Accounting for Non-Trading Concerns

Definition and Explanation of Non-trading Concerns:

Individuals or institutions with activities other than trade are known as non-trading concerns. Examples of non-trading concerns are clubs, hospitals, libraries, colleges, athletic clubs etc.

These institutions are started not for carrying on a business and making a profit but for some charitable, religious or similar purpose. Their income, which is derived from donations, subscriptions, entrances fees etc., is spent on the objects for which they are started.

Final Accounts of Non-Trading Concerns:

Non-trading concerns usually maintain their accounts by the double entry system and periodically prepare their final accounts for the submission to their members and subscribers.

The method of preparing final accounts by non trading concerns is different than trading concerns. As these concerns do not deal in any goods like trading concerns, so they cannot prepare a trading and profit and loss account. At the end of the year they make out an account called an Income and expenditure account and balance sheet. The Income and expenditure account serve the same purpose as the profit and loss account in the case of trading concerns and is made out exactly in the same manner.

Usually the non-profit making institutions do not maintain a full set of books but merely a cash book in which all receipts and payments are entered. At the end of the year the cash book is summarized under suitable heads and the summary thus prepared is called a Receipt and Payment Account. In order to know the result of the year's working it should be converted into Income and expenditure account.

Receipt and Payment Account:

Learning Objectives:

1. Define and explain receipt and payment account.
2. Why a receipt and payment account is prepared?
3. Prepare a receipt and payment account.

Definition and Explanation:

Receipt and payment account is a mere summary of cash book for a year. It begins with the cash in hand at the commencement and ends with that at the close of the year. Similarly to cash account, in receipts and payments account receipts are shown on the debit side while payments are shown on the credit side, without any distinction between capital and revenue. Moreover, it does not include an unpaid expenditure not any unrealized income relating to the period under review and so fails to reveal the financial position on the concern.

Format of Receipt and Payment Account:

Receipts	$	Payments	$

Example:

Receipt and Payment Account

Receipts	$	Payments	$
To Balance b/d To Annual subscription To Life membership fees To Entrance fees To interest on securities To sundry receipts	1,240 1,630 250 240 180 50	By general expenses By salaries and wages By furniture By rent, rates & taxes By printing & stationary By Repairs By Balance c/d	550 550 800 500 125 150 915
	3,590		3,590

 

Income and Expenditure Account:

Learning Objectives:

1. Define and explain income and expenditure account.
2. What is the purpose of preparing income and expenditure account?

Definition and Explanation:

Income and expenditure account is merely another name for profit and loss account. Such type of profit and loss account is generally adopted by non trading concerns like clubs, societies, hospitals, and like etc. This account is credited with all earnings (both realized and unrealized) and debited with all expenses (both paid and unpaid) The difference represents a surplus of deficiency for a given period which is carried to the capital account. It should be noted that items of receipts or payments of capital nature such as legacies, purchases or sales of any fixed assets must not be included in this account.

How to Convert a Receipt and Payment Account into Income and Expenditure Account:

The following steps will be necessary to convert a receipt and payment account into an income and expenditure account:

1. Opening and closing balances of receipt and payment account should be excluded.
2. All items of capital receipts and payments should be excluded.
3. All incomes of previous years or for years to come should be excluded.
4. All expenditures of previous years and years to come should be excluded.
5. All accrued income and outstanding expenditures relating to the period should be included.
6. Item such as bad debts, depreciation, etc. will have to be provided.

Treatment of Peculiar Items:

Generally in exercises the instructions are given as to the treatment of special items. Such instructions are based on the rules of the concern. These should be followed while solving questions. Incases where no specific instructions are given the following guidelines may be considered.

Legacy:

It is the amount received by the concern as per the will of the donor. It appears in the receipt side of receipt and payment account. It should not be considered as as an income but should be treated as capital receipt i.e., credited to capital fund account.

Donation:

Amount received from any source by way of gift is described as donation. It appears on the receipts side of receipt and payment account. Donations are usually credited to income. Rules of the association may provide that a part of donations are to be treated as capital. However, if donations are received for a specific purpose viz., building, free dispensary etc., then it should require special treatment. Donations for specific purposes should not be credited to income and expenditure account. Similarly donations representing heavy amount may also be treated as capital receipts.

Subscription:

The members of the associations, as per rules, are generally required to make annual subscription to enable it to serve the purpose for which it was created. It appears on the receipts side of the receipt and payment account and is usually credited to income. Care must be exercised to take credit for only those subscriptions which are relevant.

Life Membership Fees:

Generally the members are required to make the payment in a lump sum only once which enables them the members for whole of life. Life members are not required to pay the annual membership fees. As life membership fees is substitute for annual membership fees therefore, it is desirable that life membership fees should be credited to separate fund and fair portion be credited to income in subsequent years. In the examination question if there is no instruction as to what portion be treated as income then whole of it should be treated as capital.

Entrance Fees:

Entrance fees is also an item to be found on the receipt side of receipts and payments account. There are arguments that it should be treated as capital receipt because entrance fees is to be paid by every member only once (i.e., when enrolled as member) hence it is non-recurring in nature. But another argument is that since members to be enrolled every year and receipt of entrance fees is a regular item, therefore, it should be credited to income. In the absence of the instructions any one of the above treatment may be followed but students should append a note justifying their treatment.

Sale of News Papers, Periodicals etc.

As the old newspapers, magazines, and periodicals etc. are to be disposed of every year, the receipts on account of such sales should be treated as income, and therefore to be credited to income and expenditure account.

Sales of Sports Material:

Sale of support materials (used) is also a regular feature of the clubs. Sales proceeds should be treated as income, and therefore to be credited to income and expenditure account.

Honorarium:

Persons may be invited to deliver lectures or artists may be invited to give their performance by a club (for its members). Any money so paid is termed as honorarium and not salary. Such honorarium represents expenditure and will be debited to income and expenditure account.

Special Fund:

Legacies and donations may be received for specified purchases. As discussed above these should be credited to special fund and all expenses related to such fund are shown by way of deduction from the respective fund and not as expenditure in income and expenditure account.

Capital Fund:

Any concern - whether profit seeking or non profit seeking - requires money for conducting day to day functions. In the case of profit seeking concerns such money is called "capital", while in the case of non - profit seeking concerns it is called "capital fund". The excess of total assets over total external liabilities of a concern is called capital fund. Capital fund is created with surplus revenue and capital receipts and incomes. It is shown on liabilities side of balance sheet.

Format of Income and Expenditure account:

Income and Expenditure Account

Expenditures	$	Income	$

Example:

Prepare income and expenditure account and balance sheet form the following receipt and payment account of a nursing society.

Receipt and Payment Account

Receipts	$	Payments	$
To Balance at bank - 1-7-90 To Subscriptions To Fees from non members To Municipal grant To Donation for building fund To Interest	2,010 1,115 270 1,000 1,560 38	By Salaries of nurses By Board, laundry and domestic help By Rent, rates and taxes By Cost of car By Car expenses By Drugs and incidental exp. By Balance c/d	656 380 200 2,000 840 670 1,247
	5,993		5,993

The society owns freehold land costing $8,000 on which it is proposed to build the nurse's hostel. A donation of $100 received to building fund was wrongly included in subscription account. A bill for medicine purchased during the year amounting to $128 was outstanding.

Solution:

Nursing Society
Income and Expenditure Account

Expenditures	$	Income	$
To Salaries of nurses To Board, laundry and domestic help To Rent, rates and taxes To Cost of car To Car expenses To Drugs and incidental exp. To Outstanding expenses	656 380 200 2,000 840 670 798	By Subscriptions 1,115 Less Wrong inclusion 100 By Fees from non members By Municipal grant By Interest By Deficit	1,015 270 1,000 38 551
	2,874		2,874

Nursing Society
Balance Sheet on 31st December, 1991

Liabilities	$	Assets	$
Building fund 1,560 Add omission 100 Outstanding expenses Capital fund 10,010 Less deficiency 551	1,660 128 9,459	Cash Motor car Land	1,247 2,000 8,000
	11,247		11,247

Calculation of Capital Fund:

Capital fund on 1st July, 1990 is ascertained as under:

Land	8,000
Cash	2,010
Capital fund	10,010