A nonprofit organization is a legal and accounting entity that is operated for the benefit of the society as a whole, rather than for the benefit of a sole proprietor or a group of partners or shareholders. Non-profit making organisations such as public hospitals, public educational institutions, clubs, Temples, churches etc., conventionally prepare Receipts and Payments Account and Income and Expenditure Account to show periodic performance and Balance Sheet to show financial position at the end of the period. In this Chapter, we shall discuss the technique of preparing Receipts and Payments Account, Income and Expenditure Accounts and Balance Sheet of not-for-profit organisations. Also we shall discuss and illustrate the technique of preparing Income and Expenditure Account from Receipts and Payments Account. It may be mentioned that Income and Expenditure Account is just similar to Profit and Loss Account prepared for the profit making organisations. In case of Income and Expenditure Account, the excess of expenditure over income is treated as deficit. In non-profit making organisations, total cash receipts and total cash payments are highlighted through Receipts and Payments Account.
2. NATURE OF RECEIPTS AND PAYMENTS ACCOUNT
A Receipts and Payments Account is a summary of the cash book without date column. It is an elementary form of account commonly adopted by not for profit making concerns such as hospitals, clubs, societies, Temples, churchs etc., for presenting periodically the result of their working. It consists of a classified summary of cash/bank receipts and payments over a certain period together with the cash balances at the beginning and close of the period. The receipts are entered on the left hand side, and payments on the right hand side i.e., same sides as those on which they appear in Cash Book.
The receipts and payments for the Swaraj Club for the year ended March 31, 2016 were: Entrance fees Rs 300; Membership Fees Rs 3,000; Donation for Club Pavilion Rs 10,000, Foodstuff sales Rs 1,200; Salaries and Wages Rs 1,200 Purchase of Foodstuff Rs 800; Construction of Club Pavilion Rs 11,000; General Expenses Rs 600; Rent and Taxes Rs 400; Bank Charges Rs160.
Cash in hand–April. 1st Rs 200, March. 31st Rs 350
Cash in Bank–April. 1st Rs 400; March. 31st Rs 590
You are required to prepare Receipts and Payment Account.
2.1 Limitations of Receipts and Payments Account
From the study of the above account, it will be apparent that the increase in the cash and bank balances at the end of the year, as compared to those in beginning, does not truly represent the surplus for the year since it does not take into account the cost of construction of the pavilion, which is in excess of the donation received, the outstanding subscription or those which were collected in advance, etc. Ordinarily one must ascertain whether for a current year income is suficient to meet the current expenses. Since the Receipts and Payments Account includes items relating to all periods or of all types, it does not serve the purpose mentioned above. Due to these drawbacks, the preparation of Receipts and Payments Account is not favoured except where the activities of the organization, the results of which are to be exhibited, are simple and modest, involve no carry over from one period to the next and it has no assets, apart from cash balance and no liabilities.
3. INCOME AND EXPENDITURE ACCOUNT
The income and expenditure account is equivalent to the Profit and Loss Account of a business enterprise. It is an account which is widely adopted by not for profit making concerns and is prepared by following accrual principle. Only items of revenue nature pertaining to the period of account are included therein. The preparation of the account, therefore, requires adjustment in relevant accounts of outstanding items of income and expenditure as also exclusion of amounts paid in advance before these are included in Income and Expenditure Account. In so far as this, it resembles a Profit and Loss Account and serves the same function in respect of a non-profit making concern as the later account does for a firm, carrying on business or trade.
Non-profit organizations registered under section 8 of the Companies Act, 2013 are required to prepare their Income and Expenditure account and Balance Sheet as per the Schedule III to the Companies Act, 2013.
3.1 Main Sources of Income
These are subscriptions, ordinary donations, membership fees or entrances fees (if the amount is normal or provided according to bye-laws of the society), recurring grants from local authorities and income from investments, etc. Any amount raised for a special activity, e.g. on sale of match tickets, is deducted from the expenditure of that activity and net amount is shown in the income and expenditure account. Any receipt of capital nature shall not be shown as income but will be credited to the Capital Fund or special purpose fund e.g. "Building Fund' or if the receipts is on account of sale of a fixed asset, it shall be credited to the asset account.
Hospital - medicines and cost of tests and investigations.
Sports Club - sports materials, tournament expenses, etc.
Drama Club - expenses of staging plays, rent of the hall, payment to artists, etc.
Educational Societies - award of scholarships, organisation of seminars, etc.
Library Societies - newspapers and magazines.
Any expenditure for acquisition of a fixed asset will be capitalised, though the amount of annual depreciation shall be debited to revenue expenditure.
It may be noted that after various accounts have been adjusted as is considered necessary and all the revenue accounts have been closed off by transfer to the Income and Expenditure Account, there will still be a number of balances left over. These are included in the balance sheet. A balance sheet is thus a complement to such an account. If a regular Trial Balance is available, the preparation of the Income and Expenditure Account and the Balance Sheet is on the lines of final accounts.
3.2 Distinction between Receipts and Payments Account and Income and Expenditure Account
Not for profit organizations such as public hospitals, public educational institutions, clubs,Temples, churches etc., conventionally prepare Receipt and Payment Account and Income and Expenditure Account to show periodic performance for a particular accounting period. The distinguishing features of both the accounts can be summarized as:
Receipt and Payment Account is an elementary form of account consisting of a classified summary of cash receipts and payments over a certain period together with cash balances at the beginning and close of the period. The receipts are entered on the left hand side and payments on the right hand side i.e. same sides as those on which they appear in cash book. All the receipts and payments whether of revenue or capital nature are included in this account. The balance of the account at the end of a period represents the difference between the amount of cash received and paid up. It is always in debit since it is made up of cash in hand and at bank.
Income and Expenditure Account resembles a Profit and Loss Account and serves the same function in respect of a non-profit making concern as the last mentioned account does for a firm, carrying on business or trade. Income and Expenditure Account is drawn up in the same form as the Profit and Loss Account. Expenditure of revenue nature is shown on the debit side, income and gains of revenue nature are shown on the credit side. Income and Expenditure Account contains all the items of income and expenditure relevant to the period of account, whether received or paid out as well as that which have fallen due for recovery or payment. Capital Receipts, prepayments of income and capital expenditures, prepaid expenses are excluded. It does not start with any opening balance. The closing balance represents the amount by which the income exceeds the expenditure only or vice versa.
3.3 Preparation of Income and Expenditure Account from Receipts and Payments Account
Situations may require compilation of Income and Expenditure Account and the Balance Sheet from the Receipts and Payments Account after making adjustments in respect of Income accrued but not collected and expenses outstanding. The preparation of Balance Sheet in such a case is also necessary since an Income and Expenditure Account must always be accompanied by a Balance Sheet. The procedure which should be followed in this regard is briefly outlined below.
(i) Compute the opening balance of the Accumulated Fund, or Capital Fund of the Institution with the help of making opening balance sheet. It will be excess of the total value of the assets over that of the liabilities at the commencement of the period.
(ii) Open ledger accounts in respect of various items of income and expenditure (e.g. subscription, rents, printing, purchase of sports materials etc.) in which accruals or outstanding at the beginning or at the end of period have to be adjusted. Enter therein any accrual or outstanding at the end of the period as well as amounts which relate to an earlier period or the following period. The balance of the ledger accounts therefore will represent the amounts or income or expenditure pertaining to the period. These should be transferred to the Income and Expenditure Account.
(iii) Post from the debit of the Receipts & Payments Account to the credit of the Income and Expenditure Account other items of income wherein accruals and outstanding amount have to be adjusted. Likewise, post item of expenses in which no adjustment is to be made directly to debit of income and Expenditure Account.
(iv) Transfer the balance of Income and Expenditure Account to the Accumulated Fund/Capital Fund Account.
(v) Post the receipts and payments of capital nature from the Receipts and Payments Account to the appropriate asset or liability account for incorporating in the Balance Sheet. If a part or whole of an asset has been sold, the capital profit/loss, if any, is credited / debited in the Income and Expenditure Account. The balance of Income and Expenditure Account should be transferred to the Accumulated Fund/Capital Fund Account.
(vi) Prepare a Balance Sheet by including therein all the balances left over after transfers to the Income and Expenditure Account have been made.
During 2016, subscription received in cash is Rs 42,000. It includes Rs 1,600 for 2015 and Rs 600 for 2017. Also Rs 3,000 has still to be received for 2016.
Calculate the amount to be credited to Income and Expenditure Account in respect of subscription.
The various accounts will appear as under:
Subscription outstanding Rs 3,000 and Subscription received in advance Rs 600 will be shown in the balance sheet on the assets and liabilities side respectively.
Suppose salaries paid during 2016 were Rs 23,000. The following further information is available:
Calculate the amount to be debited to Income and expenditure account in respect of salaries and also show necessary ledger accounts.
4. BALANCE SHEET
A Balance Sheet is the statement of assets and liabilities of an accounting unit at a given date. It is generally prepared at the end of an accounting period after the Income and Expenditure Account has been prepared. It is classified summary of the ledger balances left over, after accounts of all the revenue items have been closed off by transfer to the Income and Expenditure Account. In not for profit organizations, the excess of total assets over total outside liabilities is known as Capital Fund. The Capital fund represents the amount contributed by members, legacies, special donations, entrance fees and accumulated surplus over the years. If however, members have not contributed any amount, the name should be Accumulated Fund. The surplus or deficit, if any, on the year's working as disclosed by the Income and Expenditure Account is shown either as an addition to or deduction from the Capital / Accumulated Fund brought forward from the previous period.
4.1 Accounting Treatment of Some Special Items
4.1.1 Donations: These may have been raised either for meeting some revenue or capital expenditure; those intended for the first mentioned purpose are credited directly to the Income and Expenditure Account but others, if the donors have declared their specific intention, are credited to special fund account and in the absence thereof, to the Capital Fund Account. If any investments are purchased out of a special fund or an asset is acquired therefrom, these are disclosed separately. Any income received from such investments or any donations collected for a special purpose are credited to an account indicating the purpose and correspondingly the expenditure incurred in carrying out the purpose of the fund is debited to this account. On no account any such expense is charged to the Income and Expenditure Account. The term "Fund" is strictly applicable to the amounts collected for a special purpose when these are invested, e.g. Scholarship Fund, Prize Fund etc. In other cases, when the amounts collected are not invested in securities or assets distinguishable from those belonging to the institution, the word "Account" is more appropriate e.g. Building Account, Tournament Account etc.
Instead of paying cash, a donor may sometimes give away or transfer a security or some other readily realisable asset. In such a case, the value of asset on valuation, must be credited to the fund for which the amount has been donated.
4.1.2 Entrance and Admission Fees: Such fees which are payable by a member on admission to club or society are normally considered capital receipts and credited to Capital Fund. This is because these do not give rise to any special obligation towards the member who is entitled to the same privileges as others who have paid only their annual subscription. Nevertheless, where the amount is small, meant to cover expenses concerning admission, or the rules of the society provided that such fees could be treated as income of the society, these amounts may be included in the Income and Expenditure Account. The treatment depends upon the requirement of question. If the question is silent then always take it to be capital receipt.
4.1.3 Subscription: Subscriptions being an income should be allocated over the period of their accrual. For testing the knowledge of candidates of this important accounting principle, questions are often set in examinations wherein figures of subscription collected by a society during the year as well as those outstanding at the beginning of the year and at its close are given. If some subscriptions have been received in advance, their amount is also indicated. In such cases, it is always desirable to set up a Subscription Account for determining the amount of subscription pertaining for the period for which accounts are being prepared. For example, if it is stated that subscriptions collected by a society during the year 2015 amounted to Rs 1,850 out of which Rs 200 represented subscription for the year 2014; Rs 100 were subscriptions collected in advance for the year 2016, and subscriptions amounting to Rs 500 were outstanding for recovery at the end of 2015, the adjusting journal entries and the Subscription Account should be set up as follows:
The amount of outstanding subscription is adjusted in the Subscription Account by debit to Outstanding Subscription Account and that balance is shown as an asset in Balance Sheet. The Subscription Account is closed off by transferring its balance at the end of the year to the Income and Expenditure Account.
4.1.4 Life Membership Fee: Fees received for life membership is a capital receipt as it is of non-recurring nature. It is directly added to capital fund or general fund.
For adjusting lump sum subscription collected from the life members, one of the following methods can be adopted:
(1) The entire amount may be carried forward in a special account until the member dies, when the same may be transferred to the credit of the Accumulated Fund.
(2) An amount equal to the normal annual subscription may be transferred every year to the Income and Expenditure Account and balance carried forward till it is exhausted. If, however, the life member dies before the whole of the amount paid by him has been transferred in this way, the balance should be transferred to the Accumulated Fund on the date of his death.
(3) An amount, calculated according to the age and average life of the member, may annually be transferred to the credit of Income and Expenditure Account.
Treatment of Important Items in Not For Profit Organization
1. Donation: it is gift in cash or kind from some person. It may be of two types:
(a) Specific Donation: It is received for certain specific purpose like Building Donation, Library Books donation etc. It should be capitalized and shown on the liabilities side of the balance sheet.
(b) General Donation: It is not received for any specific purpose and shown on the credit side of Income and Expenditure Account.
2. Entrance Fees: It may also be known as admission fees. Entrance Fees should be capitalized and added to the capital fund for all organization. If the question gives any specific treatment of Entrance fees, then it should be followed accordingly.
3. Legacy: It is an amount received by an organization as per the will of the person after the death of the person. It should be capitalized and shown on the liabilities side of the balance sheet by adding to the Capital Fund.
4. Life Membership Fees: It should be capitalized and shown on the liabilities side of the balance sheet. If the question gives any specific treatment of Life membership Fees, then it should be followed accordingly.
5. Endowment Fund Donation: It is a donation received and only income from that donation is to be used for certain specific purpose. In such cases income relating to special funds should be added to these funds on the liabilities side of the B/S. All the expenses should be deducted from that fund on the liabilities side of the Balance Sheet.
6. Treatment of Sale of Old Newspaper and Periodicals: The amount received on such sale is shown as Income on the credit side of income and expenditure account.
7. Sale of old Fixed Assets: The Sale proceeds of old Fixed Assets are treated as capital receipts. The profit or loss on sale of fixed asset is shown in the Income and Expenditure A/c
8. Honorarium: It is paid to someone for receiving any services from person who are not the employees of the Not for Profit Organisation.
4.2 Preparation of Balance Sheet
The following was the Receipts and Payments Account of Exe Club for the year ended March. 31, 2016
All the figures in thousands
Cash in hand
Balance at Bank as per Pass Book:
Rent of Ground
Cost of Teas
Donations and Subscriptions
Printing & Office Expenses
Receipts from teas
Repairs to Equipment
Contribution to fares
Honorarium to Secretary and
Sale of Equipment
Treasurer of 2015
Net proceeds of Variety
Balance at Bank as per Pass Book:
Donation for forth coming
Cash in hand
You are given the following additional information:
Amount due for printing etc.
Cheques unpresented being payment for repairs
Estimated value of machinery and equipment
Interest not yet entered in the Pass book
Bonus to Groundsman o/s.
For the year ended March. 31, 2016, the honorarium to the Secretary and Treasurer are to be increased by a total of Rs 200.
Prepare the Income and Expenditure Account for period ending 31-03-2016 and the relevant Balance Sheet.
Income and Expenditure Account of Exe Club
for the year ending 31st March, 2016
(all figures in thousand)
Balance Sheet of Exe Club as on 31st March, 2016
Balance Sheet as on 1st April, 2015
The Income and Expenditure Account of the Youth Club for the Year 2016 is as follows:
This account had been prepared after the following adjustments:
Salaries Outstanding at the beginning and the end of 2016 were respectively Rs 400 and Rs 450. General Expenses include insurance prepaid to the extent of Rs 60. Audit fee for 2016 is as yet unpaid. During 2016 audit fee for 2015 was paid amounting to Rs 200. The Club owned a freehold lease of ground valued at Rs 10,000. The club had sports equipment on 1st January, 2016 valued at Rs 2,600. At the end of the year, after depreciation, this equipment amounted to Rs 2,700. In 2015, the Club has raised a bank loan of Rs 2,000. This was outstanding throughout 2016. On 31st December, 2016 cash in hand amounted to Rs 1,600.
Prepare the Receipts and Payments Account for 2016 and Balance Sheet as at the end of the year.
The Youth Club Receipts and Payments Account for the year ended 31st December, 2016
To Balance b/d (balancing figure)
To Subscriptions as per Income
Add: Paid for 2015
& Expenditure Account
Add: 2015's Received
Less: Unpaid for 2016
By General Expenses
Add : Paid for 2017
Less: 2016’s Received in 2015
By Audit fee (2016)
By Secy. Honorarium
Less: 2016’s Outstanding
By Stationery & Printing
To Entrance Fees
By Annual Dinner Expenses
To Contribution for annual dinner
By Interest & Bank Charges
To Sport meet :
By Sports Equipments
[2700 - (2600 - 300)]
By Balance c/d
To Balance b/d
Balance Sheet of Youth Club as at December 31, 2016
Audit Fee Outstanding
As per last
Capital Fund :
Balance as per previous
Less : Depreciation
Add : Surplus for 2016
Cash in hand
Balance Sheet of Youth Club as at 31st December, 2015
Subscriptions received in advance Salaries outstanding
Audit fees unpaid
Capital Fund (balancing figure)
Cash in hand
From the following Income and Expenditure Account and the Balance Sheet of a club, prepare its Receipts and Payments Account and Subscription Account for the year ended 31st March, 2016:
Income & Expenditure Account for the year 2015-16
Balance Sheet as at 31st March, 2016
The following adjustments have been made in the above accounts:
(1) Upkeep of ground Rs 600 and Printing Rs 240 relating to 2014-2015 were paid in 2015-16. (2) One-half of entrance fee has been capitalised by transfer to General Fund.
(3) Subscription outstanding in 2014-15 was Rs 800 and for 2015-16 Rs 700.
(4) Subscription received in advance in 2014-15 was Rs 200 and in 2015-16 for 2016-17 Rs 100.
Receipts and Payments Account for the year ending 31st March, 2016
Working note: Rs 600 paid for upkeep of ground for 2014-15 and
Rs 240 paid for printing have been added to the amount shown as expenditure for the year to arrive at total payment under these heads.
The Sportwriters Club gives the following Receipts and Payments Account for the year ended March 31, 2016:
Receipts and Payments Account
Figures of other assets and liabilities are furnished as follows:
The closing values of furniture and sports equipments are to be determined after charging depreciation at 10% and 20% p.a. respectively inclusive of the additions, if any, during the year. The Club's library books are revalued at the end of every year and the value at the end of March 31, 2016 was Rs 5,250.
From the above information you are required to prepare:
(a) The Club's Balance Sheet as at March 31, 2015;
(b) The Club's Income and Expenditure Account for the year ended March 31, 2016.
(c) The Club's Closing Balance Sheet as at March 31, 2016.
Sportswriters Club Balance Sheet as on 31st March, 2015
(b) Income and Expenditure Account for the year ending 31st March, 2016
(c) Balance Sheet of Sports Writers Club as on 31st March, 2016
5. EDUCATIONAL INSTITUTIONS
The educational institutions which are functioning in India are mostly registered as Societies under the Indian Societies Registration Act of 1860, in some of the States, where Public Trust Acts have been passed all the Societies registered under the Indian Societies Registration Act, 1860 are required to be simultaneously registered under the Trust Act. Accordingly, in the State of Maharashtra, all the Societies have simultaneously been registered under the Bombay Public Trust Act, 1950.
The Trust Societies are autonomous bodies with offce bearers consisting of President, Secretary, Treasurer and Executive Committee Members. The General Body consists of all the Members of the Society. In case of Societies/Trusts which run a number of colleges and schools etc., for managing the affairs of each individual school or college, there is a governing body, wherein the head of the Unit, such as Principal of the college or Head Master of the school as, the case may be, are also members of the Governing Body. The function of the Governing Body is to supervise the smooth functioning of the individual school or college.
The basic tenets pre-suppose, that part of the expenses of the educational institutions are met from the funds raised by the educational institutions themselves, either from donations, or from charities, collected from benevolent citizens in the country. The State Governments through grant-in-aid-code have evolved different patterns of giving assistance to the educational institutions. There is, as such, no uniformity in the giving of assistance to the educational institutions in the form of grants.
All the educational institutions follow financial year as their accounting year.
5.1 Sources of Finance for Running the Educational Institution
There are three main sources through which amounts are collected by the educational institutions. These are:
(1) Donation from Public;
(2) Fees in the form of annual tuition fees, term fees, admission fees, laboratory fee etc., and
(3) Grants received from the Government.
The Government grants are of four kinds namely Maintenance Grant, Equipment grant, Building Grant and such other grants as may be sanctioned by the Government from time to time.
5.2 Specific items
5.2.1 Donation from Public
These are received either for recurring or non-recurring purposes. Donations are received either in cash or in kind. The 'in kind' donations are in the form of land and building, shares and securities, utensils, furniture and fixtures and the like, generally with a desire to perpetuate the memory of a distinguished member of the family of the donor.
5.2.2 Capitation fees or admission fees
Amounts are collected from parents/guardians of the students who seek admission in the educational institution. These are either in the form of capitation fees or admission fees and are generally collected by the Parent Body which runs the institution. In recent times, such collections have been a matter of severe attack and ban.
5.2.3 Laboratory and Library deposit
These are generally collected by schools and colleges and they remain with the institution till the student finally leaves it. The School Code prescribes the rates of tuition and other fees, to be charged from the students.
5.2.4 Use of Term Fees
A separate account of receipts and expenditures shall be maintained and surplus carried over to the next year. The following are main items on which term fee can be used:
(1) Medical Inspection.
(2) School Magazine-manuscript and/or printing.
(3) Examination expenses i.e. printing, of question papers and supply of answer books if there is sucient balance.
(4) Contribution to athletic and cultural associations, connected with school activities.
(5) School functions and festivals.
(6) Inter-class and Inter-school tournaments.
(7) Sports and Games-major and minor.
(8) Newspapers and magazines.
(9) Extra-curricular excursion and visits.
(10) School competition such as elocution competition etc.
(11) Scouting and Guiding.
(12) School Band.
(13) Social and Cultural activities and equipment required for the same.
(14) Vocational Guidance in general.
(15) Prizes for Co-curricular activities.
(16) Any other extra-curricular or co-curricular activities.
(17) Maintenance of playground.
(18) Purchase of books for Pupils Library.
(19) Drawing and Craft material.
(20) Audio-Visual Education.
(21) Curricular visits and excursions.
(22) Equipment for Physical education.
5.2.5 Recurring grants
Recurring grants in the form of Maintenance Grants are received in instalments spread out throughout the year.
5.2.6 Use of grant-in-aid
The School Code provides a detailed list of items of expenditure which are admissible for grant-in-aid:
(1) Staff salaries and allowances
(2) Leave Allowance.
(3) Bad Climate Allowance.
(4) Water Allowance.
(5) Leave Salary.
(6) Expenditure on training of teachers.
(7) Pension and Gratuity as may be applicable.
(8) Expenditure on the appointment of Librarian.
(9) Rent, Taxes and Insurance.
(10) Other Contingencies: expenditure of printing and stationery, conveyance expenditure, expenditure on purchase of books and furniture equipment.
(11) Current repairs.
(12) Miscellaneous Expenses: e.g. School Garden, Physical Education.
(14) Expenditure on co-operative stores.
(15) Registration fee paid to the Board for recognition.
(16) Maintenance of Tiffin Rooms.
(17) Bonus to Teachers.
(18) Electrical charges.
(19) Telephone Charges.
(20) Expenditure in connection with Conferences.
(21) Subscription to educational Association etc.
(22) Medical charges.
(23) Audit fees of the auditors in accordance with prescribed scale.
(24) Sales-tax and General tax on purchase of the school requirements.
(25) Payments for merit scholarships.
From the following balances and particulars of Republic College, prepare Income & Expenditure Account for the year ended March, 2016 and a Balance Sheet as on the date :
Seminars & Conference Receipts
Security Deposit - Students
Tuition Fee Received
Interest & Dividends on Investments
Hostel Room Rent
Mess Receipts (Net)
Stock of-stores and Supplies (opening)
Purchases - Stores & Supplies
Salaries - Teaching
Students Welfare expenses
Repairs & Maintenance
Games & Sports Expenses
Research Fund Investments
Provident Fund Investment
Seminar & Conference Expenses
Plant and Machinery
Furniture and Fittings
Provision for Depreciation:
Plant & Equipment
Furniture & Fittings
Cash at Bank
Republic College Income and Expenditure Account for the year ending 31st March, 2016
Republic College Balance Sheet as on 31st March, 2016
Add: Excess of Income
Furniture & Fittings:
Current Liabilities :
Capital Fund Investments
Research Fund Investment
Material & Supplies
Tuition fees receivable
Cash in hand & at Bank
Working Notes :