non-profit organisation – accountingexplained

Even though a not-for profit organisations are not supposed to make money, there are certain activities (i.e. selling of snacks or food) in a not-for profit organisations that actually involve trading. If you have trouble identifying this activities, just remember if it involves having to keep inventories then you will need to draw up the trading account. The format of trading account is shown below. The format is very similar to a normal trading account.

nfp-trading-account

Income and Expenditure account is similar to Profit and Loss account, but you only use the term income and expenditure account when preparing for a not-for profit organisation. Even the format for income and expenditure account, and profit and loss account is very similar. In general, the income for a not for profit organisation contain subscription revenue, profit from bar, sales of ticket and donations received.

NFP - Income and Expenditure Account.PNG

Expenditure would be the same as what you would have expected in a profit and loss account. Just a note that you will not have net profit or net loss in income and expenditure account. This will be replaced as surplus of income over expenditure for net profit, and surplus of expenditure over income for net loss.

In the exam, a complete not for profit organisation question will require a balance sheet account to be opened. The only thing that you will need to watch out for is the wording for your “capital”. Instead of the word “capital”, this will be replaced with “accumulated fund”.

This should be an easy topic with not much anticipated issues. Receipts and payments accounts are used for non-profit making organisation. Since their purpose of existence is not supposed to be profit-making, there is no need to prepare for an income statement. Instead, you are required to open either receipts and payments accounts or income and expenditure accounts.

Receipts and Payments Accounts is basically a new name for your cash book. The format is basically similar to cash book, with cash received being a debit entry and cash paid being a credit entry.

receipts-and-payments-accounts

The only concern with the above is the subscription amount. You will need to refresh your memory on accrued/prepaid revenue. As a club, their main revenue will be from collecting subscription fee from their members. Remember that accrued subscription means owing from members (or the members owe the club) and prepaid subscription means advances from members (or the club owes the members). This will definitely get tested, so do remember or understand it properly.

I will spend a little more time to explain this so do spend some time thinking through the examples below:

subscription-account-accrued-and-prepaid-revenue

At year end, your subscription account will look like this. (I showed this because I think most people will get confused on which entry should you put owing b/d or prepaid b/d).

If you bring forward the ending balance, then the subscription account will now looks like this.

subscription-account-2

Now, you have the format for subscription account! Remember that note 1 is actually your last step. In the exam, you will be given all the figures for owing b/d, owing c/d, prepaid b/d, prepaid c/d and bank except income and expenditure. After you have calculated this, you will need to put this figure into income and expenditure account.

Instead of calling profit and loss account, the name for profit and loss account has been changed to income and expenditure account. There are the same thing, but you will need to use income and expenditure account for non-profit organisation.

If you are still in doubt, do visit back previous chapter for Adjustment for Final Account.

Tag: non-profit organisation

Trading Account and Income & Expenditure Account

Receipts and Payments Accounts