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Not-for-profit organisations (Income of clubs and societies (Entrance fees…
Not-for-profit organisations
Many organisations do not receive their income from sales income and are not created to generate a profit
Established with an objective of being non-profit-making
A non-commercial organisation that does not exist to make a profit and is unable to distribute any of its annual surplus to its members
Covers a multitude of bodies
Central government departments
Public corporations
Local authorities
Health authorities
Charities an voluntary bodies for examples Oxfam or Age Concern
Clubs and societies for example a local swimming club or an amateur dramatic group
These bodies are set up to provide services without making a profit. This is not to say that such organisations are not involved in some trading activities but making a profit is not the driving force of their activity
Depending on the nature, size and sources of funding of such bodies, their accounting records will vary. Many bodies maintain full accounting records, in which case the preparation of their accounts follow the normal process from trial balance to final accounts, making the necessary adjustments for accruals, prepayments and the like
Some, like local authorities, universities and other government funded bodies, follow accounting procedures that although similar to those used in the private sector, also reflect the specialist nature of such bodies
The accounting requirements of many of these bodies are determined by their legal form. For example, a UK charity has to comply with the UK Charities Act and produce accruals-based accounts. Contrast with this smaller not-for-profit organisations such as clubs and societies the are run so that their members can undertake activities such as swimming, rambling, chess or amateur dramatics, they are unlikely to draw up trading profit and loss accounts and balance sheets
Income of clubs and societies
Entrance fees or joining fees - entrance fees are charges made to new applicants on their admission as members
Subscriptions - these are the annual amounts receivable from members
Life membership fees - a member pays a lump sum in return for membership for the rest of their life
Charges made to members for the use of club facilities
Surpluses from trading activities such as a licensed bar or car boot sale
If the club operates a bar or similar activity, it may be necessary to prepare a trading account to calculate the profit or loss arising on that activity
Other one off activities such as a Christmas dance or concert where the club has income from sale of tickets etc. It is better to the show the net result as this will clarify whether or not the activity covered its costs, rather than including the receipts along with the income and costs among the other items of expenditure
The accounts used to record the financial transactions of clubs and societies are known as receipts and payments accounts or income and expenditure accounts
Income and expenditure account
An annual financial statement for non-profit-making organisations that reflects the surplus or deficit made during the accounting period
Shows the surplus/deficit, i.e the surplus of income over expenditure or vice versa for a period and is drawn up on the same accruals basis as a profit and loss account
Rather than using the term 'profit and loss account', the financial statement is normally called the 'income and expenditure account', to emphasise that the main objective of a club is to provide a service to its members rather than to make a profit. For the same reason, the balance at the end of the income and expenditure account is the surplus of income over expenditure or excess of expenditure over income rather than profit or loss
Prepared following the same accounting rules as for trading profit and loss accounts
The receipts and payments account provides the basic information for producing the income and expenditure account as it reveals when money was received or paid out. This does not give the organisation real information on its financial position because payments may be received or made in advance or in arrears
When an organisation owns assets and has liabilities, the receipts and payments account is not an informative way of presenting the annual account as it only shows cash balances and omits other assets and liabilities
The income and expenditure account records all the transactions during the period whether or not money changed hands during the time - ie the accruals concept is applied. This allows the organisation to see whether its capital has increased during the period and also allows them to produce a balance sheet
The receipts and payments account
A report of the cash transactions during a single financial period
Used when it is not considered appropriate to distinguish between capital and revenue transactions or to include accruals
No adjustments made, including depreciation, doubtful debts, expenses owing, prepayments etc
In effect, is a summary of the cash transactions
Records cash coming in and cash going out, the difference between the two sides represents the cash balance at the end of the accounting period
Easy to produce but does not provide a comprehensive picture of the financial position of the club or society because
1, There is no distinction between capital and revenue
Depreciation of fixed assets is not provided for
Accruals and prepayments are not included, so members cannot determine whether the club has made a surplus or a deficit. For example, the members subscriptions included as receipts do not make adjustments for any subscriptions that are outstanding or paid in advance
The assets and liabilities of the club are not disclosed
No balance sheet is produced
Will produce a balance sheet in which they capital account may be called the accumulated fund. Any surplus for the year is added to the club fund account exactly as a profit would be to the capital account in the balance sheet of a sole trader or small business
Subscription income
One of the major sources of income for clubs and societies are members' subscriptions
The process of working out the actual subscription income to be include in the income and expenditure account is complicated by the fact that subscriptions can be paid in advance or in arrears at both the beginning of the period and the end.
Subscriptions owing at the beginning and end of the year are current assets of the organisation. In effect the members whose subscriptions are outstanding are debtors of the club or society
Subscriptions paid in advance at the beginning and end of the period are current liabilities of the club, the members who pay their subscriptions before they are due are creditors of the club or society
Subscriptions in arrears may never be received, in accordance with the prudence concept, subscriptions in arrears should be reviewed regularly and those that have been outstanding for a long time should be written off as irrecoverable. If this is not done, the organisation's assets will be overvalued
In practice, many clubs and societies follow the prudence concept fully and ignore subscriptions in arrears for final account purposes. If the question isn't clear, state that all of the subscription in arrears will be collected and so included in the final accounts
To calculate the subscription income to be included in the income and expenditure accounts, it will have to be allowed that subscriptions can be in advance or in arrears at both the beginning of the period and the end. This can be allowed for by adjusting the actual cash received for subscriptions
Cash received from members LESS subscriptions in arrears at beginning of year PLUS subscriptions in arrears at the end of year PLUS subscriptions in advance at beginning of year LESS subscriptions in advance at end of year = subscriptions to be included in income and expenditure account
Public listed company
Statement of compressive income
Profit before tax
Total equities and liabilities
Not-for-profit organisation
Income and expenditure account
Surplus of income over expenditure
Accumulated fund