Receipts and payments accounts and income and expenditure accounts Learning objectives After you have studied this chapter, you should be able to: @ explain the main differences between the financial statements of non-profit- oriented organisations and those of profit-oriented organisations © prepare receipts and payments accounts © prepare income and expenditure accounts and balance sheets for non-profit- oriented organisations @ calculate profits and losses from special activities and incorporate them into the financial statements ‘© make appropriate entries relating to subscriptions, life membership, and donations Introduction In this chapter, you'll learn about the financial statements prepared by non-profit- oriented organisations, and about how they differ from those prepared for profit- oriented organisations. @® Non-profit-oriented organisations As their main purpose is not trading or profit-making, charities, clubs, associations and other non-profit-oriented organisations do not prepare trading and profit and loss accounts. They are run so that their members can do things such as play football, chess or dungeons and dragons. Rather than producing trading and profit and loss accounts, they prepare either ‘receipts and payments accounts’ or ‘income and expenditure accounts’ @® Receipts and payments accounts Receipts and payments accounts are a summary of the Cash Book for the period. For an organisation with no assets (other than cash) and no liabilities, a summary of the Cash Book reveals everything about what has happened financially during a period. Exhibit 36.1 is an example. 443\ecounting procedures, ‘The Haven Running Club Receipts and Payments Account for the year ended 31 December 20X5 Receipts £ Payments Bank balance at 1.1.20 2,360 | Groundsman’s wages Subscriptions received in 20x5 11,480 | Sports ground rental Rent received 1,160 | Committee expenses Printing and stationery Bank balance at 31.12.20X5 Why do you think non-profit-oriented organisations prepare receipts and payments accounts when they have all this information in the Cash Book already? ‘When assets are owned and/or there are liabilities, the receipts and payments account is not a good way of drawing up financial statements. Other than the cash received and paid out, it shows only the cash balances, The other assets and liabilities are not shown at all. What is required is 1 abalance sheet, and 2 an account showing whether the association's capital has increased, In a profit-oriented organisation, 2 would be a trading and profit and loss account. In a non- profit-oriented organisation, 2 would be an income and expenditure account. ‘An income and expenditure account follows the same rules as a trading and profit and loss account. The only differences are the terms used. ‘A comparison between the terminology of financial statements produced by profit-oriented and non-profit-oriented organisations now follows. Terms used Profit-oriented organisation Non-profit-oriented organisation 1 Trading and Profit and Loss Account _| 1 Income and Expenditure Account 2 Net Profit 2 Surplus of income over Expenditure 3 Net Loss 3 Deficit of Income over Expenditure Sometimes there are reasons why a non-profit-oriented organisation would want a profit and loss account. ‘This is where something is done to make a profit. The profit is not to be kept, but used to pay for the main purpose of the organisation.Chapter 36 @ Receipts and payments accounts and incom snd expenditure accounts For instance, a football club may organise and run dances which people pay to go to. Any. profit from these helps to pay football expenses. For these dances, a trading and profit and loss account would be drawn up. Any profit (or loss) would be transferred to the income and expen- diture account, 36.5 A sole trader has a capital account. A non-profit-oriented organisation has an aceumn fund. In effect, it is the same as a capital account, as it is the difference between the assets and liabilities. For a sole trader Capital = Assets — Liabilities For a non-profit-oriented organisation ‘Accumulated Fund = Assets — Liabilities 36.6 ‘We can now look at the preparation of an income and expenditure account and a balance sheet of a club in Exhibit 36.2. A separate trading account is to be prepared for a bar, where refresh- ments are sold to make a profit. The majority of clubs and associations keep their accounts using single entry methods. This example will therefore be from single entry records, using the principles described in the previ- ous chapter. ‘The treasurer of the Long Lane Football Club has prepared a receipts and payments account, but members have complained about the inadequacy of such an account. She therefore asks an accountant to prepare a trading account for the bar, and an income and expenditure account and a balance sheet. The treasurer gives the accountant a copy of the receipts and payments account ‘together with information on assets and liabilities at the beginning and end of the year: Long Lane Football Club Receipts and Payments Account for the year ended 31 December 20X6 Receipts £ | Payments £ Bank balance at 1.1.20X6 524 | Payment for bar supplies 38,620 Subscriptions received for Wages: 20X5 (arrears) 1,400 Groundsman and assistant 19,939 20x6 14,350 Barman 8,624 20X7 (in advance) 1,200 | Bar expenses 234 Bar sales 61,280 | Repairs to stands 740 Donations received 800 | Ground upkeep 1,829 Secretary's expenses 938 Transport costs 2.420 Bank balance at 31.12.20X6 6,210Part © Speci = \ecounting procedures, Additional information: 31.12.20X5 1 £ ‘Stocks in the bar - at cost 4496 ‘Owing for bar supplies 3,294 25 Bar expenses owing 2 Transport costs 31.12.20X6 £ 5,958 4,340 336 265 2. The land and football stands were valued at 31 December 20XS at: land £40,000; football stands £20,000; the stands are to be depreciated by 10 per cent per annum. 3. The equipment at 31 December 20XS was valued at £2,500, and is to be depreciated at 20 per cent per annum, 4 Subscriptions owing by members amounted to £1,400 on 31 December 20XS, and £1,750 on 31 December 20x. From this information, in the following three stages, the accountant drew up the appropriate accounts and statements: Stage 1 Draw up a Statement of Affairs at the end of the previous period. Statement of Affairs as at 31 December 20X5 £ Fixed assets Land Stands Equipment Current assets Stock in bar Debtors for subscriptions Cash at bank Less Current liabilities Creditors 3,294 Bar expenses owing 25 Net current assets Financed by: Accumulated fund (difference) Why do you think this statement was descril rather than a ‘balance sheet’? Stage 2 Draw up a Bar Trading Account. 4,096 1,400 524 G20 (3.519) 40,000 20,000 2,500 2,500 ing a ‘statement of affairs’Chapter 36 @ Receipts and payments accounts and income and expenditure accounts Long Lane Football Club Bar Trading Account for the year ended 31 December 20X6 £ £ Sales Less Cost of goods sold: 61,280 Stock 1.1.20X6 ‘Add Purchases" 39,666 44,162 Less Stock 31.12.20X6 (38,604) Gross profit 22,676 Less Bar expenses" 345 Barman’s wages 3.624 Net profit to income and expenditure account Notes: 1 Purchases Control £ £ cash 38,620 | Balances (creditors) b/d 3,294 Balances c/d 4,340 Trading account (difference) 39,666, 72,360 42,960 2 Bar Expenses £ £ cash 234 | Balance bid 225 Balance c/d 336 | Trading account (difference) 345 570 570 Stage 3 Draw up the financial statements. Long Lane Football Club Income and Expenditure Account for the year ended 31 December 20X6 Income £ £ £ Subscriptions for 20x6™"? 16,100 Profit from the bar 13,707 Donations received ‘300 30,607 Less Expenditure ‘Wages ~ Groundsman and assistant 19,939 Repairs to stands 740 Ground upkeep 1,328 Secretary's expenses 938 Transport costst="2 2,685 Depreciation Stands 2,000 Equipment “s00 2,500 (28,631) Surplus of income over expenditure\ecounting procedures, 1 Subscriptions Received £ £ Balance (debtors) b/d 1400 | Cash 20x5 1,400 Income and expenditure 20x6 14,350 account (difference) 16,100 20X7 41,200 Balance (in advance) c/d 41,200 | Balance (owing) c/d 1,750 18,700 2 Transport Costs £ £ cash 2,420 | Income and expenditure Accrued e/a 265 account (difference) 2685 Note that subscriptions received in advance are carried down as a credit balance to the following period. ‘The Long Lane Football Club Balance Sheet as at 31 December 20X6 £ £ £ Fined assets Land at valuation 40,000 Football stands at valuation 20,000 Less Depreciation 18,000 Equipment at valuation 2,500 Less Depreciation (300) 2,000 Current assets 0,000 Stock of bar supplies 5,558 Debtors for subscriptions 1,750 ‘Cash at bank 6210 13518 Less Current liabilities Creditors for bar supplies 4340 Bar expenses owing 336 Transport costs owing 265 Subscriptions received in advance 1,200 (6141) Net current assets 2377 Financed by: ‘Accumulated fund Balance as at 1.1.20X6 65,401 Add Surplus of income over expenditure 11976 So far we have treated subscriptions owing as being an asset. However, as any treasurer of a club ‘would tell you, most subscriptions that have been owing for a long time are never paid ~ mem- bers lose interest or simply go somewhere else. As a result, many clubs do not include unpaid subscriptions as an asset in the balance sheet.Chapter 36 @ Receipts and payments accounts and incom snd expenditure accounts e& Does this policy of ignoring subscriptions due when preparing the financial statements comply with the prudence concept? Why/Why not? In an examination, you should assume that subscriptions owing are to be brought into the financial statements, unless instructions to the contrary are given. Exhibit 36.3 shows an instance where subscriptions in arrears and in advance occur at the beginning and end of a period. ‘An amateur theatrical group charges its members an annual subscription of £20 per member, It accrues for subscriptions owing at the end of each year and also adjusts for subscriptions received in advance. (A) On 1 January 20X2, 18 members had not yet paid their subscriptions for the year 20x1. {B) In December 20X1, 4 members paid £80 for the year 20X2. (©) During the year 20x2 it received £7,420 in cash for subscriptions: £ For 20x1 360 For 20x2 6.920 For 20x3, “t40 a0 {0) At31 December 20X2, 11 members had not paid their 20X2 subscriptions. Subscriptions 20x2 £ 20x2 £ Jan 1 Owing b/d (a) 360 | Jan 1. Prepaid bid ®) 80 Dec 31 Income and expenditures 7,220 | Dec 31 Bank (© 7,420 Dec 31. Prepaid cid (© _140 | Dec 31 Owing cld (0) _220 7720 7,20 20x3 20x3 Jan 1 Owing b/d (0) 220 | Jan 1. Prepaid bid © 140 + This is the difference between the two sides of the account. In some clubs and societies, members can make a payment for life membership. This means that by paying a fairly substantial amount now members can enjoy the facilities of the club for the rest of their lives. Such a receipt should not be treated as income in the income and expenditure account solely in the year in which the member paid the money. It should be credited to a life membership account, and transfers should be made from that account to the credit of the income and expen- diture account of an appropriate amount annually. Exactly what is meant by an appropriate amount to transfer each year is decided by the com- mittee of the club o society. The usual basis isto establish, on average, how long members will continue to use the benefits of the club. To take an extreme case, if a club was in existence which could not be joined until one achieved the age of 70, then the expected number of years’ use of the club on average per member would be relatively few. Another club, such as a golf club,Part S © Spe \ecounting procedures, where a fair proportion of the members joined when reasonably young, and where the game is capable of being played by members until and during old age, would expect a much higher aver- age of years of use per member. In the end, the club has to decide for itself. ‘As a club has to provide amenities for life members without any further payment, the credit balance remaining on the account, after the transfer of the agreed amount has been made to the credit of the income and expenditure account, should be shown on the balance sheet as a liability In an examination, be sure to follow the instructions set by the examiner. Any donations received are usually shown as income in the year that they are received, ‘When they first join a club, in addition to the membership fee for that year, new members often have to pay an entrance fee. Entrance fees are normally included as income in the year that they are received. A club could, however, decide to treat them differently, perhaps by spreading the income over a number of years. It all depends on the circumstances. ig outcomes You should now have learnt: 1 That a receipts and payments account does not show the full financial position of an organisation, except for one where the only asset is cash and there are no liabilities, 2 That an income and expenditure account is drawn up to show either the surplus of income over expenditure or the excess of expenditure over income. These are the same as ‘profit’ or ‘loss’ in a profit-oriented organisation. 3 That the accumulated fund is basically the same as a capital account. 4 That although the main object of the organisation is non-profit-oriented, certain activities may be run at a profit (or may lose money] in order to help finance the main objectives of the organisation. 5 That in an examination you should treat subscriptions owing at the end of a period in the same way as debtors, unless told otherwise. 6 That donations are usually treated as income in the period in which they are received. 7 That entrance fees are usually treated as income in the year in which they are received. & That the treatment of life membership fees is purely at the discretion of the organisation, but that they are usually amortised over an appropriate period Answers to activities 36.1 Just as you would prepare a balance sheet for a profit-oriented organisation in order to summarise its financial position at a specific point in time, so non-profit-oriented organisations that deal only in cash, own no assets and have no liabilities, may prepare a receipts and payments account in order to show what happened over a period and the amount of funds left at the end. Non-profit-oriented