Subject: Financial Accounts

Topic: Financial Statements of Not for Profit Organizations

By: Questionscastle Academic Team Document Code: CA/IPCC/ACC/0006

A Not for Profit Organization (NPO) is an organisation which does not work for profit purpose instead it works completely for social welfare and serving the society. For example: Public Hospitals, Public Educational Institutions, Clubs, and Resident Welfare Societies etc. Types of Accounts prepared: A NPO prepares three types of statements in its Financial Statements: 1. Receipt and Payment Account. 2. Income and Expenditure Account. 3. Balance Sheet. Receipt and Payment Account: A Receipt and Payment Account is a summary of Cash Book. In a receipt and payment account a NPO records all cash transactions occurred in a year irrespective of the year these cash transactions relates to. Just like cash account all inwards are recorded on left side and all payments are mentioned on right side. Also it shows the opening and closing balance of cash with the organization. Income and Expenditure Account: An Income and Expenditure Account is like a Profit And Loss Account for a NPO. In an Income and Expenditure Account a NPO records all transactions of nominal nature for a relevant financial year. Unlike Receipt and Payment Account it requires an adjustment of prepaid and outstanding balances related to all nominal accounts. It shows the profit earned or loss incurred by the NPO during a relevant financial year. But unlike P&L A/c it represents profit by the name of Surplus and loss by Deficit.

Balance Sheet: A balance sheet of NPO serves the same purpose as of any other financial organization. It is prepared in the same way as all other balance sheets are. Preparation of Receipt and Payment Account: As we discussed earlier a Receipt and Payment Account is a summary of Cash Book. All cash received by the NPO, no matter what they are related to are just debited to a receipt and payment account and all cash payment for any nature are to be credited. The following example will make it more clear to you: Ques 1: The following transactions occurred in Swaraj Club for the year ended December 31st, 2008: Entrance Fees `300, Subscription Fees `4,000, Donation for Club Pavilion `10,000, Foodstuff sales `1,200, Salaries and Wages `1,500, Purchase of Food Stuff `800, Construction of Club Pavilion `11,000, General Expenses `600, Rent and Taxes `400, Bank Charges `160. Cash in hand Jan 1st `200, Dec 31st 350 Cash in bank Jan 1st `400, Dec 31st 1290.

 Subscription fees include `500 received for the year ended 31st Dec 2007, while `700 are still in arrear for year ended Dec 31st 2008. Salaries and Wages paid include `300 paid in advance for year 2009. Solution: Swaraj Club Receipt and Payment Account For the year ended 31st Dec 2008 Dr Cr Receipts To Cash in hand (b/d) To Cash in bank (b/d) To Entrance Fees To Subscription Fees To Donation for Club Pavilion To Food Stuff Sales ` 200 400 300 4,000 10,000 Payments ` 1,500 800 11,000 600 400 160 350 1290 16,100

By Salaries and Wages By Purchased of Food Stuff By Construction of Club Pavilion By General Expenses By Rent and Taxes 1,200 By Bank Charges By Cash in hand (c/d) By Cash in bank (c/d) 16,100

Students to please note: All transactions resulting in inflow of cash are debited in Receipt and Payment A/c i.e. in the receipts column on the left side. All transactions resulting in outflow of cash are credited in Receipt and Payment A/c i.e. in the Payments column on the right side. In case of Subscription Fees received a sum of `500 was for last year and `700 are still in arrear, still total `4000 are included in the Receipt and Payment A/c of year 2008 irrespective of their year. In case of Salaries and Wages paid `300 are paid in advance for year 2009, still total of `1500 is included in current years Receipt and Payment A/c. Capital Receipts and Capital Payments related to Club Pavilion are also included in Receipt and Payment A/c. Opening and Closing balances of cash are also mentioned. Preparation of Income and Expenditure A/c form Receipt and Payment A/c: Income and Expenditure A/c is prepared form Receipt and Payment A/c. The procedure is mentioned below: 1. All the items of nominal nature in Receipt and Payment A/c are transferred to Income and Expenditure A/c. 2. Before transferring balances from Receipt and Payment A/c to Income and Expenditure A/c all accounts are first adjusted i.e. the balances related to current year only are to be transferred. 3. Total amount of all transactions related to current year are to be included, whether the cash for such transaction has been received earlier or is still outstanding. 4. Transfer the items mentioned on left hand side of receipt and payment a/c to right hand side of Income and Expenditure a/c. And balances on right hand side of receipt and payment account to left hand side of Income and Expenditure a/c. 5. Any amount raised for a special activity e.g. sale of match ticket etc. is deducted from the expenditure of that activity and net amount is shown in income and expenditure account. 6. Amount received for any specific purpose is not included in Income and Expenditure a/c as it is transferred to special fund a/c. For ex. Donation received for construction of building is transferred to Building Fund A/c.

7. At last just follow the principles of preparing a Profit and Loss account while preparing an Income and Expenditure A/c. The following example will make it more clearly to you: Ques 2: Jan Sevak Hospital provides you the following data for the year ended 31st Mar 2008. You are required to prepare an Income and Expenditure A/c. Dr Cr Receipts Payments ` ` To Balances Cash 400 Bank 2,600 To Subscription For 2007 For 2008 For 2009 To Govt Grant For Building For Maintenance Fees from Sundry Patient To Donations (not to be capitalised) Net Proceeds from benefit shows By Salaries (`3,600 for 2007) By Hospital Equipment By Furniture By Additions to building By Printing and Stationery By Diet Expenses By Rent and Rates (`150 for 2009) By Electricity and Water charges By Office Expenses By Investment By Balances Cash Bank 15,600 8,500 3,000 25,000 1,200 7,800 1,000 1,200 1,000 10,000 700 3,400 78,400 ` 70,000 25,500 40,000 3,250

3,000 2,550 12,250 1,200 40,000 10,000 2,400 4,000 3,000 78,400

Additional Information: Value of building under construction as on 31.12.2008 Value of hospital equipment on 31.12.200 Building Fund as on 1.1.20 Subscription in arrears as on 31.12.2 Investments in 8% govt securities were made on 1st July 2008. Solution: Jan Sevak Hospital Income and Expenditure A/c For the year ended 31st Dec 2008 Expenditure Amt Income To Salaries 12,000.00 By Subscription To Diet Expenses 7,800.00 By Govt. Grants (Maint) To Rent and Rates 850.00 By Fees from Sundry To Printing and Stationery 1,200.00 Patients To Electricity and Water 1,200.00 By Donations Charges By Benefit Shows To Office Expenses 1,000.00 By Interest on Invst. To Surplus 8,000.00 32,050.00

Amt 12,250.00 10,000.00 2,400.00 4,000.00 3,000.00 400.00 32,050.00

Students to please note: The amount of salary debited in Income and Expenditure A/c is `12,000 which is only for current year i.e. 2008 irrespective of `15,600 shown in Receipt and payment a/c which also includes `3,600 of 2007.

 Similarly Rent and Rates shows only `850 in Income and Expenditure A/c while the same reflects `1,000 in receipt and payment a/c which includes `150 for next year also. Subscription of `3250 is outstanding for year 2007 but same has not been shown in income and expenditure a/c instead a sum of `2550 is recovered from it. This is also because it does not belong to current year of 2008. Expenses such as hospital equipment and furniture purchased, grant for building and additions to building are not included in income and expenditure a/c because these are not of revenue (nominal) nature but of capital nature and will move to Balance Sheet. Preparation of Balance Sheet: Like any other financial organization the Balance Sheet of a NPO also gives an estimate of financial position of the organisation. It includes all the items of capital nature either brought forward from preceding year or is transacted during the year. A balance sheet is prepared by the following procedure: 1. All the liabilities are to be mentioned on left hand side while assets are shown on right hand side. 2. Assets and liabilities which are not settled in current year (e.g. Receivables, payables, outstanding bills etc) are also to be mentioned. 3. Assets acquired during current year are to be mentioned. 4. Liabilities generated during current year to be mentioned. 5. Opening capital fund is to be calculated from the previous year balance sheet. It is calculated by deducting all the liabilities from all the assets in the previous year balance sheet. 6. Surplus/Deficit is to be shown by adjusting in to Opening Capital Fund which is calculated above in step 5. The following example will make it more clear to you: Ques 3: In Ques 2 prepare a Balance Sheet. Solution: Jan Sevak Hospital Balance Sheet As on 31st Dec 2008 Liabilities Amt Assets Capital Fund: Building Opening Bal Opening Bal 45,000 24,650 32,650 Addition 25,000 Add: Surplus Hospital Equipment 8,000 Opening Bal 17,000 8,500 Building Fund 80,000 Addition Opening Bal Furniture 40,000 1,200 8% Investment Add: Govt Grant Subscription Receivable 40,000 Accrued Interest Subscription received in Prepaid Exp. (Rent) advance Cash at Bank Cash in hand 1,13,850

Amt

70,000 25,500 3,000 10,000 700 400 150 3,400 700 1,13,850

Students to please note: Opening capital fund is shown by deducting liabilities from assets as standing in last year balance sheet. Surplus is shown by adding in Capital Fund.

 Building Fund is shown by adding to the amount standing to the credit of Building Fund a/c during the last year i.e. `40,000. Subscription received in advance is shown as liability generated during the current year. Building a/c is shown by adding sum of `25,000 to last year total of `45,000. (See `70,000 are shown in Additional info. and `25,000 are added during current year. Hence we assume that opening bal of building is `45000). Same is in the case of Hospital Equipment. 8% investments are asset acquired during the year. And `400 is interest on investment which is earned but not received in cash. Rent of `150 paid during current year is for next year is an asset and hence included in Balance sheet. Rest is closing balance of cash and of bank.