non profit accounting

Non Profit Organizations What Are They

Definition of Fund; Assets; and Fund Balance

According to the “Financial and Accounting Guide for Not-For-Profit Organizations” written by

CPAs Gross, Larkin, Bruttomesso, and McNalley, (fifth edition, pg 25) the definition of a these

three terms is as follows:

- A fund is any part of an organization for which separate account records are kept.

- Assets are valuable things owned or controlled by the organization. Types of assets include cash,

investments, property, and amounts owed to the organization.

- Fund balance is the mathematical number obtained by subtracting total liabilities from total

assets; it is a numerical representation of the net worth of the organization, but has no other

significance. Fund balances do not exist except on paper; unlike assets, they have no intrinsic

value and cannot be spent. Both assets and fund balances (as well as liabilities, revenues, and

expenses) are part of the accounting records of a fund.

What are non-profit organizations?

A few years ago, a dentist client of mine, who did a lot of work for low-income patients under the

California medical assistance program called “MediCal”, asked me a bizarre question. He wanted

to know if he could be considered a “non-profit organization” since he did so much MediCal

work. At first, I thought he was joking, but he was serious. I told him that just because he charged

less for his services did not qualify him to become exempt from paying taxes. In fact, he made a

very nice profit. However, this is a good example of how non-profit organizations (NPO’s) are

misunderstood by a large segment of the general public.

Most countries around the world have NPO’s, but outside the U.S. they are called non-

governmental organizations (NGOs) or civil society organizations. These organizations are

exempt from paying taxes because they provide some sort of public benefit. They are said to

enhance the fabric of society. They differ from a business organization in that there are no

owners. A Board of Directors oversees operations of the organization. An Executive Director,

who reports to the Board, functions like a CEO of a business. Usually there is a lengthy

application process to establish the mission or purpose of the organization before exempt status is

granted.

According to Independent Sector, an organization that serves as an information resource for non-

profit boards, there are 1.5 million non-profits that, when combined, have general annual

revenues totaling more than $670 billion dollars. They report that six percent of all organizations

in the U.S. are non-profits and one in twelve Americans work for a non-profit. That’s big business

and has caused profit-making businesses to become alarmed that some of these NPOs are

competing unfairly. Think about a private hospital as compared to a non-profit hospital. The

profits of the private hospital are taxed, but the NPO hospital can apply all their profits to higher

salaries, more equipment, etc. Hence, there is high scrutiny of NPOs by the Internal Revenue

Service, state Attorney General offices, private watchdog organizations, and the press.

There are all types of non-profit organizations. Public charities are exempt under the Internal

Revenue Service code 501(c)(3). These organizations, such as hospitals, museums, orchestras,

private schools, churches, scientific research organizations, soup kitchens, etc., obviously do

much more than provide free care and services to the needy. To qualify for exempt status, these

organizations must show broad public support, rather than funding from an individual source. In

addition, there are private foundations, colleges, universities, social welfare organizations,

professional and trade organizations, and many more. Governmental organizations such as

communities and agencies are also non-profit organizations, however, their accounting and record

keeping is handled quite differently from 501(c)(3) organizations.

How are non-profit books organized?

Briefly, the books of an NPO are organized in the same way as a profit-making business except

for a few differences. It’s okay for a non-profit to make a profit because there may be many uses

the board has planned for the extra money. But, NPOs traditionally refer to profit as “Excess

Revenues over Expenses” to avoid being mischaracterized as a profit-making organization. A net

loss is called “Excess Expenses over Revenues”. Recall the fundamental equation that makes

double-entry accounting work:

ASSETS = LIABILITIES EQUITY

Instead of the term EQUITY, a non-profit will substitute the words FUND BALANCE or more

recently NET ASSETS. The concept is still the same. After subtracting liabilities from assets the

difference is what is owned by the organization. Where NPOs differ in their financial statement

presentation from profit-making businesses is what is called Fund Accounting. Obviously, the

presentation varies depending on the purpose and size of the organization. For instance, a Little

League baseball organization may only have one fund for which they have to account. They also

may not have any restrictions placed on the usage of contributions they receive. Everything is

straightforward.

Or, a scientific research organization may be working on various projects at the same time with

funding sources made up of private and governmental grants or contracts, private donations, sales

of research documents, some of it restricted to specific expenditures and the rest unrestricted. The

accounting challenge is to report the revenue and expenses accurately for each fund or project and

be able to combine all the funds into one cohesive financial statement.

The problem in the past for the contributors was that they could not easily tell from the financial

documents what funds were restricted and unrestricted and whether their contributions were

being spent properly. The Financial Accounting Standards Board (FASB) decided that all external

accounting should be done using the “Net Assets” approach as opposed to the “Fund Balance”

approach. Essentially, the net assets approach requires that the equity of the organization be

presented with three classes of assets, i.e., Restricted Assets; Temporarily Restricted Assets;

Unrestricted Assets. You can still use Fund Accounting for internal bookkeeping purposes, but for

external reporting purposes you are required to disclose your restricted and unrestricted funds. If

you have no restricted funds, then it is not much of a challenge.

One of the key factors in setting up non-profit books is a well thought out Chart of Accounts. In

other words, this is choosing which general ledger accounts are the most appropriate for

recording revenue and expenses, etc., and organizing them in such a way as to provide meaning.

Some U.S. organizations simply follow the same format found on the 990 IRS form for non-

profits. They do this so that their financial statements are in conformity with the way that return is

organized. This makes it easy to transfer information from their financial statement to the 990

form.

Nevertheless, the main thing is to design your accounts so that they tell you exactly where your

revenue came from and what expenses are related to that revenue. I have worked with NPOs that

have not done a very good job of this in the beginning, and I can testify that it is no fun trying to

straighten the accounts out later. It may be well worth the money to hire a competent accountant

to guide you through the set up phase. Better yet, let your accountant review your books a couple

of times a year just to make sure you are on track and save yourself some year-end grief.

Non-Profit Making Organisations

Introduction

This resource aims to give students help with financial statements from non-profit making

organisations including clubs and societies. The nature of these types of organisations means that

students should also be able to understand the effect of life membership schemes and donations.

The resource is relevant to:

OCR: Module 2502, Final accounts

AQA: Module 5, Further aspects of financial accounting

What are non-profit making organisations? Are they businesses that make losses? Are they

businesses that are run badly?

Non-profit making organisations are also known as 'not for profit' organisations and this is the

name we give them simply because they want to do something or provide something rather than

make more and more money.

What kind of organisations are we talking about that just want to do something rather than

making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's

Club? They are probably examples of non-profit making organisations. Here's a bigger list!

Associations

Clubs

Societies

Unions

Charities

Universities

Churches

Walk around town with your eyes open and you'll find loads of them!

KISS: Keep It Simple, Stupid

Simple but not Stupid

The Analysed Receipts and Payments Account

Accruals Concept

Accumulated Fund and the Balance Sheet

Calculating Losses of Stock and Cash

The Remaining Issues

KISS: Keep It Simple, Stupid

Why are these organisations important for accountants though? They are important because the

accounts of these organisations are simpler than they are for a sole trader, a partnership or a

limited company. The accounts are simpler for at least two reasons:

The members of these organisations are normally the only people interested in them

They are usually very simple organisations:

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http://www.bized.co.uk/learn/accounting/financial/nonprofit/losses.htm

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o Not that many members

o Not a huge amount of money involved

o Not that many activities

In lots of cases the only thing that the Treasurer (the bookkeeper or accountant) of a club or

society needs to do is to keep track of the cash and not a lot more than that. Well, why bother

with having to set up a full set of ledgers for a Dog Club that has, say, 50 members paying

subscriptions of £10 a year that meets 10 times a year and just has one dog show and an annual

dinner each year? Not worth the bother is it?

There's profit Jim but not as we know it

Then again, just because an organisation doesn't intend to make a profit doesn't mean that it

won't: lots of them do and in the end, all organisations have to make some profit or they won't

survive.

Jargon buster

The cash account or cash book is called the Receipts and Payments Account and the Trading

and Profit and Loss Account is called the Income and Expenditure Account. Profits are not

called profits, they are called surpluses (or deficits if it's a loss) and the capital account isn't the

capital account now, it's called the accumulated fund.

Profit Making Jargon Non-Profit Making Jargon

Cash Book

Profit and Loss Account

Profit

Loss

Capital Account

Receipts and Payments Account

Income and Expenditure Account

Surplus

Deficit

Accumulated Fund

Let's just accumulate

The capital account is called the Accumulated Fund and that tells us that there are no private

owners who have the right to keep the profits themselves or take an income from the organisation

and so on - non-profit making organisations belong to all of their members together.

Guess what they call the balance sheet, by the way? It's still called the balance sheet!

Collecting data

What data will a fairly simple club or society collect? For lots of them, they will receive money

for:

Subscriptions

Sale of refreshments

Raffles and other competitions

Sale of publications

Annual dinner ticket sales

Interest on deposit account at the bank

Sale of old equipment

Receipts will come from such things as:

Purchase of refreshments

Purchase of raffle prizes

Costs of running an annual dinner

Purchase of new equipment

Rent of hall

Simple but not Stupid

In the simplest of all cases, all we need to do at the end of a year is to prepare an account like this:

Receipts Payments

Subscriptions Purchase of refreshments

Sale of refreshments Purchase of raffle prizes

Raffles and other competitions Purchase of publications

Sale of publications Costs of running annual dinner

Annual dinner ticket sales Purchase of new equipment

Interest on deposit account at the bank Rent of hall

Sale of old equipment

Then there would be a balance carried down which is either positive or negative depending on

whether they received more than they spent or spent more than they received. Let's put some

figures to this example now to see how it works; but don't forget, we are dealing here with a receipts

and payments account which is the same as a cash book so there are no accruals and prepayments

to take into account.

Receipts Payments

Balance b/d 1,250 Purchase of refreshments 923

Subscriptions 1,219 Purchase of raffle prizes 337

Sale of refreshments 704 Purchase of publications 79

Raffles and other competitions 118 Costs of running annual dinner 314

Sale of publications 126 Purchase of new equipment 421

Annual dinner ticket sales 404 Rent of hall 110

Interest on deposit account at the bank 11 Balance c/d 1,962

Sale of old equipment 314

4,146 4,146

That's it! Wasn't too bad was it? Now try a question of your own - very, very similar to the one

you just saw!

For You To Do 1:

Prepare the Receipts and Payments Account for the Russian Culture Society for the year 2004.

Subscriptions 1,346

Purchase of new equipment 512

Costs of running annual dinner 264

Sale of refreshments 591

Purchase of publications 63

Annual dinner ticket sales 530

Purchase of refreshments 804

Interest on deposit account at the bank 15


Rent of hall 112

Sale of publications 142

Purchase of raffle prizes 322

Raffles receipts 101

Balance b/d 1,286

Balance c/d 2,192

Now take a look at the solution...

Now try this - this question looks a lot different but the method is just the same as the previous

question.

For You To Do 2:

Prepare the Receipts and Payments account for the Steel Social Club from the following

information. As part of your answer you need to calculate the cash balance c/d.

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For You To Do 3:

Prepare the Receipts and Payments account for the Sawyer's Medieval England Society for the year

ended 31 December 2004 from the following information.

Sawyer's Medieval England Society for the year ended 31/12/04

£

Cash Balances b/d 467

c/d 331

Payments Refreshments 554

New equipment 1576

Rent of hall 360

Local government levy 125

Printing costs 55

Stationery costs 71

Postage and telephone 39

Repairs to equipment 322

Lighting and heating 200

Wages 847

Annual dinner expenses 1085

Lottery prizes 513

Receipts Subscriptions 2311

Sale of annual dinner tickets 1886

Lottery tickets 1093


Refreshments 321


Final remarks: some problems with the Receipts and Payments Account

Clubs and societies prepare a Receipts and Payments Account that just tells us what has been

received and paid in cash. This means that such non-profit making organisations might not

always apply the accruals concept of accounting. Not applying the accruals concept is not a

problem for the kinds of organisations we are dealing with here.

There are problems with the Receipts and Payment Account approach to accounting too:

Apart from the cash balances, it doesn't show any assets or liabilities.

There is no real indication, except in the simplest cases, of whether the organisation has

made a surplus or a deficit or whether they have made a surplus or deficit on anything that it

does.

The Analysed Receipts and Payments Account

Because we can't tell whether we have made a surplus or deficit on the things that a club or

society does, we can prepare what is called an analysed receipts and payments account. The

term 'analysed' is used as it breaks down the accounts into constituent parts to help give a clearer

picture. Here's an example of what they are and what they do.

Worked Example

Here are the transactions of the Bristol Mountain Bikers Society for the first four months of the year.

Prepare an analysed Receipts and Payments Account for the Society for this period.

Date Details Amount

January Subscriptions 1,000

January Sale of drinks 250

January Cost of drinks 150

January Postage costs 50

March Subscriptions 600


April Sale of drinks 150

April Cost of drinks 90

April Postage costs 30

Before we show the answer to this question, let's look at what we would have prepared until now:

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to

April

Receipts Payments

Balance b/d 275 Cost of drinks 150

Subscriptions 1,000 Postage costs 50

Sale of drinks 250 Cost of drinks 90

Subscriptions 600 Postage costs 30

Sale of drinks 150 Balance c/d 1,955

Totals 2,275 Totals 2,275

That's what we would have done; now here's what we can do now. You might appreciate that

analysed statements like these are ideally prepared in a spreadsheet.

Worked Example Solution

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to

April

Receipts Payments

TotalSub-

scriptionsDrinks Postage Total

Sub-

scriptionsDrinks Postage

Balance b/d 275 Cost of

drinks150 150

Subscriptions 1,000 1,000 Postage

costs50 50

Sale of drinks 250 250 Cost of

drinks90 90

Subscriptions 600 600 Postage

costs30 30

Sale of drinks 150 150 Balance

c/d1,955

Totals 2,275 1,600 375 0 Totals 2,275 0 240 80

See what's happened. It's a fairly simple example but it gives you the idea. Look at just one example

of the additional information we've got now:

Sales of drinks 375

Costs of drinks 240

Surplus on sale of drinks 135

See? By analysing the receipts and payments in this way we can get summaries of all major

items. Notice also that we used the term surplus rather than profit.

For You To Do 4

Prepare the analysed Receipts and Payments Accounts for the Russian Culture Society in For

You To Do 1. In addition, calculate the surplus or deficit on refreshments for the period.


For You To Do 5

Prepare the analysed Receipts and Payments Accounts for the Steel Social Club in For You To

Do 2. In addition, calculate the surplus or deficit on the 100 Club for the period.


For You To Do 6

Prepare the analysed Receipts and Payments Accounts for Sawyer's Medieval England Society in

For You To Do 3. In addition, calculate the surplus or deficit on the annual dinner for the period.

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Accruals Concept

Take a look at the Between the Sheets glossary to see a broad definition of the accruals concept.

Very briefly, the accruals concept tells us that sometimes people owe us money in January but

won't pay until February. Similarly, someone may have paid their subscriptions for 2005 in

November 2004 but unless we use the accruals concept this £30 will be shown in the Receipts

and Payments Account for 2004 when it shouldn't be.

What all of this means is that a Receipts and Payments Account (RPA) needs to be changed to

take account of accruals and prepayments so that it:

follows the accruals concept

shows us a true and fair value of the organisation

When we take these ideas into account we turn a RPA into an Income and Expenditure Account

(IEA). An IEA is just another name for the Trading and Profit and Loss Account and if the

organisation carries out any trading activities, such as running a bar or buying and selling plants,

fertilisers and so on, it includes the trading account as part of the IEA.

Worked Example

Let's prepare an Income and Expenditure Account now by looking at a very similar example to

For You To Do 1 but this time with a couple of adjustments.

a. In horizontal format prepare the IEA for the Russian Culture Society for the year 2004

from the following list of balances and adjustments that follow.

b. In vertical format prepare the IEA for the Russian Culture Society for the year

2004 from the following list of balances and adjustments that follow.

Receipts

Balance b/d 1,307

Rent of hall 101




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Purchase of new equipment 516

Purchase of publication 65

Purchase of refreshments 1,004

Subscriptions 1,009

Purchase of raffle prizes 390






Balance c/d

Adjustments

Subscriptions not yet received 161

Annual dinner ticket money still owing 45

Rent of hall paid in advance 11


a. Make sure you agree with this horizontal style IEA:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04

Expenditure Income

Rent of hall 90 Subscriptions 1,170

Costs of running annual dinner 290 Raffles receipts 134

Purchase of publication 65 Sale of publications 107

Purchase of refreshments 1,004 Sale of refreshments 682

Purchase of raffle prizes 390 Interest on deposit account at the bank 11

Surplus of Income over Expenditure 758 Annual dinner ticket sales 493

2,597 2,597

Have you spotted this?

This is exactly how it should behave according to double entry bookkeeping principles and it's the

same as this:

Here is how we have dealt with the adjustments - we have shown these adjustments in two ways,

side by side:

1. as a simple calculation, and

2. in ledger account format

Subscriptions: this is revenue

Subscriptions Account

Amount received, shown in the RPA 1,009 IEA 1,170 RPA 1,009

Plus amount is owing for this year but not yet received 161 Accrual c/d 161

Amount that should have been received during the

year1,170 1,170 1,170

Annual Dinner: this is revenue

Annual Dinner Account

Amount received, shown in the RPA 448 IEA 493 RPA 448

Plus amount is owing for this year but not yet received 45 Accrual c/d 45

Amount that should have been received during the year 493 493 493

Rent of Hall: this is a cost

Rent of Hall Account

Amount paid, shown in the RPA 101 IEA 101 RPA 11

Less amount paid in advance 11 Accrual c/d 90

Amount that should have been paid during the year 90 1,170 1,170

b. Now the vertical style IEA for the Russian Culture Society for 2004:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04

Subscriptions 1,009

plus Subscriptions not yet received 161 1,170






plus Annual dinner ticket money still owing 45 493

2,597

Less: costs for the period

Rent of hall 101

less Rent of hall paid in advance 11 90


Purchase of publication 65

Purchase of refreshments 1,004

Purchase of raffle prizes 390 1,839

Surplus/(Deficit) for the period 758

Notice how the adjustments have been incorporated very nicely within the vertical format. It is

possible to do the same with the horizontal format but it doesn't look so nice!

These examples help us to learn the Golden Rules of Adjustments:

Revenues Costs

Owing but not received in

the periodAdd to RPA amount

Owing but not paid in

the periodAdd to RPA amount

Received but relates to

next period

Subtract from RPA

amount

Paid but relates to next

period

Subtract from RPA

amount

For You To Do 7

Prepare:

a. the horizontal, and

b. the vertical format IEA

for the Steel Social Club from the following information.

Steel Social Club for the year ended 30/09/04

Cash

ReceivedSubscriptions 130.55 Visitors' fees 95.82

Sale of

Refreshments100.18

Sale of mementoes 154.08100 Club Ticket

sales172.00

Interest on

Deposit

Account

12.34

Cash Spent Postage 9.51 Secretary's fee 62.15

Refreshments 41.40 Treasurer's fee 70.12

New Equipment 125.53 100 Club Prizes 79.00

Adjustments

Subscription paid

this year but

relating to last year

7.83

Subscription paid

this year but

relating to next

year

26.11

Postage stamps

bought in advance0.95


Accumulated Fund and the Balance Sheet

We already know that the capital account of a non-profit making organisation is called the

accumulated fund... but where is it? Why haven't we seen one yet? Well, we didn't want to make

your life too much of a misery all at once by giving you too much to think about so we saved it

until last! More than that, we have put the accumulated fund with our balance sheet

explanations... we think it makes sense!

The accumulated fund works in exactly the same way as the capital account:

Accumulated Fund

Balance b/d XX

± Surplus/Deficit of income over expenditure XX

Balance c/d XXX

By far the best way of sorting it all out is to work through an example although in the first case

we won't prepare a full balance sheet.

Worked Example

Buckingham Sports and Social Club - Receipts and Payments for the year ended 31/08/04

Receipts £ Payments £


Cash in hand 01/09/03 3,000 Bar purchases 24,000

Interest 1,500 Purchase of equipment 20,000

Subscriptions 36,000 General expenses 26,000

Bar sales 50,000 Competition costs 3,000

Competition receipts 2,000 Cash balance 31/08/04 19,500

92,500 92,500

Other Balances as at 01/09/03

Clubhouse and land 100,000

Equipment 25,000

Bar stock 4,000

Investments 20,000

General expenses owing 500

Subscriptions due 1,000

Additional information as at 31/08/04

Bar stock 6,000

Bar creditors 400

General expenses prepaid 300

Subscriptions prepaid 900

Equipment held on 31/08/03 to be depreciated by 20%

Required

a. Prepare a statement showing the club's accumulated fund at 01/09/03

b. Prepare the club's income and expenditure account for the year ended 31/08/04

c. Prepare the club's balance sheet as at 31/08/04


a. The club's accumulated fund at 01/09/03:

This first part is probably very similar to many questions you tried when you first learned the

accounting equation:

assets = liabilities + capital

Strictly speaking, we need to change that for non-profit making organisations to be:

assets = liabilities + accumulated fundThen you would go on to working with this equation, including the evaluation of the capital balance

at the start of the year given a list of assets and liabilities. What you are about to see is exactly the

same as that.

Buckingham Sports and Social Club Accumulated Fund at 01/09/03

Assets Liabilities + Accumulated Fund

Cash in hand 01/09/03 3,000 General expenses owing 500

Club house and land 100,000 Balance c/d 152,500

Equipment 25,000

Bar stock 4,000

Investments 20,000


153,000 153,000

b. Prepare the club's income and expenditure account for the year ended 31/08/04:

The IEA that follows is again given in vertical format and where possible we have just inserted the

final surplus or deficit figure rather than putting all of the detail in. For example, we have opened an

account for subscriptions and just shown the final figure on that account in the IEA. The same

applies to the bar and to general expenses. This is a very good and efficient way of working, by the

way!

Buckingham Sports and Social Club Income and Expenditure Account for the year ended

31/08/04

Note

Subscriptions for the year 1 34,100

Surplus on bar a/c 2,3 27,600

Interest 1,500

Gross surplus before deficit on competitions 63,200

Deficit on competitions 4 1,000

Gross Surplus 62,200

less Expenses

General expenses for the year 5 25,200

Depreciation of equipment 6 9,000 34,200

Net surplus carried forward to accumulated fund 28,000

Here are all of the notes to explain the adjustments we have made for the IEA.

Notes

1 Subscriptions a/c Dr Cr

Balance b/d 1,000

Subscriptions 36,000

Prepayments c/d 900

IEA subscriptions for the year 34,100

36,000 36,000

2 Bar a/c

Bar sales 50,000

Bar stock as at 31/08/03 4,000

Bar purchases for the year 24,400

Bar stock 6,000

IEA surplus on bar a/c 27,600

56,000 56,000

3 Bar purchases a/c

Bar purchases 24,000

Bar creditors c/d 400

Bar purchases for the year 24,400

24,400 24,400

4 Competitions a/c

Competition receipts 2,000

Competition costs 3,000

IEA deficit on competitions 1,000

3,000 3,000

5 General Expenses a/c

General expenses owing at 01/09/03 500

General expenses 26,000

General expenses prepaid c/d 300

IEA general expenses for the year 25,200

26,000 26,000

6 Equipment a/c

Equipment as at 31/08/03 25,000

Purchase of equipment 20,000

Depreciation 9,000

Balance c/d 36,000

45,000 45,000

c. Prepare the club's balance sheet as at 31/08/04:

Finally, the balance sheet - and it balances!

Buckingham Sports and Social Club Balance Sheet as at 31/08/04

Fixed Assets

Clubhouse and land 100,000

Equipment 36,000

Investments 20,000

156,000

Current Assets

Bar stock 6,000


Cash balance 31/08/03 19,500 25,800

Total assets £181,800

Accumulated Fund b/d 152,500

Net Surplus carried forward to accumulated

fund 28,000

Accumulated Fund b/d 180,500

Bar creditors 400

Subscription prepayments 900 1,300

£181,800

Even though that isn't an especially difficult question, it does take time to work through it.

However, any good bookkeeper will have learned to be methodical, logical and careful and it is

that approach that will help you to succeed with such questions.

Why not try another, very similar question to the Buckingham question now? Go on, you know

you want to! Here it is.

For You To Do 8

Pudsey Sports and Social Club Receipts and Payments for the year ended 31/12/04

Receipts £ Payments £

Cash in hand 01/01/04 2,961 Bar purchases 38,546

Interest 1,399 Purchase of equipment 19,038

Subscriptions 35,176 General expenses 25,686

Bar sales 72,704 Competition costs 3,992

Competition receipts 2,216 Cash balance 31/12/04 27,194

114,456 114,456

Other balances as at 01/01/04

Land and buildings 120,885

Machinery and

Equipment23,420

Bar stock 4,172

Investments 24,981

General expenses owing 641


Additional information as at 31/12/04

Bar stock 2,648

Bar creditors 281


Subscriptions prepaid 1,596

Machinery and Equipment held on 31/8/2003 to be depreciated 12%

by

Required:

a. Prepare a statement showing the club's accumulated fund at 01/01/04

b. Prepare the club's income and expenditure account for the year ended 31/12/04

c. Prepare the club's balance sheet as at 31/12/04


For You To Do 9

Note: this is a complex question that calls on your bookkeeping and accounting for clubs and

societies skills and there is no need to prepare a balance sheet.

The Balance Sheet of the Midlothian Sports Club as at 31 December 2003 showed the following:

Subscriptions paid in advance 310

Subscriptions in arrear 24

Bar stocks at cost 540

Bar creditors 173

Balance at bank and cash in

hand1,437

Furniture and fittings 3,110

The treasurer keeps a receipts and payments book and the totals for the year ended 31 December

2004 are as follows:

Subscriptions 5,110

Bar sales 5,716

Sales of dance tickets 2,176

Dance expenses 749

Rent and rates of premises 2,200

Lighting and heating 1,420


Barperson's wages 2,500

Steward's salary 5,000

Collections made on behalf of

charities2,650

Distributions to outside charities 2,600

Purchase of new furniture 1,460

Disposal of old furniture 150

Payments for bar purchases 2,610

The following information as at 31 December 2004 is also vital:

Subscriptions in arrears 40

Subscriptions in advance 410

Bar stocks at cost 470

Bar creditors 190

Rent unpaid 200

Book value of furniture disposed

of270

Depreciation of furniture for the year at 5% of book value on 31 December 2003.

Required:

a. Prepare an analysed Receipts and Payments Account for the year ended 31 December

2004.

b. Prepare an Income and Expenditure Account for the year ended 31 December 2004. The

Income and Expenditure Account should show clearly the profit or loss on the various

activities.

Notes:

A Balance Sheet is not required.

You need to decide where the Steward spends most of his/her time.

Think carefully about the collections and disposals made on behalf of charities as far as

the IEA is concerned.


Calculating Losses of Stock and Cash

In the busy and often tempting environment of small organisations, mistakes can happen and so

can theft. A barman in a busy bar or lounge can be forgiven from time to time if a few bottles of

beer go missing or the till is short of a few pounds. However, what we are concerned with here is

working out whether beer or cash have gone missing.

In some cases we might assume that accountants, auditors and the police find that a barman had

'lost' some beer and some cash from their bar. To carry out our own investigation, here is what we

need:

Stock

A true record of the opening stock, taken from the annual, monthly or weekly physical

stock take or stock check

Accurate delivery records from the brewery, wholesaler or supplier

Accurate sales records

A true record of the closing stock, taken from the annual, monthly or weekly physical

stock take or stock check

That's it! When we have all of that, there's nothing we don't know or can't prove!

Cash

We really need the same information as for stocks of goods for sale, since cash is really only a

stock of notes and coins. This is what we need then:

Bank statements and statements of cash in hand for the start of the period - cash balance

b/d

Accurate records of all cash received

Accurate records of all cash paid

Bank statements and statements of cash in hand for the end of the period - cash balance

c/d


Of course, with a large club that might have several bars, a café, restaurant and a sports hall and a

gym, reality can be more complicated than a simple list suggests but the principles are the same

whatever the size of club or organisation.

Worked Example: Stock

What do you make of the following information?

The basic data

Stock at start 1,000

Purchases 10,000

Sales 15,000

Stock at end 400

The average mark up on cost of sales is

30%

Working directly and only from the basic data we can estimate the cost of sales and sales using

the formula:

Opening stock+ Purchases- Closing stock= Cost of sales+ Estimated mark up= Estimated Sales

Based on the data supplied

Opening stock 1,000

Purchases 10,000

Available for sale 11,000

Closing stock 400

Cost of sales 10,600

Estimated mark up (30%) 3,180

Estimated sales 13,780

See the problem? We have been told that the actual sales were £15,000 but using the formula we

find that sales seem to be £13,780. Here's what we do to resolve this issue:

Assuming that the figure for sales of £15,000 is correct then working backwards from actual

sales we can find what closing stocks should have been. You might find the right hand column in the

table that follows useful as it confirms the percentages to work with when working backwards from

the actual sales.

Calculations from what should have happened

Opening stock 1,000.00

Purchases 10,000.00

Available for sale 11,000.00

Estimated closing stock 538.46

Estimated cost of sales 11,538.46 100%

Average mark up on actual

sales3,461.54 30%

Actual sales 15,000.00 130%

So actual sales are £15,000, 130% of the estimated cost of sales. Therefore, the estimated cost of

sales is equal to:

Estimated cost of sales

=

Actual

sales * 100% =

£15,00

0 * 100 = £11,538.46

130% 130

Then we find the estimated value of closing stock by subtracting the estimated cost of sales from

the value of goods available for sale:

= £11,000 - 11,538.46 = £538.46

Conclusion: We have found a problem. The closing stock check revealed that there is £400

worth of goods in stock yet our calculations show that there should be £538.46 worth of stock.

The committee of the organisation would now investigate what had gone wrong and take the

appropriate action.

For You To Do 10

Draw your own conclusions from the following data as to whether you think the stock of the Briney

Seafarer's Association has been looked after properly for the year ended 31 March 2004.

Stock at start 1,277

Purchases 9,222

Sales 17,965

Stock at end 889

The average mark up on cost of sales is

20%

You might find it useful to calculate using the same tables as in the above Worked Example.


Worked Example: Cash

Remember we said that holding cash really means having a stock of cash? So it should come as

no surprise that finding out whether cash is missing is remarkably like finding out if stocks are

missing.

What do you make of the following information?

Cash and bank at start 1,063.54

Payments 16,704.25

Receipts 17,693.50

Cash and bank at end 723.03

In a sense, the workings are easier than with stock, as the following solution shows.

Worked Example Solution: Cash

The logic of the solution to this problem is:


Cash and bank at start+ Receipts= Available cash- Payments= Estimated cash and bank at end- Actual cash and bank at end= Cash discrepancy, if anyApplying that template to the data in the question gives:

Based on the data supplied

Cash and bank at start 1,063.54

Receipts 17,693.50

Available cash 18,757.04

Payments 16,704.25

Estimated cash and bank at end 2,052.79

Actual cash and bank at end 723.03

Cash appears to be missing (1,329.76)

So £1,329.76 of the cash is missing, or unaccounted for. What should we do now? We are dealing

with a year's accounts so need to see the problem in that context. A total of £1,329.76 for a year is

just over £25 a week and that's probably a serious enough problem to take action. Management by

exception tells us how serious a problem it is and it gives us clues as to what to do with it!

Management by exception (MBE) means that we leave things alone unless they are a problem -

unless they are exceptional, that is. Here's a really good example of MBE - would you ever

change the tyres on your bicycle if they weren't causing you a problem and they weren't breaking

the law? No, you wouldn't unless you wanted a new colour or style. In the same way, if a

business has plenty of cash in the bank, why worry about it? In this case, though, more than

£1,300 is missing and that is exceptional. £1.30 over a year wouldn't be exceptional and neither

would £13. £130 could begin to be a problem. Can you see how we look at things in an

exceptional way now?

For You To Do 11

Evaluate the cash position from the following data and discuss what you would do as a result of

your investigations.

The Bally Elliott Twinkle Toes Club's treasurer presents the following end of year information to

the chairman of the club and just as the treasurer is about to reveal what these numbers mean, his

wife bursts through the door and drags him away to deal with an urgent family crisis.

As the chairman you have to work out what these figures mean so that you can explain their

meaning to the Club's committee in half an hour's time.

Prepare your workings and your speech!

The Bally Elliott Twinkle Toes Club for the year ended 31/12/03

Cash and bank at start 931.44 Payments 16,292.01

Cash and bank at end 855.82 Receipts 15,830.77

You might find it useful to calculate using the same table as in the above Worked Example.


The Remaining Issues

There are three issues that we can deal with relatively quickly and which will complete this

introduction to the accounts of non-profit making organisations.

Life membership fees

Joining up fees

Projecting the fees needed

Life Membership Fees

Many clubs and societies have life membership schemes where we can pay a relatively large

amount at the beginning and then never pay any more membership fees... ever. Take a look at a

few clubs and societies and see how many of them do that.

The accounting problem with life membership is to solve the problem - how long is life? Ah, the

eternal question!

In some cases, life membership could just be a year or two, for example, if someone pays their

membership fee and then, sadly, dies after a short time. On the other hand, the 18 year old who

becomes a life member of a wildlife society could be an active member for 60 or 70 years or even

more.


The solution to the problem is that the organisation has to set a policy on how long life will be.

That is, the club will agree that all life membership fees are to be spread over 10, 15 or 30 years

and then each year this calculation is done:

Jack Smith signs up for life membership from 1 January 2004 by paying £150. The club's life

membership term is 20 years so each year £7.50 (£150 ÷ 20 years) will be charged to the IEA for

Jack. Life membership works a bit like depreciation, doesn't it?

Watch out for tricky questions here because life membership fees will change. Old members die

and new members join so there will be changes to the life membership account to take care of. In

an exam, all of these issues will be set out for you.

For You To Do 12

From the information supplied, carry out the following tasks:

a. Based only on the information you see below calculate what you think should be the amount to be

shown in the end of year IEA for Life Membership fees for the Duncanstone Horticultural Society.

Membership profile Number Average age Duration of life membership (years)

Male 48 51 25

Female 100 42 35

Respondents saying they would become life members

male 25%

female 35%

Life membership fee = £95

b. Having seen the calculations in part a, the committee decided that life membership fees should

be spread over 10 years for all life members. Calculate the revised amount to be shown in the IEA

if all life members' fees are spread over 10 years.

c. The Society has undertaken more detailed research into the life membership issue and presents

you with the following additional information.

Number Duration of life membership (years)

Couple

s40 25

Singles 30

Breakdown of singles

Male 30% 25

Female 70% 35

Life membership fee

Couple 125

Single 95

As a result of this additional information, calculate the amounts to charge to the IEA providing

the life membership fees are spread over:

1. expected duration of life membership

2. 10 years

Extension: Now consider offering life membership to couples or singles. If they took out life

membership would members do so as a couple/family or as an individual?


Joining Up Fees

Lots of non-profit making organisations have joining up fees and they might be a bookkeeping

problem too. The solution to this problem is really the same as the life membership problem - the

organisation itself decides what to do with its joining up fees. Here are two suggestions:

Put them into the IEA when the member joins.

Spread them over two or three years so that if Jill Smith joins and pays the joining up fee

of £30 and we spread it over three years, then we will put £10 (£30 ÷ 3) for each of her first

three years of membership in the IEA under the heading of joining up fees.

Questions relating to joining up fees aren't difficult, so let's go straight to...

For You To Do 13

RocURBaby Music Club, which has a financial year ending on 31 December, charges a signing

on fee for all new members in addition to its annual fees.


a. For new members signing on in 2004 only and assuming that the club's policy is to

spread the signing on fee over three years, show the entries for the signing on fees in the

IEA for the club.

Note: Signing on fees are charged to the IEA in full for each year of membership and it

doesn't matter at what stage of their first year they join. So, even if they joined on 1 January

or 12 November or even 31 December, their first year signing on fee is charged in full for

that year.

b. For all new members signing on from 2004 to 2006 show the entries for each of

the three years for the signing on fees in the IEA for the Club.

Year Number of new members signing on Signing on fee (£)

2004 30 50

2005 33 55

2006 36 70


For You To Do 13: Solution

a. The entries we need to make are as follows:

RocURBaby Music Club IEA

For the year ended 31 December 2004

Signing on fees: charge for the

year=(£50 * 30) ÷ 3 500



year=(£50 * 30) ÷ 3 500



year=(£50 * 30) ÷ 3 500

b. This part of the solution is more complex so the detailed workings are shown separate from the

IEA entries.


RocURBaby Music Club IEA



year500



year1,105



year1,945

The workings for this part of the question are:

Signing on fees paid

2004 2005 2006

2004 1,500

2005 1,815

2006 2,520

Tota

l1,500 1,815 2,520

Signing on fees charged

2004 2005 2006

2004 500 500 500

2005 605 605

2006 840

Tota

l500 1,105 1,945

Projecting the Fees Needed

How does a non-profit making organisation know how much its fees should be? That is, how

does the Flora and Fauna Society know that it should have an annual fee of £15 or £500?

The World Wide Fund For Nature UK (WWF) has several layers of membership, for example:

Members at £2 per month

Companions at £5 per month

Benefactor at £10 per month, and

Any other amount that you would like to pay

The Great Yarmouth Gilbert & Sullivan Society has two levels of membership:

Singing Member - £15

Patron - £13

Patrons receive a complementary ticket to the May show, priority booking for further tickets and

regular updates from the Society, including information about concerts and social events.

How about the Norsey Wood Society of Billericay?

Standard - £3 per household

Senior Citizen - £1 per household

If you live outside Billericay, please add £1.00 towards the postage and packing of the newsletter

(sorry UK only!).

Membership entitles you to free entrance to Society meetings and talks and to four informative

newsletters per year.

Simplest solution of all - have just one level of membership and then:

Average cost per member = total costs ÷ total membership

The society can then either charge that amount or add something on to cover inflation, things they

hadn't thought about and unexpected costs such as the need for a new item of equipment.

Worked Example

A 200 Club needs to work out how much to charge per ticket. Imagine that your local church has

decided to have a 200 Club. The 200 Club aims to sign up 200 people a year who will pay exactly

the same amount as each other. Every month some names are drawn out of a hat and these people

are paid an agreed amount of money by way of a prize. At the end of the year the 200 Club aims

to donate its surplus to the church.

All we know so far is how many members the 200 Club wants. What we don't know includes:

The likely actual number of members (it can't be more than 200 but it could be fewer)

The value of the prizes

The amount to donate to the church at the end of the year.

Imagine that we have talked to the treasurer of the 200 Club and he/she has provided us with the

following additional information. St Birinus Church 200 Club needs to decide how much to charge for

membership on the basis of one of the following two suggestions:

Suggestion 1 Suggestion 2

Monthly prizes 1 £50 1 100.0

2 50 2 75.0

3 20 3 22.5

4 20

5 20

6 20

7 20

Likely number of members 175 190

Amount to donate to St Birinus at year

end £2,000 £2,000

Calculate the cost per 200 Club ticket for suggestion 1 only.


Total prize money per year (50+50+20+20+20+20+20)*12= £200 *12 = £2,400

Amount to donate to St Birinus at year £2,000

end

Total amount of money to raise per year £4,400

Average annual fee per member £4,400 ÷ 175 = £25.14

For You To Do 14

Work out the annual fee for suggestion 2.


For You To Do 14: Solution

Total prize money per year (100+75+22.5)*12= £197.5 *12 = £2,370

Amount to donate to St Birinus at year

end£2,000

Total amount of money to raise per year £4,370

Average annual fee per member £4,370 ÷ 190 = £23

Whilst the St Birinus example is simple in lots of ways, it does show the nature of the fee fixing

problem. The main problem for students, though, is that the St Birinus example is really only a

single product type of problem. In reality, as we saw with the WWF and the Gt Yarmouth Gilbert

and Sullivan Society, many organisations have several levels of membership or several kinds of

activity - multi product or multi activity organisations.

In reality, this is a budgeting question and in an examination you would be given all of the

information you would need to complete the answer to the question.

Other Resources

Interactive Worksheet on the Accounts of Clubs and Societies, Ken Delaney-Moore,

Sheffield Hallam University

http://www.bized.co.uk/learn/accounting/infosystems/bait/work09.htm


non profit accounting

Documents

nonprofit organizations

business organization

notforprofit organizations

definition of fund assets

nonprofit hospital

private watchdog organizations

fund balances

civil society organizations