Financial Statements of Not-for-Profit Organisations - Commerce Video Lecture

good morning guys and a very warm
welcome to all of you to the new chapter
in IPCC this time I'm gonna take IPCC
chapter number 11 the name of the
chapter is financial statements for the
lon profit organization before I go
ahead with the chapter guys let me
introduce myself my name is Rahul Malkin
I have also taken few chapters in IPCC
before and I hope you enjoyed it same as
this time I will take you through the
basic fundamentals of the chapter and
also the practical aspects by the end of
the chapter I hope you guys will be in
the position to solve the questions by
yourself in case you have any doubts I
have given my email ID at the end of the
chapter so that you can get in touch
with me you clear guys and you can even
take the printout of the slides and you
know you can just go through them
anyways let us go ahead with a chapter
and let us first clear the basic
fundamentals the theoretical part and
then I will take you to the practical
aspects how about it guys
can we start it now perfect thank you
guys let us start with a basic
introduction on the chapter so what is
nonprofit organization a nonprofit
organization is a legal and the
accounting entity that is upgraded for
the benefit of the society as a whole
rather than for the benefit of the sole
proprietor or the group of partners or
shareholders guys this entity upgrades
for the benefit of the society they
intend to give the benefit to the
society they intend to work for the
society provide service to the society
you know they don't intend to make
profit for themselves so main part is
what your your gonna concentrate it
intends to work for the benefit of us
by taking it ahead in every society
there are some organization or
organizations which are found which do
not have profit-making catch their
objective and this are the organizations
or entity they don't intend to make a
profit and profit making us do not just
have a look at this but again which do
not have profit-making
as their objective you understand what
am I trying to tell you now it does not
don't misinterpret me I'm not telling
you that they don't make profit I am
Telling You they don't intend to make a
profit because their objective is
providing services to the people you
feel taking it one step ahead now as I
said the main objective may be social or
educational or religious or charitable
and they may take the form of clubs or
societies or charitable bodies and so on
now their aim can be you know their
objective for example can be educational
is to spread education to provide
education free or at a very subsidized
rate to the people or it can be
religious or it can be charitable and
they do take the form of clubs or
societies or charitable bodies so what
is nonprofit organization to sum it all
it's a legal and the accounting entity
not intending to make a profit the main
objective is not to make a profit but to
provide services I hope you guys taking
a leaf out of the basic introduction we
can put certain characteristics of an
LPO now whatever we have learned in
introduction I am just summarizing its
of it the characteristics of an NPO are
now you can see them the first one is
entity service form funds enhancing no
profit margin
the first one to start with is an entity
an NPO as an organization or an entity
it has a separately we form separate
from the person second thing it intends
to provide the service this is the main
part it intends to provide the service
to the society do you agree with that
one third one the next part is the form
it's may take the form of a club or a
society or a charitable institution do
you understand that funds now they may
gather the funds from donations from
government helpings financing is exactly
the same financing of an NPO is taken up
from donations that we receive or it can
be like you know some people leave the
legacy is behind so that's a form of
financing and let's not forget the most
important part of olimpio is no profit
motive I would again like to remind you
guys don't misinterpret me I don't say
they don't make profits I say they don't
intend to make a profit means they're
more mean objective even you know when I
say don't intend you know it's like
basic objective in the mind is to
provide the service not to make a profit
i understanding it guys perfecting them
we now exactly know what an NPO means
it's an entity or an organization which
intends to provide the service and
profit-making is not the main objective
going ahead let us look at the
accounting aspects now what are the
financial statements that an NGO is
required to prepare financial statements
this organization's prepare egg be your
end the following three financial
statements I mean to say three
financially
the first financial statements is where
we seek an payment accounts the second
financial statements is the income and
expenditure accounts and the third
financial statement is the balance sheet
so an NPO prepares three financial
statements first one is a receipt and
payment account second is the income and
expenditure accounts and third one is
the balance sheet how about taking a
brief review on all three of them say
the first one the receipt and payment
accounts now a receipt and a payment
account is basically like a cash and
bank accounts yeah cash and bank account
receipt debit what comes in payments
credit watch those arms the second one
is an income and expenditure at all now
this income and expenditure is very much
similar to the profit and loss account
basically the whole follows his debit
all expenses and losses and credit all
incomes and dates yeah we don't call it
as profit and loss because as I kept on
telling you know the intention was not
to make a profit and hence the word
profit and loss is substituted by income
and expenditure and the third one is
known as the band sheet now it's a
normal balance sheet nothing new about
it it will have liabilities on the left
hand side and assets on the right hand
side so three statements I'll take all
statements in detail the first one is
known as receipts and payments the
second one is known as income and
expenditure and the third one is known
as balancing our weekly raise
- good let us go through each can and
show statement in detail now let me
start with the first one the first one
is the receipt and the payment accounts
now the receipt and payment account is a
cash bond it is a summary of all cash
transactions it starts with the opening
cash and bank balance and it ends with
the closing cash and bank
balance all receipts there is cash and
check are shown on the left hand side
that is the debit side and all payments
that is cash and check our return on the
right hand side that is the when it's
sign now to summarize you know open
accounts now when I say it's an account
it is having two sides one will be the
debit side and second one will be the
credit side now what will debit side
with on debit side will record all
receipts and credit side will record all
the payments so debit side records all
receipts and credit side records all
payments it starts with the opening
caption Bank and it ends with the
closing gas turbine and as simple as
that starts with opening Cashel man
clothes ends with closing cash in bank
receipts on debit payments on credit
it's like a cash summary of all cash
transactions you clear with that one let
us characterize this whatever written in
paragraph in point-to-point format so we
understand it better now as our selling
enough let us characterize these
features in point-to-point format what
are the characteristics or the features
of receipts and payment accounts now the
slide tells you the features of receipt
and payment account are as follows so
the first one now it's a summary of cash
and bank transaction so it records all
cash and bank transaction cash and check
basically the point number two it starts
with opening balance of cash and bank
and it ends with the closing balance of
cash and by opening cash in bank and the
closing cash in line starts with opening
ends with Joseph point number three all
receipts are recorded on the debit side
all payments are recorded on the credit
side
format debit side receipts credit side
the famous point number four it records
all receipts guys it records all
receipts irrespective of the period to
which it belongs to the for example
let's say I'm preparing accounts for the
year 2012 Jan to December
now the receipts will include all the
receipts received in this particular
year irrespective to which you're they
belong to now if you are receiving the
amount in 2012 even if the amount
belongs to the year 2011 it will be
recorded in the receipts and payment
account or even if the amount is
received for the year 2013 it will be
recorded in the receipts and payment
accounts now that's what I'm saying it
records all receipts and payments
irrespective of the period to which it
belongs to means it records the receipts
and the payments for the past for the
current for the future period and that's
what I mean to say for the past for the
current for the future obedient an
account for 2012 may include the
receipts for the year 2011 for the year
2012 and for the year 2013 also the only
criteria should fulfill is it should
have been received in the year 2012 the
next point take the next point the next
point is that the receipt and payment
account records all receipts and
payments irrespective of its nature that
is it records both the revenue and the
capital receipts and the payments for
example guys take an example of payments
payments of salary payments of rent
purchase of furniture they all will be
recorded on the payments and no but
analyze it payment of salary it's a
revenue expense payment of rent it's a
revenue expense the third one I told you
was purchase of furniture
but use of furniture is a capital
expenditure but still it will be
recorded on receipts and payments on the
payment side and it will be very much
similar to receipts also receipts also
will record both the receipts it can be
revenue receipts or it can be a capital
receipt you clear the next one it does
not record any non-cash transactions any
non-cash it does not record any non-cash
transactions if you have got only cash
and the check transactions take the next
point this account is not a trial
balance it is not a trial balance guys
don't misinterpret this account as trial
balance but yeah definitely it's a cash
trial because it contains all
transactions with reference to the cash
and the check now you understand it to
summarize if you remember all the points
it starts with opening cash in bank ends
with closing cash in bank receipts on
the debit payments on the credit it
records receipts and payments
irrespective of period to which they
belong to it records receipts and
payments irrespective of its nature it
does not record any non-cash
transactions and it is not a trial
balance but it is a cash trial to make
it more clear with reference to the
characteristics I am putting a specimen
of receipt and payment account in front
of you have a look at the specimen to
start with first on the top line at the
name of institution and the club
receives and payment account for the
year ended 31st March 2011 now please
remember the year its 31st March 2011 so
the current year will be 10 and 11 yeah
it will have two sides one is debit and
second one is credit for March it's very
simple receipts and a column of amount
and payments and the column
not now as you can see it starts to
opening cash in Bank way of subscription
for nine ten and eleven entrance fee
donations sale of furniture interests on
the opposite side we have salaries range
electricity for jeweler furniture
investment machinery sundry expenses
cleaning expenses insurance expenses
books and the closing violence of
passion bank take a rewind start
understanding what all I told you guys
what all I told you the first one it
starts or it records the receipts on the
debit side it records the payments on
the credit side which keeps on debit and
the payments on the credit do you agree
with that one the next thing I told you
is records or it starts with the opening
cash in bank and it ends with the
closing cash in bank receipts on debit
payments on privet starts with opening -
in mind ends with closing - Almighty
poor thing
it records all receipts irrespective to
the period to which it belongs to check
this out you are talking about
subscription the current year was
7-eleven but we have received
subscription for line in jail they are
received it for 10 and 11 and may have
received for lemon until 9 and 10 is the
last year 10 and 11 is the current year
whereas 11 and 12 is the next year so
irrespective to the period to which it
belongs to receipt and payment records
all receipts on all payments - next one
- note about it is you know have a look
at the receipt psychic thing I'm
highlighting have a look at this pass by
entrance fee by donation by sale of
furniture by rent receipts table asked
to sale of furniture
now sale of furniture the amount
received by the sale of an asset is a
capital receipt but it is recorded on
the receive side the range received is
the revenue receipts
but still it is recorded on the receive
side so it records all receipts
irrespective of its nature also both the
capital and the revenue receipts are
recorded on the receipt site similarly
if you go to the payments check this
portion out again the pins you have
electricity purchase or furniture
repairs purchase of investment sundry
expenses now electricity is a revenue
expenditure paid every month every year
every quarter but is a furniture now
purchase of furniture is not a revenue
payment it's a capital expenditure
virtues of investment is a capital
expenditure repairs of machinery is a
revenue expenditure what I mean to say
is it records all payments irrespective
of its nature do you understand this -
next thing you should keep a note you
know it does not record any non-cash
transactions does not you check on the
receive side check on the payment that
it does not record any non-cash
transactions so the summing of is quite
clear
debit receipts credit the payments
starts with opening action band angel
closing - in mind because all receipts
irrespective to its period - it'll
belong to because all receipts and
payments irrespective to its nature and
it does not record any non-cash
transactions guys I clear with this
account now because it only three
accounts not three statements we need to
understand those three statements one of
them was with equanimity let us have a
practical example on receipts and
payments verse against you I gave you
the specimen now let us see if you can
practice illustration I have taken it
from study material that is illustration
number one page number nine point two
now I would like you to solve it so that
you can check it out whether you are
getting it correct or not
the receipt and payment account for
Swaraj club for the urania Tory first
December 2010 where entrance fee 300
membership fee 3000 donations of club
pavilion 10000 food sub sales well
hundred salaries and wages are 1200
purchase of foodstuff is 800
construction of club level ian is 11,000
general expenses of 600 reign and taxes
are 400 banks Raja sectional cash in
hand on 1st Jan is 230 1st December is
350 there is a cash advance on 1st of
John is 400 and on 31st December is fine
90 a with real guys now what we need to
do is prepare an RMP so it will start
with opening balance of cash in mind
given to you people
ends with closing balance of cash in
bank receipts should be debited and
payment should be credited start
thinking from the viewpoint of the club
or not from your viewpoint we are in the
books of Swaraj club so what are the
receipts in the books of Swaraj club now
entrance fee will be your receipt
membership fee will be a seat the nation
for club Pavilion will be a receipt put
stop sale will be receive salaries and
wages will be a payment purchase of
foodstuff is a payments construction is
a payment general expenses rent and
taxes their payments simple start with
opening National Bank end with closing
cash in man double the receipt spread of
the payment by this objects so I have
done with the solution Shekar answers
guys now your is a solution in front of
you first one on the top line the name
of the club that is Farraj club then we
have receipts in payment account to the
year ended 31st is December 2010 the
receipts and payment account will have
two sites first one the debit and second
one is the credit
the winter receipts and credit the
payments as I told you guys it should
start with the opening balance of cash
in bank to balance brought down cash in
hands cash in bank 200 and 400
simultaneously it should end with the
closing balance of cash in bank so by
balance carried down cash in - 350 and
cash in bank is my 90 I agree with that
now start there between all the receipts
we had entrance fee for 300 membership
fees for 3,000 donation on account of
club perylene was thousand and we had
sale of foodstuff at 1200 on the
payments
we had wages and salaries at 1200
perches of foodstuff at 800 and club
pavilion expenses for the construction
with 11,000 we had general expenses for
600 and finally we had rent in taxes for
400 now we should try a trailing this
amount okay we also had bank charges for
160 now we should try trailing this
accounts
it must ally at 15,000 100 the total of
the debit and the credit should match at
15,000 100 I hope you guys are you
getting this answer it is go ahead let's
go to the next financial statement the
first one was receipts and payments and
the next one is income and expenditure
accounts now what is income and
expenditure account income and
expenditure account is equivalent to the
profit and loss accounts of the business
enterprise it is prepared by matching
the revenues against the expenses for
the specific period and the specific
period is usually a your matching
revenues against the expenses means on
the one side of the Athan will record
the expenses on the other side of the
account moving
or the revenues that is income in
expenditure
however since this is not a profit
oriented institution the account is not
known as profit and loss account the
account will be known as income and
expenditure we have just replaced the
word profit and loss with the word
income and expenditure and the balance
of this account will also not represents
the profit or the you are now the
balance will not be known as profit or
loss the balance will be known as a
deficit or the service now deficit if
the expenses are more than income or
surplus if income is more than expenses
are we clear with this guys now as we
did in receipt in payments account
let us repeat the procedure in income
and expenditure I mean to say is that is
look at the features of the income and
expenditure account now the features of
income and expenditure accounts are s
false point number one it is a revenue
account prepared at the end of the
financial period now when I say it's a
revenue account that means it's a
nominal account and it is prepared at
the end of the financial period it's
prepared generally once you're at the
end of financial period fine number two
is this account is prepared by matching
expenses against the revenue of the
period concern what is more important is
the expenses and the revenues should
belong to a particular period now as we
said if it is prepared once for your so
we are going to match one year of
expenses with the one year of revenues
and it should be the same period
point number three all expenses are
shown on the left hand side that is the
debit side and point number four as all
incomes are so
on the right hand side that is the
credit side now that was very relevant
for him in fact from the first point
itself when we said it's a revenue
account
it means the rule says that with all
expenses and losses and read it all
thing comes and it's next one let's go
to the next point the next one is point
number five the income and expenditure
account will consider both the cash as
well as the non-cash items now for
example on the expense side we might
find salary we might find bent we may
also find something that is known as
depreciation the salary is a cash
expense rent is a cash expense but
referee is a non-cash expense so it
considers both the cash as well as
non-cash items next one
the point number six all capital
expenditures and income are excluded
from the income and expenditure
accounting if you remember just two or
three slides back we were doing receipts
and payments and it said if a cots both
capital as well as revenue itis however
income and expenditure excludes the
capital items it does not record the
capital expenditure it does not record
the capital income items like purchase
of furniture which was included in
receipts and payments will be excluded
from income and expenditure it is not a
revenue expense it's a capital expense
and hence it will not obtain income and
expenditure next one point number seven
is only the current year's income and
expenses are considered current Geo's
income and current year's expenses of
unsoldered now here it's very important
whether the amount that is received
belongs to the currency of because if
the amount is received for the previous
year or the next year then it should not
be included in income and expenditure
again what is important is if the
expenses or incomes are incurred
even if expenses are incurred for 12
months doe paid for 10 months it will be
considered as an expense for 12 months
and included will come and expenditure
for 12 months even though if they are
paid for 10 months
the next point the last one
if incomes now while balancing that
accounts if incomes are more than the
expenditure then the balance will be
known as surplus where is if the
expenses are more than the incomes then
the balance will be known as deficit the
receipt and payment used to start with
opening cash in bank and ended closing
cash in bank and the account is tajalli
your income and expenditure needs to be
balanced it's like a profit or loss
account to find out the profit you are
in that case it will be known as surplus
Amba lost your m NPO accounts will be
known as a deficit are we clear with
that one so to sum it up income and
expenditure accounts is repaired for a
period it's a revenue in nature debit
the expenses fringe being comes only
revenue items are considered only
expenses for a particular period are
considered income in expenses both and
it considers both the cash as well as
the non-cash items let me give you the
specimen of income and expenditure
accounts so that we can clearly
understand as to what I was talking the
specimen of income and expenditure but
right in front of you first one is the
name of institution of the club that's
always a practice income and expenditure
account for the year ended 31st March
2011 we have two sites first one debits
and the credit on the expenses shall be
outstanding range in Charles prepay
printing repairs Dupree Sunmi expenses
and surplus that is a balancing below
income by subscription outstanding ad
less-advanced donation entrance fees a
local newspaper sundry machines
humberto and we can see may have a
surplus now let us put everything that
we try it into practice first one an
income and expenditure account is a
revenue account with change
Rabbids all expenses and credit all
incomes so debit cards will be expenses
and credit starts with deep income do
you agree with that one it records all
expenses now when I say it records all
expenses that means the cash as well as
the non-cash check the salt you can see
printing & stationery repairs of
equipment and you can see even
depreciation printing & stationery what
an expense repair both our cash printing
and the repairs and debris is also a
revenue expense but it's not cash so it
records the cash as well as non-cash
expense one more point to be noted is it
records expenses for a particular period
now you look into this blog salary ad
outstanding now irrespective of the
salaries paid for the entire period or
not we would add the outstanding and put
it for the period where as you can see
for the insurance less prepaid that
means if insurance is paid for the next
year we would subtract it as a brief it
and show it only for that particular
period so your the expenses are recorded
only for the particular period do you
understand that finally when it goes the
income and expenditure accounts we can
get the balance the balance is either or
deficit or a surplus in this case if you
see we have something that is known as
surface why do we have surplus your is
because the total of income side is
greater so if income is greater than the
expenses then the balance will be known
as
however if expenses are more than income
then the balance will be known as
deficit theory or exam the gas so having
understood both the accounts now income
and expenditure and receipts and
payments let us put them in front of
each other that is let us make them
fight distinguish enjoy cognize let us
have distinguished between the RNP and
the income and expenditure here actually
in a school days you know my name is to
say distinguished it goes like against
like a fight a fight between R and P an
income and expenditure up T formats
account always love that one side the
receipts and payment and second side the
income and expenditure point number one
pre-season payment is a real accounts
the rule is pretty simple
debit what comes in when it what goes
out income and expenditure accounts on
the other hand side is a nominal account
debit all expenses and losses and credit
all incomes and gains the next part
receipts and payment is a summary of
actual cash receipts and the payments
for a particular period its cash pure
heart cold cash debit cash credit the
cash where is income and expenditure
account is a summary of income and the
expenses of a particular period it's a
summary of income and expenses non-cash
point number 3 receipts and payments
includes both the capital and the
revenue items so capital and revenue
receives as well as capital and revenue
payments whereas income and expenditure
includes only the revenue items only
revenue
point number 4 the receipts and payments
includes all receipts and payments
irrespective to the period or of the
period to which it belongs the only
point of view is it should be received
in the current year
then it does not matter whether it
belongs to the previous year or the
current year or the next only thing that
matters is it received in the currency
it is recorded when income and
expenditure we include only the income
and the expenses of a particular period
for which the account is prepared it
will include the income and expenses
only for a particular period not for the
previous year or the next year even if
the amount is not paid and incurred it
will be recorded as an expense are you
understanding guys next one the receipts
and payments will not include non-cash
transaction it does not include non-cash
transactions whereas income and
expenditure includes both the cash as
well as the non cash transaction
receives and payments will be pure cash
and income and expenditure will include
both the cash and the next point the
last one receipts and payments starts
with opening balance of cash and bank in
it ends with the closing balance of cash
in bank and it's Italian however there
will be no opening balance of income and
expenditure but the closing balance will
either represents a deficit or a surplus
not deficit as I told you in the last
side only is if the expenses are greater
than income then we have a deficit it
basically represents the loss and if the
income is greater than the expenses then
we have a surplus it represents the
property
are we clear up that's receipts and
payments versus income and expenditure
perfect
in the last financial statements that is
the balance sheet now nothing new about
the balance sheet for a nonprofit
organization it's prepared exactly on
the same fundamentals as it is prepared
for any business for any profit seeking
business now the screen says you the
balance sheet of nonprofit concern is
prepared on same principles as the
balance sheet of profit seeking it's a
statement of all the assets and the
liabilities of the business it may be
prepared either in the order of
liquidity or in the order of permanence
now when I say in the order of liquidity
then the aside should start with cash
and bank then data is then stock if I
say it is in the order of permanence
then it should start with fixed assets
and then go on to current assets but all
in all nothing new about this balance
sheet it's just that it was one of the
statement and I put it in the slide but
it is same as the normal balance sheet
so that budget sheet the specimen of the
balance sheet now if you have seen the
balance sheet but sell for a view a
little bit of a difference you are in
there that you need to know that is name
of the institution starts with the
balance sheet as on 31st point 2011 we
all know it that on the left hand side
we have something that is known as the
liabilities to be agree with that for
your other liabilities on right hand
side we have the SS liabilities and the
essence it starts with the capital fund
add anything that has to be capitalized
we will study this so boards and drinks
Key's and subscription and all surplus
we know that in case if you have a
profit it's a surplus it should be added
to capital fund then we have any income
received in advance that is basically
subscription or any outstanding salaries
that is expenses price fund and building
1 and so on on the assets we have
building listed every furniture books
investments prepaid insurance
income subscription cash bank and cash
in hand and we all know that the chick
reversal rule which says balance sheet
must Chani it has to tell you every
question that we saw has are we
understanding it that's the balance
sheet and this balance sheet is prepared
in the order of formulas clear food