ppt non profit orgnisation

Slide 1 : Not For Profit Organisations ACCOUNTANCY Chapter 1 Class XII

Not For Profit Organisations : Not For Profit Organisations Organisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations. FEATURES:- Separate legal entity Service motive Form Profit- not a motivator Funding Accounts

Separate legal entity : Separate legal entity According to the principle of separate legal entity, a not for profit organisation is an separate entity independent of its members. These are the separate entity promoted by individuals or companies, but these are not owned by the promoters or managers.

Service Motive : Service Motive These organisations are formed For welfare of the society. For providing services to its members. Main motive is to provide services.

Form : Form Charitable hospitals Schools Trusts Colleges Clubs Hospitals Societies

Profit – not a motivator : Profit – not a motivator NPOs do not operate with the objective of earning profits. Their aim is to promote art, science, commerce, religion, culture, education, charity, sports etc. Some NPOs may involve in trading activities Main objective is not to earn the profit but to benefit the members and society. Any excess of income over expenditure is termed as SURPLUS while any excess of expenditure over income is termed as DEFICIT.

Funding : Funding The main sources of income of such organisations are: Subscriptions from members, Donations, Legacies, Grant-in-aid, Income from investments, etc.

Accounts : Accounts The Not-for-Profit Organisations are also required to prepare financial statements at the end of the each accounting period. They have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation. The final accounts of a ‘not-for-profit organisation’ consist of the following: Receipt and Payment Account Income and Expenditure Account, and Balance Sheet.

Receipt and Payment A/c : Receipt and Payment A/c Features Summary of the cash book. Receipts are recorded on the debit side Payments are entered on the credit side. Records all cash transactions irrespective of the period. Includes all receipts and payments whether they are of capital nature or of revenue nature. No distinction is made in receipts/payments made in cash or through bank. No non-cash items such as depreciation outstanding expenses accrued income, etc. are shown in this account. It begins with opening balance of cash in hand and cash at bank (or bank overdraft) and closes with the year end balance of cash in hand/ cash at bank or bank overdraft.

Steps: Receipt & Payment A/c : Steps in preparation of Receipt & Payment A/c Take the opening balances of cash in hand and cash at bank & enter them on the debit side. In case there is a bank overdraft in beginning of the year, it will be recorded on credit side. Show the total amounts of all receipts on its debit side irrespective of their nature (whether capital or revenue) & whether they belong to past, present or future. Show the total amounts of all payments on its credit side irrespective of their nature & time period. None of the receivable income or payable expense is to be entered in this account. Find out the total of debit side & credit side of the account & enter the same on the credit side of cash/bank. If a balance comes out to be on debit side, take it as closing balance of bank overdraft. Steps: Receipt & Payment A/c

Format : Format A detailed & comprehensive Receipt & Payment A/c may appear as:

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Slide 13 : A club has kept its accounts on cash basis and the figures for 2009 are given below. You are required to prepare receipts & payments A/c for the year 2005. Solution:-

Class Practice Question : Class Practice Question Q. On 1/1/06, the opening balance was Rs. 18,000 of J. M. Trust, Delhi. The following transactions were held for the year ended 31/3/08. From these particulars, prepare a Receipts & payments account.

Solution : Dr Receipt & Payment A/c Cr Solution

Income & Expenditure A/c : Income & Expenditure A/c It is a nominal account. “Debit all expenses & credit all incomes” will be followed while preparing it. Opening & closing balance of cash at bank are not shown in it. It does not take into consideration both capital receipts & capital payments. Closing balance, if comes on debit side is known as surplus & on credit side, deficit. All non-cash adjustments like depreciation, outstanding or prepaid expenses & accrued or advance income, provision, etc. need to be adjusted through this account. It must be accompanied by Balance sheet in which personal & real accounts are recorded.

Steps : Steps in preparation of Income & Expenditure A/c Pursue the Receipts & Payments Account thoroughly. Exclude opening & closing balance of cash & bank as they are not the income. Exclude the capital receipts & capital payments. Consider only revenue receipts to be shown on income side (credit side) of this account for the current year whether received or not. Take all revenue expenses of current year on debit side of this account whether paid or not. Non-Cash item like Deprecation, provisions profit / Loss on sale of assets etc. should be taken into consideration. Balance if any in debit side resembles surplus but on credit side it shows deficit. Steps

Format : Income & Expenditure A/c For the year ended Format

Slide 19 : Calculation of revenue expenditure from revenue payments:-

Calculation of revenue income from revenue receipts:- : Calculation of revenue income from revenue receipts:-

Example : Example Locker rent received during the year (-) Outstanding / Accrued locker rent in the beginning (-) Unaccrued / prepaid / advance locker rent in the end (+) Outstanding / Accrued locker rent in the end (+)Unaccrued / prepaid / advance locker rent in the beginning Locker rent credited to income and expenditure account 6400 920 800 1260 600 6540

Example : Solution: Step 1. Determine the current year Step 2. Solve the problem as: Q. Miscellaneous expenses paid during the year ended March 31, 2007 amount to Rs. 16,500. Information about prepaid and outstanding expenses is as under: Rs. Prepaid expenses on March 31, 2006 1,500 Expenses unpaid on March 31, 2006 2,300 Expenses unpaid on March 31, 2007 2,500 Prepaid expenses on March 31, 2007 1,400 Ascertain the expenses to be debited to the Income and Expenditure Account for the year ended March 31, 2007. Example Expenses paid in 2007 (-) Outstanding expenses in the beginning (-) Prepaid expense in the end. (+) Outstanding expenses in the end. (+) Prepaid expenses in the end. Expenditure incurred Debited to income & expenditure A/c. 16,500 2,300 1,400 2,500 1,500 16,800

Example : Example

Slide 24 : To Rent 42,400 Add- O/s Rent 3,600 46,000 To Honorarium 61,200 Add Outstanding 9,800 71,000 To postage & stationery To printing charges 5,300 61,200 To Donation To Surplus (excess of income over expenditure) 11,000 To loss on sale of furniture 700 60,100 2,55,300 By Subscription 2,48,000 Less O/s subscription (04-05) 28,000 Add O/s Subscription (05-06) 20,000 2,40,000 By Income from Advertisement By Sale of old Newspaper 2,55,300 14,800 500 Solution

DIFFERENCE : DIFFERENCE

Balance Sheet : Balance Sheet The preparation of their Balance Sheet is on the same pattern as that of the business entities. It shows assets and liabilities as at the end of the year. Assets are shown on the right hand side and the liabilities on the left hand side. However, there will be a Capital Fund or General Fund in place of the Capital. The surplus or deficit as per Income and Expenditure Account shall be added to/deducted to this fund. It is also a common practice to add some of the capitalised items like legacies, entrance fees and life membership fees directly in the capital fund.

Balance Sheet : Following procedure is adopted to prepare the Balance sheet. Take the capital fund as per opening balance sheet & add surplus or deduct deficit as per income & expenditure account. Further, add legacy, life membership fees, endowment fund received during the year. Take all fixed assets (not sold or destroyed) add additions made during the year les depreciation for assets used during the year. Compare items on receipt side of receipt & payment A/c with items on income side of income & expenditure A/c to determine advances & dues. Similarly, compare items of payments side of receipt & payment A/c with items of expenditure side of income & expenditure account to determine prepaid or outstanding expenses. Balance sheet resembles the position statement of the organization & is a true indicator of growth potential. Balance Sheet

Opening Balance Sheet : Balance sheet as on Opening Balance Sheet

Balance Sheet: At End : Closing balance sheet is prepared at the end of the year after preparing Income & expenditure account. It maybe shown as:- Balance Sheet: At End

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 1 Opening balance of Cash and Bank is transferred to Opening Balance Sheet and Closing balances of Cash and Bank are transferred to Closing Balance Sheet.

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 2 Items on the receipt side of Receipt & Payment A/c give the Components for Income Side for Income & Expenditure A/c.

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 3 Items on the payment side of Receipt & Payment A/c give the components for Expenditure side for Income & Expenditure A/c.

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 4 Items of revenue nature (recurring too) are carried from Receipt & Payment A/c and after analysing adjustments if any, total amount for the Current year is transferred to Income & Expenditure A/c.

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 5 Items of Capital nature are adjusted through Balance Sheet.

How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. : How to make income and expenditure A/c and Balance Sheet using Receipt & Payment A/c. PROCEDURE STEP 6 Adjustments on Capital Nature Items are not to be considered while preparing Income & Expenditure A/c.

Slide 36 : PROCEDURE Result The balance on Debit Side of Income & Expenditure A/c will show SURPLUS while that on Credit Side will show DEFICIT. This will be transferred to Closing Balance Sheet and Added/Subtracted as the case may be.

Slide 37 : Following is Receipt & payment of Stanford trust, prepare Income & Expenditure and balance sheet for the year ended 31/12/05 and 31/12/06. Adjustments: 1) Subscription for 2006 still owing were 7,000. 2) Interest due on defence bonds was Rs. 7,000. 3) Rent still owing was Rs. 1,000. 4) Investment sold valued Rs. 80,000, Rs. 30,000 of Investment were still in hand. 5) Salary paid for the year 2007 is Rs. 2,000. Question

Slide 38 : Rent 6,000 Add O/s Rent 1,000 7,000 Salary 12,000 Less paid for 2007: 2,000 10,000 Postage 300 Electricity charges 6,000 Charity 22,000 Loss on sale of furniture 200 Surplus 63,500 1,09,000 Subscription 2006 : 83,000 Add O/s Subscription: 7,000 90,000 Interest on Investment 2,000 Interest on defence bonds 7,000 Profit on sale of investment 10,000 1,09,000 Solution

Slide 39 : WORKING NOTES: Cash in Hand Cash at bank Subscription Furniture Investment 14,000 60,000 5,000 3,400 1,10,000 1,92,400 1,92,400 1,92,400 Capital fund Solution

Slide 40 : Capital fund 1,92,400 Add Surplus 63,500 2,55,900 Outstanding rent 1,000 Subscription for 2007 3,000 Prepaid salary Accrued interest Investment Defence bonds Books Furniture Subscription Cash at bank Cash in Hand 10,900 30,000 7,000 20,000 3,000 1,50,000 30,000 7,000 2,000 2,59,900 2,59,900 Solution

Terminology for NPOs : Terminology for NPOs Subscription Donation Legacy Life membership fee Entrance fee Honorarium Grants and subsidies Stationery Sale of old assets Sale of periodicals Endowment fund Special funds

Subscription : Subscription Subscription is a membership fee paid by the member on annual basis. This is the main source of income of such Organisations. Subscription paid by the members is shown as receipt in the Receipt and Payment Account and as income in the Income and Expenditure Account. Receipt and Payment Account shows the total amount of subscription actually received during the year. The amount shown in Income and Expenditure Account is confined to the figure related to the current period only irrespective of the fact whether it has been received or not.

Subscription : Subscription HOW TO CALCULATE SUBSCRIPTION FOR THE YEAR WHEN SOME OTHER ITEMS RELATED TO SUBSCRIPITON ARE GIVEN

Subscription A/c : Subscription A/c FORMAT

Slide 45 : As per Receipt & Payment A/c for the year ended March 31, 2007, the subscriptions received were Rs. 12, 50,000. It is also given that: 1. Subscriptions Outstanding on 1.4.2006 Rs. 80,000 2. Subscriptions Outstanding on 31.3.2007 Rs. 85,000 3. Subscriptions Received in Advance as on 1.4.2006 Rs. 45,000 4. Subscriptions Received in Advance as on 31.3.2007 Rs. 60,000 Calculate the amount to be shown in income & Expenditure A/c for the year 2006 – 07 and show relevant items in balance sheet also. Subscriptions Received as per Receipt and Payment A/c 12,50,000 Add: Subscriptions outstanding on 31.3.2007 85,000 Add: Subscriptions received in advance on 1.4.2006 45,000 13,80,000 Less: Subscriptions outstanding on 1.4.2006 80,000 13,00,000 Less: Subscriptions received in advance on 31.3.2007 60,000 Income from subscription for the year 2006-07 12,40,000

Slide 46 : Alternately, income received from subscriptions can be calculated by preparing a Subscriptions account as under.

Slide 47 : Relevant items of subscription can be shown in the opening and closing balance sheet as under: Balance sheet as on march 31, 2006 Balance sheet as on march 31, 2007

Calculate Subscription amount to be shown in income & expenditure A/c from the following: : Calculate Subscription amount to be shown in income & expenditure A/c from the following: A club received Rs. 1,20,000 as subscriptions during the year 2007-08 of which Rs.13,000 relate to year 2006-07 and Rs.22,000 to 2008-09, and at the end of the year 2007-08 Rs.26,000 are still receivable. Find subscription received for the year 2007-08.

Slide 49 : The above amount of subscriptions can also be ascertained by preparing the subscription account as follows:

Donations : Donations It is a sort of gift in cash or property received from some person or organisation. It appears on the receipts side of the Receipts and Payments Account. Donation can either be specific or general: 1. Specific Donations: Received for specified purpose like extension of the existing building, construction of new computer laboratory, creation of a book bank, etc. Such donation is to be capitalized and shown on the liabilities side of the Balance Sheet. 2. General Donations: Such donations are to be utilised to promote the general purpose of the organisation. These are treated as revenue receipts as it is a regular source of income hence, it is taken to the income side of the Income and Expenditure Account of the current year.

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Legacy : Legacy It is the amount received as per the will of a deceased person. It appears on the receipts side of the Receipt and Payment Account and is directly added to capital fund/general fund in the balance sheet, because it is not of recurring nature. However, legacies of a small amount may be treated as income and shown on the income side of the Income and Expenditure Account.

Life Membership Fees : Life Membership Fees Some members prefer to pay lump sum amount as life membership fee instead of paying periodic subscription. Such amount is treated as capital receipt and credited directly to the capital/general fund.

Entrance Fees : Entrance Fees Entrance fee also known as admission fee is paid only once by the member at the time of becoming a member. In case of organisations like clubs and some charitable institutions, number of members is limited and the amount of entrance fees is quite high. Hence, it is treated as non-recurring item and credited directly to capital/general fund. However, for some organisations like educational institutions, the entrance fees is a regular income and the amount involved may also be small. In their case, it is customary to treat this item as a revenue receipt. However, if there is specific instruction, it is advisable to treat the entire amount as capital receipt and the relevant amount should be directly added to capital/general fund.

Honorarium : Honorarium It is the amount paid to the person who is not the regular employee of the institution. Payment to a surgeon called for some specific operation or to some artist for giving performance at the club is an example of honorarium. This payment of honorarium is shown on the expenditure side of the Income and Expenditure Account.

Grants and Subsidies : Grants and Subsidies Schools, colleges, public hospitals, etc. depend upon government grant and subsidies for their activities. The recurring grants in the form of maintenance grant is treated as revenue receipt (i.e. income of the current year) and credited to Income and Expenditure account. However, grants such as building grant are treated as capital receipt and transferred to the building fund account. It may be noted that some Not-for-Profit organisations receive cash subsidy from the government or government agencies. This subsidy is also treated as revenue income for the year in which it is received.

Stationery : Stationery Normally expenses incurred on stationary, a consumable items are charged to Income and Expenditure Account. But in case stock of stationery (opening and/or closing) is given, the approach would be make necessary adjustments in purchases of stationery and work out cost of stationery consumed and show that amount in Income and Expenditure Account and its stock in the balance sheet. For example, the Receipt and Payment Account shows a payment for stationery amounting to Rs. 40,000 and there is an opening and closing stationery amounting to Rs. 12,000 and Rs. 15,000. Rs. 37,000 will be transferred to Income & Expenditure A/c as stationery consumed.

Slide 58 : Step .1 Calculation of total stock purchased on credit & cash.

Slide 59 : Step-2 Calculation of Stock consumed.

Slide 60 : Q. How will you deal with the following items while preparing the Income & Expenditure A/c for the year ended on March 31, 2007.

Slide 61 : Step 2. Calculation of stationery consumed. Step 1. Calculation of purchases

Slide 62 : Extract of a Receipt and Payment Account for the year ended on march 31, 2006: Payments: Creditors for Stationery Rs. 68,000 Additional information: Details 1 April, 2005 March 31, 2006 Stock of stationery 14,000 13,000 Creditor for stationery 19,000 12,500

Slide 63 : To Cash 68,000 To Opening Stock 14,000 By Closing Stock 13,500 By Balance b/d 19,000 To Balance c/d 12,500 80,500 80,500 61,500 By Purchases To Purchases 61,500 75,500 75,500 By Stationery Consumed 62,500

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Slide 65 : Class Practice Question Find out the cost of medicines consumed during 2006-07 from the following information:

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Sale of old assets : Sale of old assets Receipts from the sale of an old asset appear in the Receipts and Payments Account of the year in which it is sold. But any gain or loss on the sale of asset is taken to the Income and Expenditure Account of the year. For example, if an item furniture with a book value of Rs. 800 is sold for Rs. 700, this amount of Rs. 700 will be shown as receipt in Receipts and Payments Account and Rs. 100 on the expenditure side of the Income and Expenditure Account as a loss on sale of old asset and while showing furniture in the balance sheet Rs. 800 will be deducted from its total book value.

Sale of periodicals : Sale of periodicals It is an item of recurring nature and shown as the income side of the Income and Expenditure Account

Endowment fund : Endowment fund It is a fund arising from a bequest or gift, the income of which is devoted for a specific purpose. Hence, it is a capital receipt and shown on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.

Special funds : Special funds The Not-for-Profit Organisations office create special funds for certain purposes/ activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds are invested in securities and the income earned on such investments is added to the respective fund, not credited to Income and Expenditure Account . Similarly, the expenses incurred on such specific purposes are also deducted from the special fund. For example, a club may maintain a special fund for sports activities. In such a situation, the interest income on sports fund investments is added to the sports fund and all expenses on sports deducted there from. The special funds are shown in balance sheet. However, if, after adjustment of income and expenses the balance in specific or Special fund is negative, it is transferred to the debit side of the Income and Expenditure Account or adjusted as per prescribed directions.

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Slide 72 : Show how you would deal with the following items in the final account of a club: Solution

Slide 73 : (a) Show the following information in financial statements of a ‘Not-for-Profit’ Organization (b) What would happen if match expenses go up to Rs. 9,000 other things remaining the same?

Slide 74 : (b) If match expenses go up to Rs. 9,000, the net balance of the match fund becomes negative i.e. Debit exceeds the Credit, and the resultant debit balance of Rs. 2,000 shall be charged to the Income and Expenditure Account of that year.

Incidental Trading Activities : Incidental Trading Activities Sometimes, trading activities such as chemist shop, hospital, canteen, bar etc. also take place in such organizations to provide certain facilities to members or public in general. In such a situation a trading account is prepared to calculate profit or loss from that trading aspect. Procedure: It is very important to take into consideration following two points: Profit or loss calculated by preparing trading A/c must be transferred to Income & expenditure A/c. Incomes & expenses related to that incidental activity, which is not recorded in trading A/c, are also to be considered while preparing. Income & expenditure A/c.

Slide 76 : The assets and liabilities on the Millennium Cricket Club on April 1, 2007 were: Club house and ground Rs. 10, 00,000; Creditors for bar supplies Rs. 3,41,000; Equipment Rs. 3,45,000; Bank Rs. 1,34,500; Bar stocks Rs. 92,240. At the end of March 2008, the following further information was available: Subscriptions Rs. 35,000 received this year related to the next year. Creditors for bar supplies Rs. 3,50,000. Bar stocks Rs. 84,380. Depreciate equipment by Rs. 65,000 Prepare for the Millennium Cricket Club: (i) the bar Trading Account for the year ended March 31, 2007; (ii) the Income and Expenditure Account for the year ended march 31, 2007; and (iii) the Balance Sheet as on March 31, 2007.

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Slide 79 : Thank You