Non Profit Organizations What Are They

Definition of Fund; Assets; and Fund Balance

According to the “Financial and Accounting Guide for Not-For-Profit Organizations” written by
CPAs Gross, Larkin, Bruttomesso, and McNalley, (fifth edition, pg 25) the definition of a these
three terms is as follows:

- A fund is any part of an organization for which separate account records are kept.

- Assets are valuable things owned or controlled by the organization. Types of assets include cash,
investments, property, and amounts owed to the organization.

- Fund balance is the mathematical number obtained by subtracting total liabilities from total
assets; it is a numerical representation of the net worth of the organization, but has no other
significance. Fund balances do not exist except on paper; unlike assets, they have no intrinsic
value and cannot be spent. Both assets and fund balances (as well as liabilities, revenues, and
expenses) are part of the accounting records of a fund.

What are non-profit organizations?

A few years ago, a dentist client of mine, who did a lot of work for low-income patients under the
California medical assistance program called “MediCal”, asked me a bizarre question. He wanted
to know if he could be considered a “non-profit organization” since he did so much MediCal
work. At first, I thought he was joking, but he was serious. I told him that just because he charged
less for his services did not qualify him to become exempt from paying taxes. In fact, he made a
very nice profit. However, this is a good example of how non-profit organizations (NPO’s) are
misunderstood by a large segment of the general public.

Most countries around the world have NPO’s, but outside the U.S. they are called non-
governmental organizations (NGOs) or civil society organizations. These organizations are
exempt from paying taxes because they provide some sort of public benefit. They are said to
enhance the fabric of society. They differ from a business organization in that there are no
owners. A Board of Directors oversees operations of the organization. An Executive Director,
who reports to the Board, functions like a CEO of a business. Usually there is a lengthy
application process to establish the mission or purpose of the organization before exempt status is
granted.

According to Independent Sector, an organization that serves as an information resource for non-
profit boards, there are 1.5 million non-profits that, when combined, have general annual
revenues totaling more than $670 billion dollars. They report that six percent of all organizations
in the U.S. are non-profits and one in twelve Americans work for a non-profit. That’s big business
and has caused profit-making businesses to become alarmed that some of these NPOs are
competing unfairly. Think about a private hospital as compared to a non-profit hospital. The
profits of the private hospital are taxed, but the NPO hospital can apply all their profits to higher
salaries, more equipment, etc. Hence, there is high scrutiny of NPOs by the Internal Revenue
Service, state Attorney General offices, private watchdog organizations, and the press.

There are all types of non-profit organizations. Public charities are exempt under the Internal
Revenue Service code 501(c)(3). These organizations, such as hospitals, museums, orchestras,
private schools, churches, scientific research organizations, soup kitchens, etc., obviously do
much more than provide free care and services to the needy. To qualify for exempt status, these
organizations must show broad public support, rather than funding from an individual source. In
addition, there are private foundations, colleges, universities, social welfare organizations,
professional and trade organizations, and many more. Governmental organizations such as
communities and agencies are also non-profit organizations, however, their accounting and record
keeping is handled quite differently from 501(c)(3) organizations.

How are non-profit books organized?

Briefly, the books of an NPO are organized in the same way as a profit-making business except
for a few differences. It’s okay for a non-profit to make a profit because there may be many uses
the board has planned for the extra money. But, NPOs traditionally refer to profit as “Excess
Revenues over Expenses” to avoid being mischaracterized as a profit-making organization. A net
loss is called “Excess Expenses over Revenues”. Recall the fundamental equation that makes
double-entry accounting work:

ASSETS = LIABILITIES EQUITY

Instead of the term EQUITY, a non-profit will substitute the words FUND BALANCE or more
recently NET ASSETS. The concept is still the same. After subtracting liabilities from assets the
difference is what is owned by the organization. Where NPOs differ in their financial statement
presentation from profit-making businesses is what is called Fund Accounting. Obviously, the
presentation varies depending on the purpose and size of the organization. For instance, a Little
League baseball organization may only have one fund for which they have to account. They also
may not have any restrictions placed on the usage of contributions they receive. Everything is
straightforward.
Or, a scientific research organization may be working on various projects at the same time with
funding sources made up of private and governmental grants or contracts, private donations, sales
of research documents, some of it restricted to specific expenditures and the rest unrestricted. The
accounting challenge is to report the revenue and expenses accurately for each fund or project and
be able to combine all the funds into one cohesive financial statement.

The problem in the past for the contributors was that they could not easily tell from the financial
documents what funds were restricted and unrestricted and whether their contributions were
being spent properly. The Financial Accounting Standards Board (FASB) decided that all external
accounting should be done using the “Net Assets” approach as opposed to the “Fund Balance”
approach. Essentially, the net assets approach requires that the equity of the organization be
presented with three classes of assets, i.e., Restricted Assets; Temporarily Restricted Assets;
Unrestricted Assets. You can still use Fund Accounting for internal bookkeeping purposes, but for
external reporting purposes you are required to disclose your restricted and unrestricted funds. If
you have no restricted funds, then it is not much of a challenge.

One of the key factors in setting up non-profit books is a well thought out Chart of Accounts. In
other words, this is choosing which general ledger accounts are the most appropriate for
recording revenue and expenses, etc., and organizing them in such a way as to provide meaning.
Some U.S. organizations simply follow the same format found on the 990 IRS form for non-
profits. They do this so that their financial statements are in conformity with the way that return is
organized. This makes it easy to transfer information from their financial statement to the 990
form.

Nevertheless, the main thing is to design your accounts so that they tell you exactly where your
revenue came from and what expenses are related to that revenue. I have worked with NPOs that
have not done a very good job of this in the beginning, and I can testify that it is no fun trying to
straighten the accounts out later. It may be well worth the money to hire a competent accountant
to guide you through the set up phase. Better yet, let your accountant review your books a couple
of times a year just to make sure you are on track and save yourself some year-end grief.

Non-Profit Making Organisations

Introduction

This resource aims to give students help with financial statements from non-profit making
organisations including clubs and societies. The nature of these types of organisations means that
students should also be able to understand the effect of life membership schemes and donations.

The resource is relevant to:

 • OCR: Module 2502, Final accounts
• AQA: Module 5, Further aspects of financial accounting

What are non-profit making organisations? Are they businesses that make losses? Are they
businesses that are run badly?

Non-profit making organisations are also known as 'not for profit' organisations and this is the
name we give them simply because they want to do something or provide something rather than
make more and more money.

What kind of organisations are we talking about that just want to do something rather than
making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's
Club? They are probably examples of non-profit making organisations. Here's a bigger list!

• Associations
• Clubs
• Societies
• Unions
• Charities
• Universities
• Churches

Walk around town with your eyes open and you'll find loads of them!

• KISS: Keep It Simple, Stupid

• Simple but not Stupid
• The Analysed Receipts and Payments Account
• Accruals Concept
• Accumulated Fund and the Balance Sheet
• Calculating Losses of Stock and Cash
• The Remaining Issues

KISS: Keep It Simple, Stupid

Why are these organisations important for accountants though? They are important because the
accounts of these organisations are simpler than they are for a sole trader, a partnership or a
limited company. The accounts are simpler for at least two reasons:
 • The members of these organisations are normally the only people interested in them
• They are usually very simple organisations:
o Not that many members
o Not a huge amount of money involved
o Not that many activities
In lots of cases the only thing that the Treasurer (the bookkeeper or accountant) of a club or
society needs to do is to keep track of the cash and not a lot more than that. Well, why bother with
having to set up a full set of ledgers for a Dog Club that has, say, 50 members paying
subscriptions of £10 a year that meets 10 times a year and just has one dog show and an annual
dinner each year? Not worth the bother is it?

There's profit Jim but not as we know it

Then again, just because an organisation doesn't intend to make a profit doesn't mean that it
won't: lots of them do and in the end, all organisations have to make some profit or they won't
survive.

Jargon buster

The cash account or cash book is called the Receipts and Payments Account and the Trading
and Profit and Loss Account is called the Income and Expenditure Account. Profits are not
called profits, they are called surpluses (or deficits if it's a loss) and the capital account isn't the
capital account now, it's called the accumulated fund.

Profit Making Jargon Non-Profit Making Jargon

Cash Book Receipts and Payments Account
Profit and Loss Account Income and Expenditure Account
Profit Surplus
Loss Deficit
Capital Account Accumulated Fund

Let's just accumulate

The capital account is called the Accumulated Fund and that tells us that there are no private
owners who have the right to keep the profits themselves or take an income from the organisation
and so on - non-profit making organisations belong to all of their members together.

Guess what they call the balance sheet, by the way? It's still called the balance sheet!
Collecting data

What data will a fairly simple club or society collect? For lots of them, they will receive money
for:

• Subscriptions
• Sale of refreshments
• Raffles and other competitions
• Sale of publications
• Annual dinner ticket sales
• Interest on deposit account at the bank
• Sale of old equipment

Receipts will come from such things as:

• Purchase of refreshments
• Purchase of raffle prizes
• Costs of running an annual dinner
• Purchase of new equipment
• Rent of hall

Simple but not Stupid

In the simplest of all cases, all we need to do at the end of a year is to prepare an account like
this:

Receipts Payments
Subscriptions Purchase of refreshments
Sale of refreshments Purchase of raffle prizes
Raffles and other competitions Purchase of publications
Sale of publications Costs of running annual dinner
Annual dinner ticket sales Purchase of new equipment
Interest on deposit account at the bank Rent of hall
Sale of old equipment
Then there would be a balance carried down which is either positive or negative depending on
whether they received more than they spent or spent more than they received. Let's put some
figures to this example now to see how it works; but don't forget, we are dealing here with a
receipts and payments account which is the same as a cash book so there are no accruals and
prepayments to take into account.

Receipts Payments
Balance b/d 1,250 Purchase of refreshments 923
Subscriptions 1,219 Purchase of raffle prizes 337
Sale of refreshments 704 Purchase of publications 79
Raffles and other competitions 118 Costs of running annual dinner 314
Sale of publications 126 Purchase of new equipment 421
Annual dinner ticket sales 404 Rent of hall 110
Interest on deposit account at the bank 11 Balance c/d 1,962
Sale of old equipment 314
4,146 4,146
That's it! Wasn't too bad was it? Now try a question of your own - very, very similar to the one
you just saw!

For You To Do 1:

Prepare the Receipts and Payments Account for the Russian Culture Society for the year 2004.

Subscriptions 1,346
Purchase of new equipment 512
Costs of running annual dinner 264
Sale of refreshments 591
Purchase of publications 63
Annual dinner ticket sales 530
Purchase of refreshments 804
Interest on deposit account at the bank 15
Sale of old equipment 258
Rent of hall 112
Sale of publications 142
Purchase of raffle prizes 322
Raffles receipts 101
Balance b/d 1,286
Balance c/d 2,192
Now take a look at the solution...

Now try this - this question looks a lot different but the method is just the same as the previous
question.

For You To Do 2:

Prepare the Receipts and Payments account for the Steel Social Club from the following
information. As part of your answer you need to calculate the cash balance c/d.

Now take a look at the solution...

For You To Do 3:

Prepare the Receipts and Payments account for the Sawyer's Medieval England Society for the
year ended 31 December 2004 from the following information.

Sawyer's Medieval England Society for the year ended 31/12/04

£
Cash Balances b/d 467
c/d 331

Payments Refreshments 554

New equipment 1576
Rent of hall 360
Local government levy 125
Printing costs 55
Stationery costs 71
Postage and telephone 39
Repairs to equipment 322
Lighting and heating 200
Wages 847
Annual dinner expenses 1085
Lottery prizes 513
Receipts Subscriptions 2311
Sale of annual dinner tickets 1886
Lottery tickets 1093
Refreshments 321
Now take a look at the solution...

Final remarks: some problems with the Receipts and Payments Account

Clubs and societies prepare a Receipts and Payments Account that just tells us what has been
received and paid in cash. This means that such non-profit making organisations might not always
apply the accruals concept of accounting. Not applying the accruals concept is not a problem
for the kinds of organisations we are dealing with here.
There are problems with the Receipts and Payment Account approach to accounting too:

• Apart from the cash balances, it doesn't show any assets or liabilities.
• There is no real indication, except in the simplest cases, of whether the organisation has
made a surplus or a deficit or whether they have made a surplus or deficit on anything that it
does.

The Analysed Receipts and Payments Account

Because we can't tell whether we have made a surplus or deficit on the things that a club or
society does, we can prepare what is called an analysed receipts and payments account. The
term 'analysed' is used as it breaks down the accounts into constituent parts to help give a clearer
picture. Here's an example of what they are and what they do.

Worked Example

Here are the transactions of the Bristol Mountain Bikers Society for the first four months of the
year. Prepare an analysed Receipts and Payments Account for the Society for this period.

Date Details Amount

January Subscriptions 1,000
January Sale of drinks 250
January Cost of drinks 150
January Postage costs 50
March Subscriptions 600
April Sale of drinks 150
April Cost of drinks 90
April Postage costs 30
Before we show the answer to this question, let's look at what we would have prepared until now:

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to
April
Receipts Payments
Balance b/d 275 Cost of drinks 150
Subscriptions 1,000 Postage costs 50
Sale of drinks 250 Cost of drinks 90
Subscriptions 600 Postage costs 30
Sale of drinks 150 Balance c/d 1,955
Totals 2,275 Totals 2,275
That's what we would have done; now here's what we can do now. You might appreciate that
analysed statements like these are ideally prepared in a spreadsheet.

Worked Example Solution

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to
April
Receipts Payments
Sub- Sub-
Total Drinks Postage Total Drinks Postage
scriptions scriptions
Cost of
Balance b/d 275 150 150
drinks
Postage
Subscriptions 1,000 1,000 50 50
costs
Cost of
Sale of drinks 250 250 90 90
drinks
Postage
Subscriptions 600 600 30 30
costs
Balance
Sale of drinks 150 150 1,955
c/d
Totals 2,275 1,600 375 0 Totals 2,275 0 240 80
See what's happened. It's a fairly simple example but it gives you the idea. Look at just one
example of the additional information we've got now:

Sales of drinks 375

Costs of drinks 240
Surplus on sale of drinks 135
See? By analysing the receipts and payments in this way we can get summaries of all major
items. Notice also that we used the term surplus rather than profit.

For You To Do 4
Prepare the analysed Receipts and Payments Accounts for the Russian Culture Society in For You
To Do 1. In addition, calculate the surplus or deficit on refreshments for the period.

Now take a look at the solution...

For You To Do 5

Prepare the analysed Receipts and Payments Accounts for the Steel Social Club in For You To Do
2. In addition, calculate the surplus or deficit on the 100 Club for the period.

Now take a look at the solution...

For You To Do 6

Prepare the analysed Receipts and Payments Accounts for Sawyer's Medieval England Society in
For You To Do 3. In addition, calculate the surplus or deficit on the annual dinner for the period.

Now take a look at the solution...

Accruals Concept

Take a look at the Between the Sheets glossary to see a broad definition of the accruals concept.
Very briefly, the accruals concept tells us that sometimes people owe us money in January but
won't pay until February. Similarly, someone may have paid their subscriptions for 2005 in
November 2004 but unless we use the accruals concept this £30 will be shown in the Receipts
and Payments Account for 2004 when it shouldn't be.

What all of this means is that a Receipts and Payments Account (RPA) needs to be changed to
take account of accruals and prepayments so that it:

• follows the accruals concept

• shows us a true and fair value of the organisation

When we take these ideas into account we turn a RPA into an Income and Expenditure Account
(IEA). An IEA is just another name for the Trading and Profit and Loss Account and if the
organisation carries out any trading activities, such as running a bar or buying and selling plants,
fertilisers and so on, it includes the trading account as part of the IEA.

Worked Example
Let's prepare an Income and Expenditure Account now by looking at a very similar example to
For You To Do 1 but this time with a couple of adjustments.

a. In horizontal format prepare the IEA for the Russian Culture Society for the year 2004
from the following list of balances and adjustments that follow.
b. In vertical format prepare the IEA for the Russian Culture Society for the year 2004 from
the following list of balances and adjustments that follow.

Receipts
Balance b/d 1,307
Rent of hall 101
Sale of old equipment 378
Costs of running annual dinner 290
Purchase of new equipment 516
Purchase of publication 65
Purchase of refreshments 1,004
Subscriptions 1,009
Purchase of raffle prizes 390
Raffles receipts 134
Sale of publications 107
Sale of refreshments 682
Interest on deposit account at the bank 11
Annual dinner ticket sales 448
Balance c/d
Adjustments
Subscriptions not yet received 161
Annual dinner ticket money still owing 45
Rent of hall paid in advance 11

Worked Example Solution

a. Make sure you agree with this horizontal style IEA:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04
Expenditure Income
Rent of hall 90 Subscriptions 1,170
Costs of running annual dinner 290 Raffles receipts 134
Purchase of publication 65 Sale of publications 107
Purchase of refreshments 1,004 Sale of refreshments 682
Purchase of raffle prizes 390 Interest on deposit account at the bank 11
Surplus of Income over Expenditure 758 Annual dinner ticket sales 493
2,597 2,597
Have you spotted this?

This is exactly how it should behave according to double entry bookkeeping principles and it's the
same as this:

Here is how we have dealt with the adjustments - we have shown these adjustments in two ways,
side by side:

1. as a simple calculation, and

2. in ledger account format

Subscriptions: this is revenue

Subscriptions Account
Amount received, shown in the RPA 1,009 IEA 1,170 RPA 1,009
Plus amount is owing for this year but not yet received 161 Accrual c/d 161
Amount that should have been received during the
1,170 1,170 1,170
year

Annual Dinner: this is revenue

Annual Dinner Account
Amount received, shown in the RPA 448 IEA 493 RPA 448
Plus amount is owing for this year but not yet received 45 Accrual c/d 45
Amount that should have been received during the year 493 493 493

Rent of Hall: this is a cost

Rent of Hall Account
Amount paid, shown in the RPA 101 IEA 101 RPA 11
Less amount paid in advance 11 Accrual c/d 90
Amount that should have been paid during the year 90 1,170 1,170
b. Now the vertical style IEA for the Russian Culture Society for 2004:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04
Subscriptions 1,009
plus Subscriptions not yet received 161 1,170
Raffles receipts 134
Sale of publications 107
Sale of refreshments 682
Interest on deposit account at the bank 11
Annual dinner ticket sales 448
plus Annual dinner ticket money still owing 45 493
2,597
Less: costs for the period
Rent of hall 101
less Rent of hall paid in advance 11 90
Costs of running annual dinner 290
Purchase of publication 65
Purchase of refreshments 1,004
 Purchase of raffle prizes 390 1,839
Surplus/(Deficit) for the period 758
Notice how the adjustments have been incorporated very nicely within the vertical format. It is
possible to do the same with the horizontal format but it doesn't look so nice!

These examples help us to learn the Golden Rules of Adjustments:

Revenues Costs
Owing but not received in Owing but not paid in
Add to RPA amount Add to RPA amount
the period the period
Received but relates to Subtract from RPA Paid but relates to next Subtract from RPA
next period amount period amount

For You To Do 7

Prepare:

a. the horizontal, and

b. the vertical format IEA

for the Steel Social Club from the following information.

Steel Social Club for the year ended 30/09/04

Cash Sale of
Subscriptions 130.55 Visitors' fees 95.82 100.18
Received Refreshments
Interest on
100 Club Ticket
Sale of mementoes 154.08 172.00 Deposit 12.34
sales
Account
Cash Spent Postage 9.51 Secretary's fee 62.15
Refreshments 41.40 Treasurer's fee 70.12
New Equipment 125.53 100 Club Prizes 79.00

Adjustments Subscription paid 7.83 Subscription paid 26.11

this year but this year but
relating to last year relating to next
 year
Postage stamps
0.95
bought in advance
Now take a look at the solution...

Accumulated Fund and the Balance Sheet

We already know that the capital account of a non-profit making organisation is called the
accumulated fund... but where is it? Why haven't we seen one yet? Well, we didn't want to make
your life too much of a misery all at once by giving you too much to think about so we saved it
until last! More than that, we have put the accumulated fund with our balance sheet
explanations... we think it makes sense!

The accumulated fund works in exactly the same way as the capital account:

Accumulated Fund
Balance b/d XX
± Surplus/Deficit of income over expenditure XX
Balance c/d XXX
By far the best way of sorting it all out is to work through an example although in the first case
we won't prepare a full balance sheet.

Worked Example

Buckingham Sports and Social Club - Receipts and Payments for the year ended 31/08/04
Receipts £ Payments £
Cash in hand 01/09/03 3,000 Bar purchases 24,000
Interest 1,500 Purchase of equipment 20,000
Subscriptions 36,000 General expenses 26,000
Bar sales 50,000 Competition costs 3,000
Competition receipts 2,000 Cash balance 31/08/04 19,500
92,500 92,500

Other Balances as at 01/09/03

Clubhouse and land 100,000
Equipment 25,000
Bar stock 4,000
Investments 20,000
General expenses owing 500
Subscriptions due 1,000

Additional information as at 31/08/04

Bar stock 6,000
Bar creditors 400
General expenses prepaid 300
Subscriptions prepaid 900
Equipment held on 31/08/03 to be depreciated by 20%

Required

a. Prepare a statement showing the club's accumulated fund at 01/09/03

b. Prepare the club's income and expenditure account for the year ended 31/08/04
c. Prepare the club's balance sheet as at 31/08/04

Worked Example Solution

a. The club's accumulated fund at 01/09/03:

This first part is probably very similar to many questions you tried when you first learned the
accounting equation:

assets = liabilities + capital

Strictly speaking, we need to change that for non-profit making organisations to be:

assets = liabilities + accumulated fund

Then you would go on to working with this equation, including the evaluation of the capital
balance at the start of the year given a list of assets and liabilities. What you are about to see is
exactly the same as that.

Buckingham Sports and Social Club Accumulated Fund at 01/09/03

Assets Liabilities + Accumulated Fund
Cash in hand 01/09/03 3,000 General expenses owing 500
Club house and land 100,000 Balance c/d 152,500
Equipment 25,000
Bar stock 4,000
Investments 20,000
Subscriptions due 1,000
153,000 153,000
b. Prepare the club's income and expenditure account for the year ended 31/08/04:

The IEA that follows is again given in vertical format and where possible we have just inserted
the final surplus or deficit figure rather than putting all of the detail in. For example, we have
opened an account for subscriptions and just shown the final figure on that account in the IEA.
The same applies to the bar and to general expenses. This is a very good and efficient way of
working, by the way!

Buckingham Sports and Social Club Income and Expenditure Account for the year ended
31/08/04
Note
Subscriptions for the year 1 34,100
Surplus on bar a/c 2,3 27,600
Interest 1,500
Gross surplus before deficit on competitions 63,200
Deficit on competitions 4 1,000
Gross Surplus 62,200
less Expenses
General expenses for the year 5 25,200
Depreciation of equipment 6 9,000 34,200
Net surplus carried forward to accumulated fund 28,000
Here are all of the notes to explain the adjustments we have made for the IEA.

Notes
1 Subscriptions a/c Dr Cr
Balance b/d 1,000
 Subscriptions 36,000
Prepayments c/d 900
IEA subscriptions for the year 34,100
36,000 36,000
2 Bar a/c
Bar sales 50,000
Bar stock as at 31/08/03 4,000
Bar purchases for the year 24,400
Bar stock 6,000
IEA surplus on bar a/c 27,600
56,000 56,000
3 Bar purchases a/c
Bar purchases 24,000
Bar creditors c/d 400
Bar purchases for the year 24,400
24,400 24,400
4 Competitions a/c
Competition receipts 2,000
Competition costs 3,000
IEA deficit on competitions 1,000
3,000 3,000
5 General Expenses a/c
General expenses owing at 01/09/03 500
General expenses 26,000
General expenses prepaid c/d 300
IEA general expenses for the year 25,200
26,000 26,000
6 Equipment a/c
Equipment as at 31/08/03 25,000
Purchase of equipment 20,000
 Depreciation 9,000
Balance c/d 36,000
45,000 45,000
c. Prepare the club's balance sheet as at 31/08/04:

Finally, the balance sheet - and it balances!

Buckingham Sports and Social Club Balance Sheet as at 31/08/04

Fixed Assets
Clubhouse and land 100,000
Equipment 36,000
Investments 20,000
156,000
Current Assets
Bar stock 6,000
General expenses prepaid 300
Cash balance 31/08/03 19,500 25,800
Total assets £181,800

Accumulated Fund b/d 152,500

Net Surplus carried forward to accumulated
28,000
fund
Accumulated Fund b/d 180,500

Bar creditors 400

Subscription prepayments 900 1,300
£181,800
Even though that isn't an especially difficult question, it does take time to work through it.
However, any good bookkeeper will have learned to be methodical, logical and careful and it is
that approach that will help you to succeed with such questions.

Why not try another, very similar question to the Buckingham question now? Go on, you know
you want to! Here it is.
For You To Do 8

Pudsey Sports and Social Club Receipts and Payments for the year ended 31/12/04
Receipts £ Payments £
Cash in hand 01/01/04 2,961 Bar purchases 38,546
Interest 1,399 Purchase of equipment 19,038
Subscriptions 35,176 General expenses 25,686
Bar sales 72,704 Competition costs 3,992
Competition receipts 2,216 Cash balance 31/12/04 27,194
114,456 114,456

Other balances as at 01/01/04

Land and buildings 120,885
Machinery and
23,420
Equipment
Bar stock 4,172
Investments 24,981
General expenses owing 641
Subscriptions due 1,433

Additional information as at 31/12/04

Bar stock 2,648
Bar creditors 281
General expenses prepaid 274
Subscriptions prepaid 1,596
Machinery and Equipment held on 31/8/2003 to be depreciated
12%
by
Required:

a. Prepare a statement showing the club's accumulated fund at 01/01/04

b. Prepare the club's income and expenditure account for the year ended 31/12/04
c. Prepare the club's balance sheet as at 31/12/04
Now take a look at the solution...

For You To Do 9

Note: this is a complex question that calls on your bookkeeping and accounting for clubs and
societies skills and there is no need to prepare a balance sheet.

The Balance Sheet of the Midlothian Sports Club as at 31 December 2003 showed the following:

Subscriptions paid in advance 310

Subscriptions in arrear 24
Bar stocks at cost 540
Bar creditors 173
Balance at bank and cash in
1,437
hand
Furniture and fittings 3,110
The treasurer keeps a receipts and payments book and the totals for the year ended 31 December
2004 are as follows:

Subscriptions 5,110
Bar sales 5,716
Sales of dance tickets 2,176
Dance expenses 749
Rent and rates of premises 2,200
Lighting and heating 1,420
Barperson's wages 2,500
Steward's salary 5,000
Collections made on behalf of
2,650
charities
Distributions to outside charities 2,600
Purchase of new furniture 1,460
Disposal of old furniture 150
Payments for bar purchases 2,610
The following information as at 31 December 2004 is also vital:
Subscriptions in arrears 40
Subscriptions in advance 410
Bar stocks at cost 470
Bar creditors 190
Rent unpaid 200
Book value of furniture disposed
270
of
Depreciation of furniture for the year at 5% of book value on 31 December 2003.

Required:

a. Prepare an analysed Receipts and Payments Account for the year ended 31 December 2004.
b. Prepare an Income and Expenditure Account for the year ended 31 December 2004. The
Income and Expenditure Account should show clearly the profit or loss on the various
activities.

Notes:

• A Balance Sheet is not required.

• You need to decide where the Steward spends most of his/her time.
• Think carefully about the collections and disposals made on behalf of charities as far as the
IEA is concerned.

Now take a look at the solution...

Calculating Losses of Stock and Cash

In the busy and often tempting environment of small organisations, mistakes can happen and so
can theft. A barman in a busy bar or lounge can be forgiven from time to time if a few bottles of
beer go missing or the till is short of a few pounds. However, what we are concerned with here is
working out whether beer or cash have gone missing.

In some cases we might assume that accountants, auditors and the police find that a barman had
'lost' some beer and some cash from their bar. To carry out our own investigation, here is what we
need:

Stock
 • A true record of the opening stock, taken from the annual, monthly or weekly physical stock
take or stock check
• Accurate delivery records from the brewery, wholesaler or supplier
• Accurate sales records
• A true record of the closing stock, taken from the annual, monthly or weekly physical stock
take or stock check

That's it! When we have all of that, there's nothing we don't know or can't prove!

Cash

We really need the same information as for stocks of goods for sale, since cash is really only a
stock of notes and coins. This is what we need then:

• Bank statements and statements of cash in hand for the start of the period - cash balance b/d
• Accurate records of all cash received
• Accurate records of all cash paid
• Bank statements and statements of cash in hand for the end of the period - cash balance c/d

Of course, with a large club that might have several bars, a café, restaurant and a sports hall and a
gym, reality can be more complicated than a simple list suggests but the principles are the same
whatever the size of club or organisation.

Worked Example: Stock

What do you make of the following information?

The basic data

Stock at start 1,000
Purchases 10,000
Sales 15,000
Stock at end 400
The average mark up on cost of sales is 30%
Working directly and only from the basic data we can estimate the cost of sales and sales using
the formula:
Opening stock
+ Purchases
- Closing stock
= Cost of sales
+ Estimated mark up
= Estimated Sales
Based on the data supplied
Opening stock 1,000
Purchases 10,000
Available for sale 11,000
Closing stock 400
Cost of sales 10,600
Estimated mark up (30%) 3,180
Estimated sales 13,780
See the problem? We have been told that the actual sales were £15,000 but using the formula we
find that sales seem to be £13,780. Here's what we do to resolve this issue:

Assuming that the figure for sales of £15,000 is correct then working backwards from actual
sales we can find what closing stocks should have been. You might find the right hand column in
the table that follows useful as it confirms the percentages to work with when working backwards
from the actual sales.

Calculations from what should have happened

Opening stock 1,000.00
Purchases 10,000.00
Available for sale 11,000.00
Estimated closing stock 538.46
Estimated cost of sales 11,538.46 100%
Average mark up on actual
3,461.54 30%
sales
Actual sales 15,000.00 130%
So actual sales are £15,000, 130% of the estimated cost of sales. Therefore, the estimated cost of
sales is equal to:
 Actual £15,00
Estimated cost of sales
sales * 100% = 0 * 100 = £11,538.46
=
130% 130
Then we find the estimated value of closing stock by subtracting the estimated cost of sales from
the value of goods available for sale:

= £11,000 - 11,538.46 = £538.46

Conclusion: We have found a problem. The closing stock check revealed that there is £400 worth
of goods in stock yet our calculations show that there should be £538.46 worth of stock. The
committee of the organisation would now investigate what had gone wrong and take the
appropriate action.

For You To Do 10

Draw your own conclusions from the following data as to whether you think the stock of the
Briney Seafarer's Association has been looked after properly for the year ended 31 March 2004.

Stock at start 1,277

Purchases 9,222
Sales 17,965
Stock at end 889
The average mark up on cost of sales is 20%
You might find it useful to calculate using the same tables as in the above Worked Example.

Now take a look at the solution...

Worked Example: Cash

Remember we said that holding cash really means having a stock of cash? So it should come as
no surprise that finding out whether cash is missing is remarkably like finding out if stocks are
missing.

What do you make of the following information?

Cash and bank at start 1,063.54

Payments 16,704.25
Receipts 17,693.50
Cash and bank at end 723.03
In a sense, the workings are easier than with stock, as the following solution shows.
Worked Example Solution: Cash

The logic of the solution to this problem is:

Cash and bank at start

+ Receipts
= Available cash
- Payments
= Estimated cash and bank at end
- Actual cash and bank at end
= Cash discrepancy, if any
Applying that template to the data in the question gives:

Based on the data supplied

Cash and bank at start 1,063.54
Receipts 17,693.50
Available cash 18,757.04
Payments 16,704.25
Estimated cash and bank at end 2,052.79
Actual cash and bank at end 723.03
Cash appears to be missing (1,329.76)
So £1,329.76 of the cash is missing, or unaccounted for. What should we do now? We are dealing
with a year's accounts so need to see the problem in that context. A total of £1,329.76 for a year is
just over £25 a week and that's probably a serious enough problem to take action. Management by
exception tells us how serious a problem it is and it gives us clues as to what to do with it!

Management by exception (MBE) means that we leave things alone unless they are a problem -
unless they are exceptional, that is. Here's a really good example of MBE - would you ever
change the tyres on your bicycle if they weren't causing you a problem and they weren't breaking
the law? No, you wouldn't unless you wanted a new colour or style. In the same way, if a business
has plenty of cash in the bank, why worry about it? In this case, though, more than £1,300 is
missing and that is exceptional. £1.30 over a year wouldn't be exceptional and neither would £13.
£130 could begin to be a problem. Can you see how we look at things in an exceptional way
now?

For You To Do 11

Evaluate the cash position from the following data and discuss what you would do as a result of
your investigations.
The Bally Elliott Twinkle Toes Club's treasurer presents the following end of year information to
the chairman of the club and just as the treasurer is about to reveal what these numbers mean, his
wife bursts through the door and drags him away to deal with an urgent family crisis.

As the chairman you have to work out what these figures mean so that you can explain their
meaning to the Club's committee in half an hour's time.

Prepare your workings and your speech!

The Bally Elliott Twinkle Toes Club for the year ended 31/12/03
Cash and bank at start 931.44 Payments 16,292.01
Cash and bank at end 855.82 Receipts 15,830.77
You might find it useful to calculate using the same table as in the above Worked Example.

Now take a look at the solution...

The Remaining Issues

There are three issues that we can deal with relatively quickly and which will complete this
introduction to the accounts of non-profit making organisations.

• Life membership fees

• Joining up fees
• Projecting the fees needed

Life Membership Fees

Many clubs and societies have life membership schemes where we can pay a relatively large
amount at the beginning and then never pay any more membership fees... ever. Take a look at a
few clubs and societies and see how many of them do that.

The accounting problem with life membership is to solve the problem - how long is life? Ah, the
eternal question!

In some cases, life membership could just be a year or two, for example, if someone pays their
membership fee and then, sadly, dies after a short time. On the other hand, the 18 year old who
becomes a life member of a wildlife society could be an active member for 60 or 70 years or even
more.

The solution to the problem is that the organisation has to set a policy on how long life will be.
That is, the club will agree that all life membership fees are to be spread over 10, 15 or 30 years
and then each year this calculation is done:
Jack Smith signs up for life membership from 1 January 2004 by paying £150. The club's life
membership term is 20 years so each year £7.50 (£150 ÷ 20 years) will be charged to the IEA for
Jack. Life membership works a bit like depreciation, doesn't it?

Watch out for tricky questions here because life membership fees will change. Old members die
and new members join so there will be changes to the life membership account to take care of. In
an exam, all of these issues will be set out for you.

For You To Do 12

From the information supplied, carry out the following tasks:

a. Based only on the information you see below calculate what you think should be the amount to
be shown in the end of year IEA for Life Membership fees for the Duncanstone Horticultural
Society.

Membership profile Number Average age Duration of life membership (years)

Male 48 51 25
Female 100 42 35

Respondents saying they would become life members

male 25%
female 35%
Life membership fee = £95

b. Having seen the calculations in part a, the committee decided that life membership fees should
be spread over 10 years for all life members. Calculate the revised amount to be shown in the IEA
if all life members' fees are spread over 10 years.

c. The Society has undertaken more detailed research into the life membership issue and presents
you with the following additional information.

Number Duration of life membership (years)

Couple
40 25
s
Singles 30
Breakdown of singles
Male 30% 25
Female 70% 35
Life membership fee
Couple 125
Single 95
As a result of this additional information, calculate the amounts to charge to the IEA providing
the life membership fees are spread over:

1. expected duration of life membership

2. 10 years

Extension: Now consider offering life membership to couples or singles. If they took out life
membership would members do so as a couple/family or as an individual?

Now take a look at the solution...

Joining Up Fees

Lots of non-profit making organisations have joining up fees and they might be a bookkeeping
problem too. The solution to this problem is really the same as the life membership problem - the
organisation itself decides what to do with its joining up fees. Here are two suggestions:

• Put them into the IEA when the member joins.

• Spread them over two or three years so that if Jill Smith joins and pays the joining up fee of
£30 and we spread it over three years, then we will put £10 (£30 ÷ 3) for each of her first
three years of membership in the IEA under the heading of joining up fees.

Questions relating to joining up fees aren't difficult, so let's go straight to...

For You To Do 13

RocURBaby Music Club, which has a financial year ending on 31 December, charges a signing
on fee for all new members in addition to its annual fees.

a. For new members signing on in 2004 only and assuming that the club's policy is to spread
the signing on fee over three years, show the entries for the signing on fees in the IEA for
the club.
Note: Signing on fees are charged to the IEA in full for each year of membership and it
doesn't matter at what stage of their first year they join. So, even if they joined on 1 January
 or 12 November or even 31 December, their first year signing on fee is charged in full for
that year.
b. For all new members signing on from 2004 to 2006 show the entries for each of the three
years for the signing on fees in the IEA for the Club.

Year Number of new members signing on Signing on fee (£)

2004 30 50
2005 33 55
2006 36 70
Now take a look at the solution...

For You To Do 13: Solution

a. The entries we need to make are as follows:

RocURBaby Music Club IEA

For the year ended 31 December 2004
Signing on fees: charge for the
=(£50 * 30) ÷ 3 500
year
For the year ended 31 December 2005
Signing on fees: charge for the
=(£50 * 30) ÷ 3 500
year
For the year ended 31 December 2006
Signing on fees: charge for the
=(£50 * 30) ÷ 3 500
year
b. This part of the solution is more complex so the detailed workings are shown separate from the
IEA entries.

RocURBaby Music Club IEA

For the year ended 31 December 2004
Signing on fees: charge for the
500
year
For the year ended 31 December 2005
Signing on fees: charge for the
1,105
year
For the year ended 31 December 2006
Signing on fees: charge for the
1,945
year
The workings for this part of the question are:

Signing on fees paid

2004 2005 2006
2004 1,500
2005 1,815
2006 2,520
Total 1,500 1,815 2,520

Signing on fees charged

2004 2005 2006
2004 500 500 500
2005 605 605
2006 840
Total 500 1,105 1,945

Projecting the Fees Needed

How does a non-profit making organisation know how much its fees should be? That is, how does
the Flora and Fauna Society know that it should have an annual fee of £15 or £500?

The World Wide Fund For Nature UK (WWF) has several layers of membership, for example:

• Members at £2 per month

• Companions at £5 per month
• Benefactor at £10 per month, and
• Any other amount that you would like to pay

The Great Yarmouth Gilbert & Sullivan Society has two levels of membership:

• Singing Member - £15

 • Patron - £13

Patrons receive a complementary ticket to the May show, priority booking for further tickets and
regular updates from the Society, including information about concerts and social events.

How about the Norsey Wood Society of Billericay?

• Standard - £3 per household

• Senior Citizen - £1 per household

If you live outside Billericay, please add £1.00 towards the postage and packing of the newsletter
(sorry UK only!).

Membership entitles you to free entrance to Society meetings and talks and to four informative
newsletters per year.

Simplest solution of all - have just one level of membership and then:

Average cost per member = total costs ÷ total membership

The society can then either charge that amount or add something on to cover inflation, things they
hadn't thought about and unexpected costs such as the need for a new item of equipment.

Worked Example

A 200 Club needs to work out how much to charge per ticket. Imagine that your local church has
decided to have a 200 Club. The 200 Club aims to sign up 200 people a year who will pay exactly
the same amount as each other. Every month some names are drawn out of a hat and these people
are paid an agreed amount of money by way of a prize. At the end of the year the 200 Club aims
to donate its surplus to the church.

All we know so far is how many members the 200 Club wants. What we don't know includes:

• The likely actual number of members (it can't be more than 200 but it could be fewer)
• The value of the prizes
• The amount to donate to the church at the end of the year.

Imagine that we have talked to the treasurer of the 200 Club and he/she has provided us with the
following additional information. St Birinus Church 200 Club needs to decide how much to
charge for membership on the basis of one of the following two suggestions:

Suggestion 1 Suggestion 2
Monthly prizes 1 £50 1 100.0
2 50 2 75.0
3 20 3 22.5
4 20
5 20
6 20
7 20
Likely number of members 175 190
Amount to donate to St Birinus at year
£2,000 £2,000
end
Calculate the cost per 200 Club ticket for suggestion 1 only.

Worked Example Solution

Total prize money per year (50+50+20+20+20+20+20)*12= £200 *12 = £2,400

Amount to donate to St Birinus at year
£2,000
end
Total amount of money to raise per year £4,400
Average annual fee per member £4,400 ÷ 175 = £25.14

For You To Do 14

Work out the annual fee for suggestion 2.

Now take a look at the solution...

For You To Do 14: Solution

Total prize money per year (100+75+22.5)*12= £197.5 *12 = £2,370

Amount to donate to St Birinus at year
£2,000
end
Total amount of money to raise per year £4,370
Average annual fee per member £4,370 ÷ 190 = £23
Whilst the St Birinus example is simple in lots of ways, it does show the nature of the fee fixing
problem. The main problem for students, though, is that the St Birinus example is really only a
single product type of problem. In reality, as we saw with the WWF and the Gt Yarmouth Gilbert
and Sullivan Society, many organisations have several levels of membership or several kinds of
activity - multi product or multi activity organisations.

In reality, this is a budgeting question and in an examination you would be given all of the
information you would need to complete the answer to the question.

Other Resources

• Interactive Worksheet on the Accounts of Clubs and Societies, Ken Delaney-Moore,

Sheffield Hallam University