◄Unit 3 PARTNERSHIP ACCOUNTSUnit 5 PUBLIC SECTOR ACCOUNTING►

Unit 4 INTRODUCTION TO NONPROFIT ORGANIZATIONS

  • Unit 4 INTRODUCTION TO NONPROFIT ORGANIZATIONS

    Key unit competence: To be able to prepare financial statements for

    non-profit organizations

    s

    Introductory activity

    Schools, hospital, clubs, Charitable Organizations, NGOs etc share common
    features as they do not operate like trading organizations. Their objectives
    are rather limited to various social and charitable features. Thus the nature
    of their accounting records must reflect the nature of their operating
    activities and take form of there
    What do you think can be the accounts that are done by non-profit making

    organizations?

    4.1. Introduction to non-profit organizations

    Learning Activity 4.1

    Non-profit making organizations record and report their transactions in

    form of accounts same as profit making organizations.

    Required: What do you think is the difference between the two?

    Learning Activity 4.1

    The topic of accounting for nonprofit organizations (NPOs), differs from
    commercial accounting in many respects. NPOs’ main goal is to serve the
    public rather than to make money for their collaborators or owners. Nonprofit
    organizations (NPOs) are money oriented, whereas commercial organizations
    are profit focused, because their expenses must be met by revenues, which are

    financed by grants or contributions rather than market transactions.

    These organizations whose establishment is mainly non-profit making are

    namely ; Schools, hospital, clubs, Charitable Organizations, NGOs etc.

    These organizations provide specific services to the community without profit
    drive. Although these organization charge fees to the services provided to the

    beneficiaries, its low compared to the benefit.

    Non-profits organizations prepare final accounts like profit making

    organizations but they differ in the following circumstances :

    • A cash book is replaced by receipts and payments A/C

    • Profit and loss A/c is replaced by income and expenditure A/C

    • Capital is replaced by accumulated funds

    • Net profit is called excess of income over expenditure

    • Net loss is called excess of expenditure

    Differences between Profit making and Non-profit making organizations

    a

    Receipts and payments Account of non-government organizations

    This is a summary of all cash and Bank transactions that took place during a

    particular accounting period and these include ;

    • Opening balance

    • The receipts for the period

    • The payment for the period

    • Closing balance

    Illustration

    Receipts and Payments Account

    s

    NOTE : Receipts and payments account is simply a summarized cash account

    Incomes and expenditure Account

    As contrast to profit making organizations, profit generated from non-profit
    making organizations is termed as excess of income over expenditure same as

    for the loss.

    Income and expenditure account is presented in same manner as the profit and
    loss account for profit making organization in such way that costs incurred are

    compared to the revenues or incomes.

    The main features of income and expenditure account ;

    • It is a summary of all items relating to income and expenditure on
    accrual basis
    • It deals with only revenue and expenditure items
    • Income is credited while expenditure is debited
    • Account balance is represents a surplus or deficit for the period and is
    transferred to the accumulated funds.
    • The main sources of income are subscriptions, incomes from social

    activities like dance parties, film, plays, donations etc.

    NOTE : Sometimes Bar account is prepared separately like a trading account.

    Mostly is prepared within the income and expenditure account.

    Illustration

    Income and Expenditure Account

    s

    Bar trading Account

    The club may occasionally establish a bar to serve drinks to its participants
    when they meet. In this case the bar is set for the purpose of earning additional
    income to the club. The account for the bar will be prepared in the same way as
    of profit making business and the profit will be transferred to the income and

    the expenditure account as an income.

    Bar trading Account

    s

    Surplus and Deficit

    A surplus is the excess of income over expenditure that is, when (incomes
    exceed the expenditures). It is arrived at from the income and expenditure
    account. At the end of every financial period the surplus is added to the

    accumulated funds in the balance sheet.

    When the expenditure exceeds the income the difference is a deficit. A deficit

    appears as reduction from accumulated funds in the balance sheet.

    Accumulated fund

    The capital account of a non-profit organization is termed as accumulated
    fund. Any surplus from the income and expenditure account is transferred to

    this account and vice versa.

    Balance sheet

    The term balance sheet refers to a financial statement that reports a company’s

    assets, liabilities, and shareholder equity at a specific point in time.

    Non-profit making organizations prepare balance sheet like Profit making
    organization and their items are treated the same except that for capital in
    trading organizations. Non-profit making organization’s balance sheet is

    called accumulated fund.

    Balance sheet

    S

    In non-profit making organizations Accumulated fund= Assets

    i.e Assets- liabilities=Accumulated fund,

    Thus, accumulated fund + liabilities=Assets

    Types of revenues

    Business receipts are inflow of economic resources mostly in the form of cash

    and cash equivalents.

    There are mainly two types of revenues notably ;
    • Capital receipts

    • Revenue receipts

    Capital receipts

    Capital receipts are commercial receipts that are unrelated to a company’s
    ongoing business operations. They are infrequent yet are advantageous in the

    long run.

    In any business capital is introduced for the smooth running of the business.
    When realize, capital receipts are often disclosed in the business’s balance
    sheet. This is the money that is paid by the sole trader, partners or members
    of the company known as shareholders, loans, proceeds from the sale of fixed
    assets etc. Similarly, non-profit making organizations receive capital in form of

    membership fees, subscriptions, grants, donations etc.

    Example 1.

    Suppose, in annual general meeting of Barnabas and sons ltd company, the
    issue of right shares was approved at the rate of RWF.1000 per share. Barnabas
    and sons ltd allocated shares to all the existing members of the company
    proportionately and in return received cash. The cash received by Barnabas

    and sons ltd company was a capital receipt.

    Revenue receipts

    The money that a business makes from its regular business operations is known
    as revenue receipts. These are recurring in nature and have a direct impact
    on the company’s earnings and loss. Consequently, it is necessary to disclose
    revenue receipts in the company’s or organization’s income statement.


    These include ;

    • Revenue received from sale of goods to customers.
    • Revenue received from provision of services to clients
    • Income received as interest on a saving account.
    • Dividend income received from shares of various companies.
    • Rental income received by a company.
    • Bad debts recovered by a company
    • Cash discount received from vendors.
    • Commission income received by a company
    • Interest received
    • Interest on investment
    • Trading profit
    • Rental income

    • Bad debts recovered, etc

    Whereas non-profit making organizations get their receipts from annual
    subscriptions, cash sales from trading activity of an organization or charges

    from the use of premises etc.

    Example 2.

    Suppose ABC ltd Company is in the business of manufacturing and selling
    clothes in bulk to wholesalers and retailers. ABC ltd invoices its customers on
    receipt of goods by them and maintains an average collection period of 30 days.
    ABC records its sale/revenue on receipt of goods by the customers. The sales

    revenue received by ABC company is a revenue receipt.

    Subscription

    Subscriptions are made from the members of the organization as major
    source of non-profit making organizations and these can be ordinary or life

    subscriptions.

    Accounting treatment for subscriptions

    • Subscriptions due or arrears are current assets
    • Subscriptions received in advance or prepaid are current liabilities
    • Subscription taken as income for a particular year should exclude

    subscriptions received in arrears and subscription received in advance.

    Below is the format of subscription account

    S

    Life subscription

    In some clubs, members are allowed to become life members by paying life

    subscription, which allows them to access the club facilities for the rest of their

    life.

    Accounting entries when life subscription is paid ;

    Dr Receipts and payment A/c xx

    Cr life subscription A/c xx

    Instructions must be given regarding how much of the life subscription is to be
    transferred to the income and expenditure account at the end of the each year.

    When transfer is done, the following entries are affected ;

    Dr Life subscription A/c xx

    Cr income and expenditure A/c xx

    The credit balance in the life subscription A/c is long-term liability of the club

    Types of expenditure

    Expenditure is a payment made using cash or credit to purchase goods or

    services.

    Expenditures are of two that is ;

    1. Capital expenditure

    2. Revenue expenditure

    Capital expenditure is the Cost incurred for the acquisition of fixed assets and
    their additions. The advantage from this expenditure is divided over multiple
    periods rather than being entirely utilized in one. It includes fixed assets
    purchased with the intention of generating income or enhancing the company’s
    ability to generate income. For instance, buying land and buildings and adding
    things like renovations to buildings, buying plants and machinery, or buying

    more machinery, etc.

    Capital expenditure appears in the balance sheet

    Revenue expenditure comprises of expenses paid for during one accounting

    period that have a fully utilized benefit throughout that period.

    Revenue expenditures are just the expenses incurred over a specific time
    period to operate the firm ; they do not increase the value of fixed assets. It
    includes things like depreciation, current business expenses, replacements,
    maintenance, or renewals e.g wages and salaries, rent, rates, carriages etc.
    Such items appear in Trading and profit and loss accounts for profit making
    organizations and in an income and expenditure account for non-profit making

    organizations.

    Application activity 4.1

    The following information provided is taken from the books of ABC as at

    31.12.2022

    Subscription received during the year ending 31.12.2022 RWF 1,000,000
    Subscription due at the end of 31.12.2022                                   RWF 100,000
    Subscription received in advance for the following year starting on

    1.1.2023 RWF 300,000

    Required:

    Determine the amount of subscription to be taken as income for the year

    for ABC.

    4.2. Accounting for non-profit making organization

    Learning Activity 4.2

    A new school has been opened in Kagarama Sector due to a number of
    Students that were moving for a long distance and others could not afford

    the schools around.

    This school has come to carter for the above problems as it receives funding
    from the government and other donors. It is claimed that much money has

    been spent on this school.

    Required:

    In which ways would you expect the ministry of Education to monitor the

    financial performance of this school?

    Nonprofit accounting is the unique process by which nonprofit making
    organizations plan, record, and report upon their finances. Non-profit
    organizations focus on accountability and profit making organizations focus on
    profit making. They adhere to a particular set of guidelines and practices that

    aid them in maintaining their accountability to their contributions and donors.

    Application activity 4.2

    Given below are the receipts and payments account ended 31rst December

    2021 for Kigali Arena Social Club.

    D

    Additional information

    Stock of refreshment 1/1/2021                          RWF 200,000

    Stock of refreshment as at 31/12/2021           RWF 300,000

    Prepaid rent                                                                RWF 100,000

    Ground hire dues                                                      RWF 50,000

    Subscription                                                                RWF 300,000

    Required

    Bar trading account

    Prepare an income statement and expenditure account for the year ended

    31/12/1021

    Balance sheet

    End unit assessment 4

    1. What are final accounts for non-profit organizations?

    a) Receipts and payment account

    b) Trading and profit and loss account

    c) Income and expenditure account

    d) Both a and c

    2. From the following receipts and payments account for Gikoba foot
    ball club and the additional information is provided. Prepare an
    income and expenditure account for the year ended 31 December

    2021.

    Receipts and payments Account

    s

    Additional information on 31 December 2021

    I. The club consists of 200 members paying annual subscription of
         RWF 2,000 and only180 members had paid their subscription fully
        while 10 had paid for 2022.
    II. Wages outstanding amounted to RWF 8,000; insurance prepaid RWF

         6,000 and stock of unused stationery RWF 2,500.

    Required:

    1. Prepare Income and expenditure statement

    2. Extract the balance sheet


    ◄Unit 3 PARTNERSHIP ACCOUNTSUnit 5 PUBLIC SECTOR ACCOUNTING►