Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.

About the Class
We bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.

Chapter 5 Lesson D - Accounting for Non-Profit Entities
In this lesson we will get to know about non-profit organisations and their accounting procedures.

What are non-profit organisations?
Organisations that exist for the purpose of providing service like schools, hospitals and other clubs and societies are known as non- profit organisations. A hospital provides medical facilities to the society while schools impart teaching. The main objective being service and not profit, these institutions do not prepare profit and loss accounts. At the same time, they would like to know what their income and expenditure is. This will give them an idea of whether their current income is sufficient to pay off the current expenses.

Receipt and Payment account
Organisations, especially small ones do not maintain proper accounts and only maintain a cashbook. They prepare a summary from the cashbook. This summary is called a 'Receipts and Payments' account.

• A receipts and payments account is a real account.
• The account opens with the opening balance of cash or the bank balance.
• All receipts of capital and revenue nature will be entered in this account, irrespective of the year for which it is received.
• Similarly, all payments whether capital or revenue in nature will also be entered, irrespective of the year for which it is incurred.
• The closing cash balance will be entered on the credit side of the account.
• This account is merely a statement of accounts and it does not show whether the income is in excess of expenditure or vice-versa. It only depicts the cash balance on hand.

Income and Expenditure account.

An income and expenditure account is prepared to find out whether the income is in excess of expenditure or vice-versa. This account is a nominal one and is prepared in the same lines as a profit and loss account.

• This account does not show any items that are of a capital nature. If there is any sale of property the income cannot be credited to the account, but it should be deducted from the book value of the asset. In other words only revenue items are accounted for here.
• This account shows details only for the relevant period. No transactions relating to the previous period or the next period can be shown. This applies to both revenue and expenditure items.
• Any transactions for which adjustments were not made in the previous year can be shown in the current year but has to be shown separately.
• Any income that has been earned but has not been actually received will also be shown as an income.
• Similarly an expense for which the payment has not been made in that year will also be included in the account; immaterial of whether it has been actually paid.

Preparation of Income and Expenditure accounts.
An income and expenditure account will be prepared based on the receipts and payments account, where there exists no trial balance.

• The amounts of income can be taken from the receipt side of the Receipts and Payments account. To these amounts adjustments have to be made for income received in advance and for incomes that are outstanding at the end of the current year and at the end of the previous year. The net figure will appear on the credit side of the income and expenditure account.
• Similarly, from the expenses side due adjustments will be made for expenses outstanding at the end of the previous year and the expenses outstanding in the current year. Proper adjustments will also be made for the pre-paid expenses at the beginning and end of the previous and current year. The adjusted figure will appear in the income and expenditure account.
• All relevant adjustments for bad debts and depreciation have to be made.
• Where the right hand side is more than the left-hand side the current income will be more than the current expenses and vice-versa.
• Any surplus of income over expenditure is written on the left-hand side of the account and is added to the Capital Fund.
• Any deficit will be written on the right hand side of the account and will be deducted from the Capital fund.

Distinction between Income and Expenditure account and Profit and Loss account.

• The income and expenditure account depicts the excess of income over expenditure and vice-versa, whereas a profit and loss account shows the profit or loss for a particular period.
• An income and expenditure account is prepared by non-profit organisations while a profit and loss account is prepared by trading and other business concerns.
• A profit and loss account is prepared based on the trial balance while an income and expenditure account is prepared based on the receipts and payments account.
• The balance of an income or expenditure account is deficit or surplus while that in a profit or loss account is the net profit or net loss.

Transactions relating to Income and Expenditure account

• Membership: Life membership fees received by clubs cannot be treated as current year income and should be added to the Capital Fund and not credited to the income and expenditure account.
• Entrance Fees: Where the entrance fees are of a small amount they should be shown in the income and expenditure account, but where they contain a capitalised portion they should be shown in the capital fund account and not credited to the income and expenditure account.
• Receipts: Where special receipts are received these should be credited to the respective asset accounts . For example donations for buildings should be credited to the Buildings account.
• Donations: Small donations should be shown in the income and expenditure account while big donations should be added to capital fund.
• Sale of assets: Loss on sale is shown, as an expense while profit on sale will be considered as a capital profit.
• Income from sale of newspapers: This will be shown as a receipt in the receipt and Payments account.

Balance Sheet

• Assets in the previous year's Balance Sheet should be adjusted for any sale, purchase or depreciation and the adjusted figure will be shown.
• New assets purchased should be shown in the asset side of the balance sheet and any loans should be shown on the liability side.
• All adjustments for outstanding and prepaid expenses as also for outstanding and prepaid incomes will appear on the balance sheet.
• All special receipts that are not entered in the income and expenditure account will appear in the balance sheet.
• The Capital Fund in the previous year's balance sheet should be adjusted with the surplus or deficit and the net amount will be shown in the Balance sheet.

As non-profit organizations are not run with a commercial motive it is important that the accounts of these organisations be maintained in a proper manner as explained above.

Questions on Chapter 5 Lesson C
1.What are the two methods of depreciation?
2.Why is it important to provide for depreciation?