Accounting for Not-for-Profit Organisations | ISC Class 11 Accounts Notes
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What is a not-for-profit organisation?
A not-for-profit organisation is an entity formed to serve its members or the public in fields such as education, health, sport, charity, religion or culture, and not to earn profit for distribution to its members. Clubs, charitable hospitals, schools run by trusts, libraries and sports associations are common examples.
Such organisations are usually managed by a committee elected by the members, and their main source of income is subscription from members, along with donations, entrance fees, grants and income from investments.
Any surplus earned is not distributed among members; it is carried forward and added to the organisation's accumulated fund so that it can be used for the organisation's objectives.
Because these organisations do not trade in goods or services for profit, they do not normally prepare a Trading Account or a Profit and Loss Account.
Instead, they prepare a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet, which together show the cash position, the surplus or deficit for the year, and the financial position at the year end.
What are the objectives and special features of an NPO?
The main objective of a not-for-profit organisation is to render service to its members or to society, rather than to earn and distribute profit. Its activities are funded mainly by subscriptions, donations, entrance fees and grants rather than by sale of goods.
Its accounting has some special features. First, there is no owner's capital; instead, the excess of assets over liabilities is called the Capital Fund (also called Accumulated Fund or General Fund).
Second, income is recognised only when it relates to the current year, so items like entrance fees and legacies, which are non-recurring, are treated differently from recurring items like subscriptions.
Third, the committee is accountable to members, so the accounts must clearly separate capital receipts (which strengthen the Capital Fund) from revenue receipts (which appear in the Income and Expenditure Account as income for the year).
Finally, because membership changes and donations vary, careful adjustment is needed for items outstanding, prepaid or received in advance, such as subscriptions and expenses.
Why are not-for-profit organisations necessary, and why do they keep accounts?
Not-for-profit organisations are necessary because they provide services that a profit-seeking business may not offer, or may not offer at a price everyone can afford.
- They let members pool small contributions to share facilities, such as a club's ground, a library or a gymnasium, that few could afford alone.
- They carry out social and charitable work in fields such as health care, education, relief and culture, often for people who cannot pay the full cost.
- They channel donations and grants from the public and the government towards the purposes for which the money was given.
They keep proper accounts for three reasons. First, the committee is accountable to members and donors, who need to see that the funds were spent on the organisation's stated objectives. Second, the law under which the organisation is registered, and the income-tax exemption most such bodies claim, require accounts to be kept and, in many cases, audited. Third, the accounts show whether the year's income covered its expenditure, which helps the committee plan the next year's subscriptions and spending.
Which accounting books does an NPO maintain?
A not-for-profit organisation maintains a cash book (or a bank book) to record day-to-day cash and bank transactions, a ledger for individual accounts, and at the end of the year it prepares three summarised statements for its members: the Receipts and Payments Account, the Income and Expenditure Account, and the Balance Sheet.
The Receipts and Payments Account is a summary of the cash book; it lists every cash and bank receipt and payment of the year, whether of a capital or revenue nature, and whether relating to the current, past or future year.
It does not distinguish between capital and revenue items and does not show non-cash items such as depreciation or outstanding amounts.
The Income and Expenditure Account is prepared from the Receipts and Payments Account after making adjustments, and it includes only revenue items relating to the current year, on the accrual basis.
The Balance Sheet is then prepared to show the assets, liabilities and Capital Fund at the end of the year.
These three statements differ in scope and purpose, and the committee generally presents all three to the members at the annual general meeting.
What is a Receipts and Payments Account and what are its features?
Definition: Receipts and Payments Account. A Receipts and Payments Account is a summary of cash and bank transactions of a not-for-profit organisation for a given period, prepared by totalling and classifying the entries of the cash book under suitable heads.
Its features are as follows. It is a real account, and it begins with the opening balance of cash and bank and ends with the closing balance of cash and bank.
It records all cash receipts on one side and all cash payments on the other side, grouped under heads such as subscriptions, donations, entrance fees, salaries, rent and printing and stationery.
It records receipts and payments of any nature, capital as well as revenue, and of any period, whether relating to the past, the current or a future year.
It does not record any non-cash item such as depreciation, outstanding subscription or accrued rent, and it does not show whether the organisation has earned a surplus or a deficit for the year, because it only reflects actual cash movement.
How does a Receipts and Payments Account differ from a Cash Book?
Although both record cash and bank transactions, a Receipts and Payments Account and a Cash Book differ in several ways, as shown below.
| Basis | Receipts and Payments Account | Cash Book |
|---|---|---|
| Nature | A summary statement, prepared at the end of the year from the cash book | A primary book of original entry, in which transactions are recorded as they occur |
| Period of recording | Shows the totals of a whole year, classified under heads | Shows each transaction separately, date-wise, as it takes place |
| Balancing | Balanced only once, at the end of the accounting year | Balanced periodically, such as daily, weekly or monthly |
| Form | Has a receipts side and a payments side, with items grouped under heads and only one amount column each side | Has separate cash, bank and sometimes discount columns, with each transaction entered individually |
| Who prepares it | Prepared by not-for-profit organisations in place of a profit and loss account | Prepared by every business and organisation that deals in cash |
What is an Income and Expenditure Account and what are its features?
Definition: Income and Expenditure Account. An Income and Expenditure Account is a nominal account prepared by a not-for-profit organisation to find out the surplus or deficit of the current year, by recording only the revenue incomes and revenue expenses relating to that year.
It is prepared on the accrual basis, so it includes income earned and expenses incurred during the year whether or not cash has actually been received or paid; it therefore includes adjustments for outstanding and prepaid items, and non-cash items such as depreciation.
It excludes all capital receipts and capital payments. Capital receipts, such as entrance fees, life membership fees, legacies, special grants and special donations, are taken directly to the Capital Fund in the Balance Sheet rather than shown as income.
Capital payments, such as purchase of a fixed asset, are shown in the Balance Sheet as an addition to assets, not as expenditure.
Its balancing figure is either a surplus, when income exceeds expenditure, or a deficit, when expenditure exceeds income, and this figure is transferred to the Capital Fund in the Balance Sheet, increasing it in case of a surplus and reducing it in case of a deficit.
How does the Income and Expenditure Account differ from the Profit and Loss Account?
| Basis | Income and Expenditure Account | Profit and Loss Account |
|---|---|---|
| Purpose | Prepared by a not-for-profit organisation to ascertain surplus or deficit for the year | Prepared by a trading or business concern to ascertain net profit or net loss |
| Prepared by | Clubs, societies, hospitals, schools run by trusts and similar organisations | Sole traders, partnership firms and companies carrying on business |
| Result shown | Shows a Surplus or a Deficit for the year | Shows Net Profit or Net Loss for the year |
| Treatment of result | Surplus or deficit is added to or deducted from the Capital Fund | Net profit or loss is transferred to Capital Account or Reserves |
| Scope of items | Excludes capital items like entrance fees and legacies, which are capitalised directly | Has no such concept; all trading income and expenses of the period are included |
Both accounts, however, are nominal accounts prepared on the accrual basis for one accounting period, and both exclude items of a purely capital nature such as the purchase of fixed assets.
How is the Balance Sheet of a not-for-profit organisation prepared?
The Balance Sheet of a not-for-profit organisation is prepared in the same two-sided format as for any other organisation, showing liabilities and the Capital Fund on one side and assets on the other, but instead of a capital account it shows the Capital Fund.
Definition: Capital Fund. The Capital Fund (also called Accumulated Fund) is the excess of assets over liabilities of a not-for-profit organisation, representing the accumulated surplus built up over the years together with any capitalised receipts.
The opening Capital Fund is found, where not already known, by preparing an opening Balance Sheet from the opening balances of assets and liabilities given in the question.
The closing Capital Fund is then arrived at by adding the surplus for the year (or deducting the deficit) and adding capitalised items such as entrance fees, life membership fees, legacies, special grants and special donations.
The asset side of the closing Balance Sheet shows fixed assets after charging depreciation, closing stock of consumable items such as stationery, closing cash and bank balances taken from the Receipts and Payments Account, and amounts such as outstanding subscription receivable.
The liabilities side shows outstanding expenses, subscriptions received in advance, any specific fund balances and the Capital Fund.
How is the Income and Expenditure Account prepared from the Receipts and Payments Account?
To convert a Receipts and Payments Account into an Income and Expenditure Account, each item is examined and adjusted so that only revenue items relating to the current year remain. The usual procedure is:
- Exclude the opening and closing balances of cash and bank, since these are not items of income or expenditure.
- Exclude all capital receipts, such as entrance fees to be capitalised, legacies, special grants and special donations, and all capital payments, such as purchase of fixed assets or investments.
- Adjust revenue receipts for the amount relating to the current year only, by adding amounts outstanding at the end of the year and subtracting amounts relating to other years or received in advance.
- Adjust revenue payments in the same way, by adding outstanding expenses of the current year and amounts prepaid at the start of the year, and subtracting amounts prepaid at the end of the year or relating to other years.
- Include non-cash items relevant to the current year that do not appear in the Receipts and Payments Account at all, such as depreciation on fixed assets and consumption of stock of items like stationery.
- Total the adjusted incomes and adjusted expenses; the excess of income over expenditure is the surplus, and the excess of expenditure over income is the deficit, to be transferred to the Capital Fund.
Only after these adjustments does the resulting figure correctly reflect the organisation's performance for the year on the accrual basis.
How are entrance fees, life membership fees, legacies and special donations treated?
Certain receipts are non-recurring in nature and are treated as capital receipts: they are added directly to the Capital Fund in the Balance Sheet and are not shown as income in the Income and Expenditure Account.
| Item | Nature | Treatment |
|---|---|---|
| Entrance and admission fees | Paid once by a member on joining | Capitalised; added to the Capital Fund |
| Life membership fees | Lump sum paid instead of annual subscription for life | Capitalised; added to the Capital Fund |
| Legacy | Amount received under a person's will after their death | Capitalised; added to the Capital Fund |
| Special grant | Grant received for a specific, non-recurring purpose | Capitalised; added to the Capital Fund |
| Special donation | Donation received for a specific purpose, such as building a hall | Capitalised; added to the Capital Fund |
| General donation | Donation of a recurring or general nature, not tied to a specific purpose | Revenue receipt; shown as income |
Note: Practice differs on entrance fees. Some textbooks treat them as revenue income when the question gives no instruction, so always follow the treatment the question asks for and state the treatment you have used.
Definition: Legacy. A legacy is a gift of money or property received by the organisation under the will of a deceased person. Being a non-recurring receipt, it is treated as a capital receipt and credited directly to the Capital Fund.
Worked example 1. A Residents' Welfare Association operating in an Indian housing colony received a legacy of ₹60,000 and life membership fees of ₹15,000 during the year. Entrance fees received during the year were ₹8,000. State how these items are to be treated in the final accounts.
Answer: The legacy of ₹60,000, the life membership fees of ₹15,000 and the entrance fees of ₹8,000 are all non-recurring capital receipts. None of these ₹83,000 is shown as income in the Income and Expenditure Account. Instead, all three amounts are added directly to the Capital Fund in the Balance Sheet, increasing it by ₹83,000 in total.
How are general donations and recurring receipts such as subscriptions treated?
General donations, general grants and all receipts of a recurring nature, such as membership fees or subscriptions, are treated as revenue receipts. They are shown as income in the Income and Expenditure Account for the year to which they relate, after adjusting for amounts outstanding or received in advance.
Definition: Subscription. Subscription is the periodic amount paid by members of a not-for-profit organisation to retain their membership. Being a regular, recurring receipt, it is treated as revenue income of the year to which it relates.
Current year subscription = Received + Closing O/s − Opening O/s + Opening Advance − Closing Advance
To find the subscription to be shown as income for the current year, the subscription actually received during the year (as shown in the Receipts and Payments Account) is adjusted for outstanding and advance subscriptions.
Amounts received in the current year that relate to the current year's outstanding subscription from last year are deducted, since they belong to the previous year's income; amounts still receivable at the end of the current year are added, since they belong to this year's income.
Advance subscriptions received during the year for the next year are deducted, and any advance received last year for the current year is added.
Worked example 2. A sports club in India shows subscription received during the year, as per its Receipts and Payments Account, of ₹85,000. Subscription outstanding at the start of the year was ₹5,000, and outstanding at the end of the year was ₹8,000. Subscription received in advance at the start of the year was ₹2,000, and received in advance at the end of the year was ₹3,000. Calculate the subscription to be shown as income in the Income and Expenditure Account.
Answer: Subscription received ₹85,000; add closing outstanding ₹8,000 (relates to this year, not yet received); add opening advance ₹2,000 (received last year but relates to this year); less opening outstanding ₹5,000 (relates to last year, though received this year); less closing advance ₹3,000 (received this year but relates to next year). Subscription for the current year = 85,000 + 8,000 + 2,000 − 5,000 − 3,000 = ₹87,000.
How are specific items like consumption of stationery and sale of old assets treated?
Some items need special working before they can enter the Income and Expenditure Account or the Balance Sheet. One common example is the consumption of stationery, which is treated like a trading item within the accounting period.
Consumption of Stationery = Opening Stock + Purchases − Closing Stock
The stock of stationery at the start of the year is added to the stationery purchased during the year (as shown in the Receipts and Payments Account) and the stock remaining unused at the end of the year is deducted; the resulting figure is the stationery actually consumed, and only this figure is shown as an expense in the Income and Expenditure Account.
The opening stock and closing stock of stationery themselves appear as assets in the respective Balance Sheets.
Sale proceeds of an old, fully worn-out asset, such as old newspapers or an old typewriter, are generally small and non-recurring; such receipts are usually shown as income in the Income and Expenditure Account unless the organisation treats them as a reduction in the book value of the related asset.
Where a fixed asset is sold during the year, any profit or loss on sale, calculated by comparing the sale proceeds with the asset's book value, is adjusted through the Income and Expenditure Account.
Worked example 3. A charitable trust running a school in India had an opening stock of stationery of ₹2,000 and a closing stock of ₹3,500. Stationery purchased during the year, as shown in the Receipts and Payments Account, was ₹14,000. Calculate the amount of stationery to be shown as an expense in the Income and Expenditure Account.
Answer: Stationery consumed = Opening stock + Purchases − Closing stock = 2,000 + 14,000 − 3,500 = ₹12,500. This amount is debited to the Income and Expenditure Account as an expense, and the closing stock of ₹3,500 is shown as an asset in the Balance Sheet.
How are surplus, deficit and the Capital Fund linked across the two Balance Sheets?
Surplus = Income − Expenditure
Capital Fund = Assets − Liabilities
At the start of the year, if no opening Capital Fund is directly given, it is calculated by preparing an opening Balance Sheet from the opening figures of each asset and liability supplied in the question, and applying the formula above.
This opening Capital Fund then forms the base for the closing Balance Sheet.
Opening Capital Fund = Opening Assets − Opening Liabilities
The closing Capital Fund equals the opening Capital Fund, plus the surplus for the year (or less the deficit), plus all capitalised receipts such as entrance fees, life membership fees, legacies, special grants and special donations received during the year.
Worked example 4. The opening Balance Sheet of a cooperative credit society operating in India showed total assets of ₹2,40,000 and total liabilities of ₹40,000. During the year, the Income and Expenditure Account showed a surplus of ₹25,000, and the society also received a legacy of ₹30,000, which is to be capitalised. Calculate the closing Capital Fund.
Answer: Opening Capital Fund = Assets − Liabilities = 2,40,000 − 40,000 = ₹2,00,000. Closing Capital Fund = Opening Capital Fund + Surplus + Legacy = 2,00,000 + 25,000 + 30,000 = ₹2,55,000. This figure is shown on the liabilities side of the closing Balance Sheet, and the asset side must total the same amount after adjustments.
What do specimen final accounts of a not-for-profit organisation look like?
A specimen Receipts and Payments Account, drawn up from illustrative figures, is shown below. All amounts are for illustration and show the overall format rather than any particular organisation's figures.
| Receipts | Amount (₹) | Payments | Amount (₹) |
|---|---|---|---|
| Balance b/d (cash and bank) | 20,000 | Salaries | 60,000 |
| Subscriptions | 85,000 | Rent and electricity | 18,000 |
| Entrance fees | 8,000 | Printing and stationery | 14,000 |
| Legacy | 60,000 | Purchase of furniture | 25,000 |
| Life membership fees | 15,000 | Balance c/d (cash and bank) | 71,000 |
| Total | 1,88,000 | Total | 1,88,000 |
From this account, after making the adjustments shown in the earlier sections, the corresponding Income and Expenditure Account would show subscriptions as adjusted income, salaries, rent and electricity, and stationery consumed as expenditure, while entrance fees, the legacy and life membership fees would be removed and credited directly to the Capital Fund instead of being shown as income.
Specimen format of the closing Balance Sheet
The closing Balance Sheet of a not-for-profit organisation follows the format below. The items are those most often met in examination questions; any item not in the question is simply left out.
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital Fund: opening balance | xxx | Fixed assets (such as building, furniture, equipment) at cost, less depreciation | xxx |
| Add: surplus for the year (or less: deficit) | xxx | Investments, such as fixed deposits | xxx |
| Add: capitalised receipts (legacies, life membership fees, special donations) | xxx | Stock of consumables, such as stationery or sports material | xxx |
| Specific funds, if any | xxx | Subscriptions outstanding (receivable) | xxx |
| Outstanding expenses | xxx | Prepaid expenses and accrued income | xxx |
| Subscriptions received in advance | xxx | Cash and bank balances (from the Receipts and Payments Account) | xxx |
| Total | xxx | Total | xxx |
Worked example 5: from a Receipts and Payments Account to the final accounts
The Receipts and Payments Account of Riverside Sports Club for the year ended 31st March 2026 is given below.
| Receipts | Amount (₹) | Payments | Amount (₹) |
|---|---|---|---|
| Balance b/d (cash) | 15,000 | Salaries | 48,000 |
| Subscriptions | 1,20,000 | Rent | 24,000 |
| Legacy | 40,000 | Stationery | 9,000 |
| Interest on fixed deposit | 4,000 | Sports equipment purchased | 30,000 |
| General donations | 10,000 | Electricity | 7,000 |
| Balance c/d (cash) | 71,000 | ||
| Total | 1,89,000 | Total | 1,89,000 |
Additional information:
- On 1st April 2025 the club had sports equipment of ₹50,000, a fixed deposit of ₹50,000, stationery in stock of ₹2,000, subscriptions outstanding of ₹6,000 and salaries outstanding of ₹3,000.
- On 31st March 2026, subscriptions outstanding were ₹9,000, subscriptions received in advance were ₹4,000, salaries outstanding were ₹4,000 and stationery in stock was ₹3,000.
- Depreciation of ₹8,000 is to be charged on sports equipment. The legacy is to be capitalised.
Prepare the Income and Expenditure Account for the year and the Balance Sheet as at 31st March 2026.
Step 1: the opening Capital Fund. Opening assets = cash 15,000 + subscriptions outstanding 6,000 + stationery 2,000 + sports equipment 50,000 + fixed deposit 50,000 = ₹1,23,000. Opening liabilities = salaries outstanding ₹3,000. Opening Capital Fund = 1,23,000 − 3,000 = ₹1,20,000.
Step 2: the adjusted figures.
- Subscriptions for the year = 1,20,000 − 6,000 (last year's arrears) + 9,000 (closing outstanding) − 4,000 (received in advance) = ₹1,19,000.
- Salaries for the year = 48,000 − 3,000 (opening outstanding) + 4,000 (closing outstanding) = ₹49,000.
- Stationery consumed = 2,000 (opening stock) + 9,000 (bought) − 3,000 (closing stock) = ₹8,000.
- The legacy of ₹40,000 and the equipment bought for ₹30,000 are capital items, so neither appears in the Income and Expenditure Account.
Income and Expenditure Account of Riverside Sports Club for the year ended 31st March 2026
| Expenditure | Amount (₹) | Income | Amount (₹) |
|---|---|---|---|
| Salaries | 49,000 | Subscriptions | 1,19,000 |
| Rent | 24,000 | Interest on fixed deposit | 4,000 |
| Stationery consumed | 8,000 | General donations | 10,000 |
| Electricity | 7,000 | ||
| Depreciation on sports equipment | 8,000 | ||
| Surplus (excess of income over expenditure) | 37,000 | ||
| Total | 1,33,000 | Total | 1,33,000 |
Balance Sheet of Riverside Sports Club as at 31st March 2026
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital Fund: opening balance 1,20,000; add legacy 40,000; add surplus 37,000 | 1,97,000 | Sports equipment: 50,000 + 30,000 − 8,000 | 72,000 |
| Salaries outstanding | 4,000 | Fixed deposit | 50,000 |
| Subscriptions received in advance | 4,000 | Stock of stationery | 3,000 |
| Subscriptions outstanding | 9,000 | ||
| Cash | 71,000 | ||
| Total | 2,05,000 | Total | 2,05,000 |
The two sides agree at ₹2,05,000, which confirms the working. The closing cash comes straight from the Receipts and Payments Account, the surplus comes from the Income and Expenditure Account, and the legacy goes directly to the Capital Fund.
Going beyond the syllabus
Many not-for-profit organisations maintain a specific fund, such as a prize fund, a tournament fund or a building fund, created from donations or grants given by members for that particular purpose rather than for the organisation's general running expenses.
Income earned on the investments of such a fund, and expenses met out of it, are added to or deducted from the fund itself rather than being taken to the Income and Expenditure Account, and the fund balance is shown separately on the liabilities side of the Balance Sheet, over and above the general Capital Fund.
For example, if a club holds a tournament fund invested in fixed deposits, the interest earned on that deposit is simply added to the tournament fund balance, and any amount actually spent on holding the tournament is deducted from the fund, rather than being shown as income or expenditure of the year.
Only if the fund is fully exhausted and expenditure still exceeds the fund balance does the excess get transferred to the Income and Expenditure Account as an ordinary expense of the year.
This treatment keeps donor-restricted money separate from the organisation's general revenue, so members can see clearly how much of the Capital Fund is freely available and how much is tied to a specific purpose set by the donors.
Glossary
- Not-for-profit organisation: an entity formed to serve members or the public rather than to earn and distribute profit.
- Receipts and Payments Account: a summary of all cash and bank receipts and payments of the year, of any nature or period.
- Income and Expenditure Account: a nominal account showing only revenue items of the current year, prepared on the accrual basis to find surplus or deficit.
- Capital Fund: the excess of assets over liabilities of a not-for-profit organisation, also called Accumulated Fund.
- Surplus: the excess of income over expenditure for the year, added to the Capital Fund.
- Deficit: the excess of expenditure over income for the year, deducted from the Capital Fund.
- Subscription: the periodic payment made by members to retain membership, treated as recurring revenue income.
- Entrance fees: a one-time amount paid by a new member on joining, usually capitalised.
- Life membership fees: a lump sum paid once instead of annual subscription for life, capitalised and added to the Capital Fund.
- Legacy: money or property received under the will of a deceased person, treated as a capital receipt.
- Special donation: a donation given for a specific, non-recurring purpose and capitalised.
- General donation: a donation of a recurring or general nature, treated as revenue income.
- Capital receipt: a non-recurring receipt added directly to the Capital Fund, not shown as income.
- Revenue receipt: a recurring receipt of the current year, shown as income in the Income and Expenditure Account.
- Consumption of stationery: the stationery actually used during the year, calculated as opening stock plus purchases less closing stock.
Common errors and misconceptions
- Misconception: The Receipts and Payments Account shows the surplus or deficit of the organisation. Correct: It only shows cash and bank movement; the surplus or deficit is shown by the Income and Expenditure Account.
- Misconception: All donations are treated as revenue income. Correct: Only general donations are revenue income; special donations given for a specific purpose are capitalised.
- Misconception: Entrance fees must always be shown as income. Correct: Being a non-recurring receipt, entrance fees are usually capitalised and added to the Capital Fund; where the question gives an instruction, follow it.
- Misconception: The Income and Expenditure Account includes the opening and closing cash balances. Correct: These balances belong only to the Receipts and Payments Account and the Balance Sheet, not to the Income and Expenditure Account.
- Misconception: Subscription received during the year equals subscription income for the year. Correct: Subscription income must be adjusted for opening and closing outstanding and advance amounts.
- Misconception: A not-for-profit organisation has an owner's capital account. Correct: It has a Capital Fund instead, representing accumulated surplus and capitalised receipts, since there is no single owner.
- Misconception: Depreciation need not be considered because it is not a cash payment. Correct: Depreciation is still charged as an expense in the Income and Expenditure Account, since that account is prepared on the accrual basis.
Exam-style questions with model answers
Q1. Which of the following is a capital receipt for a not-for-profit organisation? (a) Subscription (b) General donation (c) Legacy (d) Sale of old newspapers [1 mark]
- (c) Legacy, since it is a non-recurring receipt under a will and is capitalised, added directly to the Capital Fund rather than shown as income.
Q2. State two differences between a Receipts and Payments Account and a Cash Book. [2 marks]
- A Receipts and Payments Account is a yearly summary prepared at the end of the year, whereas a Cash Book is a primary book in which each transaction is recorded as it occurs.
- A Receipts and Payments Account is balanced only once, at the year end, whereas a Cash Book is balanced periodically, such as daily or weekly.
Q3. Subscription received during the year, as shown in the Receipts and Payments Account, was ₹70,000. Subscription outstanding at the start of the year was ₹4,000 and at the end of the year was ₹6,000. There was no advance subscription in either year. Calculate the subscription income for the Income and Expenditure Account. [3 marks]
- Subscription received during the year is ₹70,000.
- Add subscription outstanding at the end of the year, ₹6,000, since it relates to the current year though not yet received.
- Less subscription outstanding at the start of the year, ₹4,000, since it relates to the previous year though received this year.
- Subscription for the current year = 70,000 + 6,000 − 4,000 = ₹72,000, to be shown as income in the Income and Expenditure Account.
Q4. A society received entrance fees of ₹10,000, a life membership fee of ₹20,000, and a general donation of ₹5,000 during the year. State, with reasons, how each item is to be treated in the final accounts. [4 marks]
- Entrance fees of ₹10,000 are a non-recurring receipt paid once on joining, so they are capitalised and added directly to the Capital Fund; they are not shown as income.
- Life membership fees of ₹20,000 are a lump sum paid instead of annual subscription for life, so they too are capitalised and added to the Capital Fund.
- The general donation of ₹5,000 is of a recurring, general nature, not tied to any specific purpose, so it is treated as a revenue receipt.
- The ₹5,000 general donation is shown as income in the Income and Expenditure Account for the current year, while the remaining ₹30,000 strengthens the Capital Fund in the Balance Sheet.
Q5. State any two differences between an Income and Expenditure Account and a Profit and Loss Account. [2 marks]
- An Income and Expenditure Account is prepared by a not-for-profit organisation to find surplus or deficit, whereas a Profit and Loss Account is prepared by a trading concern to find net profit or loss.
- The result of an Income and Expenditure Account is added to or deducted from the Capital Fund, whereas the result of a Profit and Loss Account is transferred to the Capital or Partners' Accounts.
Q6. The opening stock of stationery of a club was ₹1,500 and the closing stock was ₹2,200. Stationery purchased during the year was ₹9,000, as shown in the Receipts and Payments Account. Calculate the stationery to be shown as an expense in the Income and Expenditure Account, and state where the opening and closing stock figures are shown. [4 marks]
- Stationery consumed = Opening stock + Purchases − Closing stock.
- Stationery consumed = 1,500 + 9,000 − 2,200 = ₹8,300.
- This amount of ₹8,300 is debited to the Income and Expenditure Account as stationery expense for the year.
- The opening stock of ₹1,500 appears as an asset in the opening Balance Sheet, and the closing stock of ₹2,200 appears as an asset in the closing Balance Sheet.
Q7. From the following information, prepare the Income and Expenditure Account of a club for the year ended 31st March 2025, and calculate the surplus or deficit. Receipts and Payments Account showed: subscriptions received ₹1,00,000, salaries paid ₹55,000, rent paid ₹18,000. Additional information: subscription outstanding at the end of the year ₹7,000; subscription received in advance at the end of the year ₹3,000; outstanding salaries at the end of the year ₹4,000; depreciation on furniture for the year ₹6,000. [6 marks]
- Adjusted subscription income = Subscription received + Closing outstanding − Closing advance = 1,00,000 + 7,000 − 3,000 = ₹1,04,000.
- This ₹1,04,000 is credited to the Income and Expenditure Account as subscription income.
- Adjusted salaries expense = Salaries paid + Outstanding salaries = 55,000 + 4,000 = ₹59,000, debited to the Income and Expenditure Account.
- Rent of ₹18,000 is debited to the Income and Expenditure Account as paid, since no adjustment is given for it.
- Depreciation on furniture of ₹6,000 is also debited to the Income and Expenditure Account as an expense, though it does not appear in the Receipts and Payments Account.
- Total expenditure = 59,000 + 18,000 + 6,000 = ₹83,000. Surplus = Income − Expenditure = 1,04,000 − 83,000 = ₹21,000, to be added to the Capital Fund.
Key takeaways
- A not-for-profit organisation serves members or society and does not distribute surplus; it maintains a Capital Fund instead of owner's capital.
- The Receipts and Payments Account is a summary of cash book transactions, covering receipts and payments of any nature and any period.
- The Income and Expenditure Account is a nominal account showing only revenue items of the current year, prepared on the accrual basis.
- Entrance fees, life membership fees, legacies, special grants and special donations are capital receipts and are capitalised, added to the Capital Fund.
- General donations, general grants and recurring receipts such as subscriptions are revenue receipts, shown as income in the Income and Expenditure Account.
- Subscription income is found by adjusting the amount received for opening and closing outstanding and advance subscriptions.
- Consumption of stationery, found as opening stock plus purchases less closing stock, is debited as an expense, while unused stock is shown as an asset.
- The closing Capital Fund equals the opening Capital Fund plus the surplus (or less the deficit) plus any capitalised receipts of the year.
Test yourself
What is the Capital Fund of a not-for-profit organisation?
It is the excess of the organisation's assets over its liabilities, representing accumulated surplus and capitalised receipts in place of owner's capital.
Name two items that are always treated as capital receipts.
Life membership fees and legacies are both non-recurring capital receipts, capitalised and added directly to the Capital Fund rather than shown as income.
Why does the Receipts and Payments Account not show a surplus or deficit?
It records only cash and bank movement for any purpose or period; it does not separate capital from revenue items or adjust for outstanding and prepaid amounts.
How is the current year's subscription income calculated from subscription received?
Add closing outstanding and opening advance subscriptions to the amount received, and deduct opening outstanding and closing advance subscriptions.
What happens to a deficit shown by the Income and Expenditure Account?
The deficit is deducted from the opening Capital Fund when preparing the closing Balance Sheet, reducing the Capital Fund for the year.
How is stationery consumed during the year calculated?
Stationery consumed equals opening stock of stationery plus purchases of stationery during the year, less closing stock of stationery remaining unused.
Give one difference between a general donation and a special donation.
A general donation is of a recurring nature and is treated as revenue income, while a special donation is for a specific purpose and is capitalised.
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