NPO
Accounts of 'Not For Profit' Concerns
Objective Type Questions.
Answer in one sentence only.
What do you mean by ‘Not for Profit’ concerns?
Answer: Organisations that are formed not to earn profit but to render services to their members and to the public are known as not-for profit organisations. For example, aided schools, clubs, societies etc.
What is Capital Fund?
Answer: In case of not-for profit organisations, excess of assets over liabilities is called capital fund. It is similar to the capital account in case of profit-making entities. Any surplus/ deficit shown by the Income and Expenditure Account will be added/ deducted from the opening capital and the net capital fund will be shown on the Liabilities side.
Which receipts are called capital receipts?
Answer: Those receipts, the benefits of which accrue to an organisation in the current year, as well in the years to come, are referred to as capital receipts. They are non-recurring in nature. For example, life membership fees, endowment receipts, donations and legacies etc.
What is deferred revenue expenditure?
Answer: Those expenses, the benefits of which accrue to an organisation for more than one accounting year are known as deferred revenue expenditure. For example, in the case of advertisement expenses, the benefits of advertisement accrue to an organisation for more than one year. Hence, such expenses are spread over the years in which the benefits accrue to the organisation. The current year expenses are debited to Income and Expenditure Account and the balance is shown under Assets side of the Balance Sheet.
What do you mean by recurring expenses?
Answer: Expenses which are of a routine nature are known as recurring expenses. These expenses are incurred in the normal course of business activities (operations) and are debited to Income and Expenditure Account. For example, salaries, rent, printing and stationery etc.
What is legacy?
Answer: Legacy is the money received by a not-for profit organisation (NPO) as per the will of a deceased person. It is not the main source of income for an NPO. It is treated as a capital receipt.
What does ‘surplus’ mean?
Answer: Income and Expenditure Account is prepared as a part of final accounts of not-for- profit organisations. It is prepared to ascertain the results of operating activities of the business. All the incomes and expenses are recorded in the Income and Expenditure Account. If the income side exceeds the expenditure side, then it is recorded as surplus, whereas if the expenditure side exceeds the income side, it is recorded as deficit.
What do you mean by subscription?
Subscription is the main source of income of a not-for profit organisation. It is shown on the credit side (i.e. the income side) of the Income and Expenditure Account. It is in the form of membership fees received from the members of an organisation every year.
What is an Entrance Fee?
Fee charged from the new members, apart from the annual subscriptions, is termed as entrance fee. It represents the amount to be paid by the person, who intends to become a member of the society, club etc. It can be treated either as a capital receipt or a revenue receipt. Also, it is possible that some portion of it may be capitalised while the rest may be treated as revenue.
Which receipts are called ‘Revenue Receipts?
Revenue receipts are those receipts that are received in the conduct of ordinary and day-to-day business activities. For instance, receipts from the sale of goods and services are the main source of revenue receipts. These receipts or incomes are received frequently in the normal course of business operations. Revenue receipts are shown on the credit side of the Income and Expenditure Account.
What is ‘Deficit’?
If the expenditure side of the Income and Expenditure Account exceeds its income side, then it is regarded as a deficit.
What do you mean by non-recurring expenses?
Expenses that are not incurred frequently during the normal course of a business are known as non-recurring expenses. These are one-time expenses incurred due to some event or abnormal circumstances.
Write one Word / Term / Phrase for each of the following statements.
An Account, which is prepared by ‘Not for Profit’ concern, instead of Profit and Loss Account.
Answer: Income and Expenditure Account
Explanation: It is an account prepared by a not-for profit organisation to know the surplus/deficit earned by the organization during the accounting period. It is similar to a Profit and Loss Account prepared by the sole-proprietorship concerns. It is nominal in nature; therefore, expenses are debited and incomes are credited in this account.
The excess of total assets over total liabilities of a ‘Not for Profit’ Concern.
Capital Fund
Explanation: In case of non- profit organisations, excess of assets over liabilities is termed as capital fund. It is similar to the capital account in case of profit-making entities. Any surplus/ deficit shown by the Income and Expenditure Account will be added/ deducted from the opening capital and the net capital fund will be shown on the Liabilities side.
The income which is earned during the year, but it has not been received during the year.
Accrued Income/Outstanding Income
Explanation: Certain incomes are earned during the current year but are not actually received by the end of the current year. Such incomes are known as ‘accrued incomes’ or outstanding income, i.e. income which is earned but yet to be received. For example, subscription outstanding at the end of the current year is accrued income. It is added to the amount of subscriptions on the credit side of Income and Expenditure Account and is also shown on the Assets side of the Closing Balance Sheet.
Such concerns, which are formed for rendering some useful services to its members without having profit motive.
‘Not for Profit’ concern
Explanation: Certain organisations are formed not to earn profits but to render services to their members or to the society at large. For example, aided schools, clubs, hospitals, societies etc. The primary motive of such organisations is to provide a service. In such organisations, Income and Expenditure Account and Balance Sheet are prepared at year end to know the surplus/deficit and the financial position.
Excess of income over expenditure.
Surplus
Explanation: Income and Expenditure Account is prepared to ascertain the results of activities of a not-for-profit organisation. When the income side exceeds the expenditure side, we have a surplus. However, in case of profit-seeking entities, it is termed as profit (ascertained from Profit and Loss Account).
Excess of expenditure over income.
Deficit
Explanation: When the expenditure side of the Income and Expenditure Account exceeds its income side, we have a deficit. In case of profit seeking entities, it is termed as loss (ascertained from Profit and Loss Account).
A fund created out of a specific amount earmarked, gifted, or donated and the income of this fund is to be used for a specific purpose.
Endowment Fund
Explanation: Endowment fund is basically the fund generated via gifts and bequests. The income from such funds is usually allocated for some specific purpose. It is a capital receipt because it provides a permanent income to the organisation and is shown on the Liabilities side as a separate item.
The fees paid by a person, who wants to become a member of the concern, for his whole life.
Life Membership Fees
Explanation: In order to become a member of an organisation for life, some members pay fees in lump sum (i.e. a single large payment). Such fees are known as life membership fees. It is non-recurring in nature, i.e. a capital income. Therefore, it is not credited to Income and Expenditure Account; rather, it is added to the capital fund appearing on the Liabilities side of the Balance Sheet.
All such receipts which are non-recurring in nature and not forming a part of regular flow of income of a concern.
Capital Receipts
Explanation: Those receipts, the benefits of which accrue to an organisation in the current year, as well as in the years to come, are termed as capital receipts. They are non-recurring in nature. For example, life membership fees, endowment receipts, donations and legacies etc.
A statement showing the financial position of a concern on a particular date.
Balance Sheet
Explanation: A statement prepared to ascertain the financial position of a business at the end of the accounting year is regarded as a Balance Sheet. It contains only capital items, i.e. assets, liabilities and capital fund. It is prepared after the transfer of all revenue income and expenses to the Income and Expenditure Account.
Select the most appropriate answers from the alternatives given below and rewrite the sentences.
Income and Expenditure Account is a ______________.
a) capital account b) real account c) personal account d) nominal account
Income and Expenditure Account is a nominal account.
Explanation: In this account, only revenue items are recorded, while capital items are ignored. It is prepared to ascertain the results of operating activities of the business over a period of time. All revenue items, i.e. both income and expenses, are recorded in it. Thus, it is treated as a nominal account.
For a sports club, expenditure on the purchase of sports Machinery/Equipment is a ______________ expenditure.
a) revenue b) recurring c) general d) capital
For a sports club, expenditure on the purchase of sports machinery/equipment is a capital expenditure.
Explanation: Expenditure incurred on the purchase of fixed assets is regarded as capital expenditure. So, the purchase of sports machinery/equipment is a capital expenditure. Such expenses are recorded on the Assets side of the Balance Sheet. However, the depreciation charged on the equipment and machinery (or any other fixed asset) is a type of revenue expenditure and is, therefore, charged to the Income and Expenditure Account.
‘Outstanding subscription’ at the end of Accounting year represents _____________.
a) a liability b) an expenditure c) an asset d) a capital fund
‘Outstanding subscription’ at the end of Accounting year represents an asset.
Explanation: Subscriptions are the main source of income for an NPO. Outstanding subscription represents amount receivable on account of subscriptions. Such outstanding income at year-end is an asset and, therefore, shown on the Assets side of the Closing Balance Sheet (being closing balance of subscription).
Excess of income over Expenditure is termed as _________________.
a) deficit
b) profit
c) surplus
d) loss
ANSWER:
Excess of income over expenditure is termed as surplus.
Explanation: When income side of the Income and Expenditure Account exceeds its expenditure side, then we have surplus.
‘Not for Profit’ Concerns prepare _________________ Account instead of Profit and loss Account.
a) Trading
b) Income and Expenditure
c) Cash
d) Receipts and Payments
ANSWER:
‘Not for Profit’ Concerns prepare Income and Expenditure Account instead of Profit and loss.
Explanation: Not-for Profit concerns prepare Income and Expenditure Account to ascertain the surplus/deficit resulting from the activities of an organisation. Like Profit and Loss Account, Income and Expenditure Account is prepared as a part of final accounts. All revenue expenses and all revenue incomes are recorded in this account.
Purchase of stationery is an _______________ expenditure.
a) capital
b) revenue
c) long-term
d) deferred revenue
ANSWER:
Purchase of stationery is a revenue expenditure.
Explanation: Stationery is treated as consumable good, as it is used up during the year. The amount of stationery consumed during the year should be debited to Income and Expenditure Account. It is a type of revenue expenditure.
The amount consumed is calculated as,
Opening stock
Add: Purchases made during the year
Less: Closing stock
Usually _______________ is a major source of revenue income for ‘Not for Profit’ concerns.
a) subscription
b) donations
c) legacies
d) life membership
ANSWER:
Usually subscription is a major source of revenue income for ‘Not for Profit’ concerns.
Explanation: It is the main source of income for a not-for-profit organisation. It is recorded on the credit side, i.e. the income side of the Income and Expenditure Account.
Why Life Membership Fees is not the correct option?
On the other hand, life membership fees are the amount paid by a person in lump sum to become the member of the organisation for life. It is non-recurring in nature and, hence, added to the capital fund.
Why Legacy is not the correct option?
Legacy is the amount received by the not-for-profit organisation as per the will of a deceased person. It is non-recurring in nature and, therefore, treated as capital receipt. Hence, legacy cannot be treated as the main source of income for an NPO.
Why Donation is not the correct option?
Donations can be categorised into general donations and specific donations. Specific donations are received for particular purposes; hence they are to be capitalised. On the contrary, general donations, usually of big amount, are not expected to be received every year. Hence, cannot be treated as main source of income.
An Income and Expenditure Account and a Balance sheet is prepared as final accounts by a ______________ .
a) ‘Not for Profit’ Concern
b) Trading Concern
c) Commercial Organisation
d) Public Limited Company
ANSWER:
An Income and Expenditure Account and a Balance sheet is prepared as final accounts by a Not for Profit Concern.
Explanation: Certain organisations are formed not to earn profits but to render services to their members or to society at large. For example, schools, clubs, hospitals etc. The primary motive of such organisations is to provide service. At the end of the accounting year, non-profit organisations (NPO) prepare Income and Expenditure Account and Balance Sheet to ascertain the financial performance (i.e. surplus or deficit) and the financial position.
In case of profit seeking entities, i.e. commercial organisations, public limited companies or trading concerns, Profit and Loss Account is prepared to ascertain the profit earned or loss incurred during the year and Balance Sheet is prepared to know the financial position of the business.
Non-Cash items are not recorded in_____________ .
a) Income and Expenditure
b) Receipt and Payments Accounts
c) Balance Sheet
d) Profit and Loss Account
ANSWER:
Non-Cash items are not recorded in Receipts and Payments Account.
Explanation: Receipts and Payments Account is a summary of cash and bank transactions over a certain period. It is prepared by societies, clubs, associations etc. It is prepared on cash basis. So, any transaction that is not recorded in the Cash Book will not be entered in the Receipts and Payments Account also.
On the other hand, Income and Expenditure Account, Balance Sheet and Profit and Loss Account record non- cash items such as depreciation. These items are not recorded in the Receipts and Payments Account.
In case of non trading concern the excess of assets over liabilities is termed as _____________.
a) surplus
b) deficit
c) capital fund
d) loan
ANSWER:
In case of non trading concern the excess of assets over liabilities is termed as capital fund.
Explanation: Excess of assets over liabilities, in case of a not-for-profit organisation, is called capital fund. It is same as capital, which is calculated in case of profit-seeking entities. Opening capital fund is calculated by deducting opening liabilities from opening assets. It is shown on the Liabilities side of the Balance Sheet.
State whether the following statements are True or False.
‘Not for Profit’ concerns do not have profit motive.
ANSWER:
True
Explanation: Certain organisations are formed not to earn profits but to render services to members or to society at large. For example, aided schools, clubs, hospitals etc. The primary motive of all these organisations is to provide service.
‘Not for Profit’ concerns concentrate their efforts on maximizing their profit.
ANSWER:
False
Explanation: Unlike profit-making organisations, NPOs do not have profit-making as their primary motive. In fact, they are formed to render services to their members or to society at large. For example, aided schools, clubs, hospitals etc. The primary motive of all these organisations is to provide service to others.
Every year, ‘Bal Vikas Mandir’, a primary school, prepares Income and expenditure Account.
ANSWER:
True
Explanation: It is an account prepared by NPOs to know the surplus earned /deficit incurred during the accounting period. It is similar to the Profit and Loss Account prepared by the profit-making organisations. It is a nominal account, where all the revenue expenses are debited and revenue incomes are credited. As Bal Vikas Mandir is a school (i.e. an NPO), it prepares Income and Expenditure Account.
Charitable Institutions prepare Profit and Loss Account, at the end of every financial year.
ANSWER:
False
Explanation: Charitable institutions are not-for-profit organisations. So, these organisations prepare Income and Expenditure Account, rather than Profit and Loss Account, which is prepared by profit-making organisations.
There is no difference between Receipts and Payment Account and Income and Expenditure Account.
ANSWER:
False
Explanation: Similar to a Profit & Loss Account, Income and Expenditure Account is prepared to ascertain the surplus/deficit of a concern during the accounting year, whereas Receipts and Payments Account is a summary of the cash book. Income and Expenditure Account is a nominal account that records all revenue expenses and all revenue incomes, while Receipts and Payment Account is a real account that records receipts and payments of capital and revenue nature.
All receipts are the items of revenue income.
ANSWER:
False
Explanation: Receipts can be of capital or revenue nature. Both types of receipts are recorded on the receipt side, i.e. the debit side of the Receipts and Payments Account. However, while revenue receipts are recorded in Income and Expenditure Account, all capital receipts are shown in the Balance Sheet. For example, life membership fees, endowment fund, specific donations and legacies are capital receipts, whereas general donations and miscellaneous receipts are revenue receipts.
Income and expenditure account, prepared by ‘Not for Profit’ concerns, must be accompanied by balance sheet.
ANSWER:
True
Explanation: Income and Expenditure Account is prepared to ascertain the surplus earned/deficit incurred during the accounting year. On the other hand, Balance Sheet is prepared to depict the true financial position of business. Both Income and Expenditure Account and Balance Sheet form a part of the final accounts.
In the Income and Expenditure Account, all incomes received during the year irrespective of the year for which they are received, are to be recorded.
ANSWER:
False
Explanation: Only income related to the current year is recorded in the Income and Expenditure Account, irrespective of whether the income is received in cash or not. In other words, income earned during a year is accounted within that year itself. So, income received in advance will be shown on the Liabilities side of the Balance Sheet and is also deducted from the total amount received during the year. On the other hand, income earned but not received (i.e. outstanding income) is shown on the Asset side of the Balance Sheet and is also shown on the credit side of Income and Expenditure Account.
The final balancing amount of Income and Expenditure Account represents either surplus or Deficit.
ANSWER:
True
Explanation: Income and Expenditure Account is prepared to ascertain the financial performance of an NPO. If the income side exceeds the expenditure side, the balancing figure is surplus and if the expenditure side exceeds the income side, the balancing amount is regarded as deficit.
Receipts and Payments Account do not have any opening balance.
ANSWER:
False
Explanation: Receipts and Payments Account is a summary of transactions appearing in the Cash Book. It is prepared by not-for-profit organisations at the end of an accounting year. It is a real account, wherein receipts are recorded on the debit side and payments on the credit side. It usually has an opening balance i.e. cash balance and bank balance.
