ¢‟000                     ¢'000
Balance b/f                       240,000  Balance b/f                                150,000
Income & Expenditure a/c 1,751,560 Receipts & Payments                 1,643,560             a/c
  -  Bad debt (240-192)  48,000
Balance c/f  210,000 Balance c/f  360,000
                                             201,560   

 
3 Telephone & Postages  ¢'000
      Petty cash 2004      3,000
      Receipts & Payments     65,000

     68 ,000
      Petty cash 2005      1 ,000
     Income & Expenditure a/c     67 ,000
 
4    Receivables on President's Ball:  ¢'000
      Tickets sold   720,000
      Less Amount Paid  408,000
      Amount to be collected   312,000
 
5 Work in progress- Club House  ¢'000  ¢'000
    Payment for materials       839,000
    Add Amount owed (2005)       511,500

     1,350,500
    Less Closing inventories       220,500

    Materials used on project     1,130,000
    Wages paid  525,000  
    Add Amount owed (2005)   175,000  

    Cost to date

6    Accumulated Fund          ¢'000
      Balance as at 1/11/2004      373,970
      Transfer from   I & E a/c   2,198,895

      2,572,865
   Amount transferred to building fund  1 ,000,000
  1,572,865


14.8  Summary

We have learned the difference between a Receipt and Payment account and an Income and Expenditure Account and have also explained that the Receipts and Payments Account does not show the true financial position of the organisation.

The Income Statement of a not-for profit organisation is called Income and Expenditure Account from which any surplus (profit) or deficit (loss) is calculated and also the accumulated fund is similar to the capital account of a trader.

We also learned that where the club or society engaged in any activity with the aim of earning income for the attainment of the objectives of the organization, a separate Income Statement should be prepared and the resulting profit or loss transferred to the income and Expenditure Account.

We also mentioned the treatment of subscription owing should be seen as part of the earnings of the organization for the period unless its accounting policy dictates otherwise. Similarly life membership and entrance fees should be accounted for bearing in mind the accounting policy of the organization.