Peculiar Items in NPO Accounts

Some Peculiar Items

Not-For-Profit Organisations (NPOs) deal with certain financial items that are not typically found or treated in the same way in commercial business accounting. These items reflect the unique nature of NPOs' funding sources and activities. Understanding the accounting treatment of these "peculiar items" is crucial for preparing the Receipt and Payment Account, Income and Expenditure Account, and Balance Sheet of an NPO.

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Subscriptions

Subscriptions are the most common source of recurring income for many NPOs, particularly clubs and associations. These are amounts paid periodically (e.g., monthly, quarterly, annually) by members to maintain their membership.

Accounting Treatment:

• Receipt and Payment Account: The total amount of subscription received in cash or bank during the accounting period is shown on the Debit (Receipts) side, regardless of the period it pertains to (current, previous, or next).
• Income and Expenditure Account: Only the amount of subscription related to the current accounting period is shown as income on the Credit (Income) side, following the Accrual Basis. Adjustments are made for outstanding subscriptions (at the start and end) and subscriptions received in advance (at the start and end).
• Balance Sheet:
  • Outstanding Subscriptions (due from members) at the end of the period are shown as an Asset (Current Asset).
  • Subscriptions Received in Advance (from members) at the end of the period are shown as a Liability (Current Liability).

Calculation of Subscription for Income and Expenditure Account:

Subscription Received (as per R&P A/c)

Add: Outstanding Subscription at the end of Current Year

Add: Subscription Received in Advance at the beginning of Current Year

Less: Outstanding Subscription at the beginning of Current Year

Less: Subscription Received in Advance at the end of Current Year

= Subscription for Current Year (to be shown in I&E A/c)

Answer:

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Donations

Donations are gifts received by the NPO from individuals or organisations. They can be general or specific.

Accounting Treatment:

• Receipt and Payment Account: The total amount of donation received in cash or bank is shown on the Debit (Receipts) side.
• Income and Expenditure Account:
  • General Donations: If the amount is small or the donation is for general purposes, it is treated as a revenue income and shown on the Credit (Income) side.
  • Specific Donations: If the donation is for a specific purpose (e.g., Building Fund, Tournament Fund) or the amount is large, it is treated as a capital receipt and NOT shown in the Income and Expenditure Account.
• Balance Sheet:
  • Specific Donations are shown as a separate Liability (as they are restricted funds) on the Liabilities side.
  • If a general donation is large and specifically decided by the management to be capitalised, it is added to the Capital Fund or General Reserve.

Answer:

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Legacies

Legacies are amounts received by the NPO as per the will of a deceased person.

Accounting Treatment:

• Receipt and Payment Account: The amount received in cash or bank is shown on the Debit (Receipts) side.
• Income and Expenditure Account: Generally treated as a capital receipt as it is non-recurring in nature, and hence NOT shown here.
• Balance Sheet: Added directly to the Capital Fund (or General Fund) on the Liabilities side.

(Note: Sometimes, if the amount of Legacy is very small or the will specifies it is for a revenue purpose, it might be treated as revenue income and shown in the Income and Expenditure Account. However, the general rule is to treat Legacies as capital receipts.)

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Life Membership Fees

Life Membership Fees are fees paid by a member once in a lifetime to become a permanent member of the NPO.

Accounting Treatment:

• Receipt and Payment Account: The amount received in cash or bank is shown on the Debit (Receipts) side.
• Income and Expenditure Account: Generally treated as a capital receipt as it is non-recurring and provides benefit over the member's lifetime, and hence NOT shown here.
• Balance Sheet: Added directly to the Capital Fund (or General Fund) on the Liabilities side.

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Entrance Fees (or Admission Fees)

Entrance Fees are amounts paid by a person to become a member of the NPO at the time of joining.

Accounting Treatment:

The treatment of Entrance Fees depends on the NPO's policy or the amount involved.

• Receipt and Payment Account: The amount received in cash or bank is shown on the Debit (Receipts) side.
• Income and Expenditure Account:
  • If the amount is small or the NPO treats it as recurring income, it is shown on the Credit (Income) side as Revenue Income.
  • If the amount is large or the NPO treats it as non-recurring or capital, it is NOT shown here.
• Balance Sheet:
  • If treated as capital, it is added directly to the Capital Fund (or General Fund) on the Liabilities side.
  • Sometimes, a portion might be treated as revenue and the balance as capital (e.g., 50% revenue, 50% capital).

(Note: If there is no specific instruction, Entrance Fees are generally treated as revenue income, especially if the amount is small).

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Sale Of Old Asset

This refers to the sale of fixed assets owned by the NPO (e.g., old furniture, sports equipment - if capitalised).

Accounting Treatment:

• Receipt and Payment Account: The actual cash received from the sale is shown on the Debit (Receipts) side. This is a Capital Receipt.
• Income and Expenditure Account: The Profit or Loss on the sale of the asset is shown here.
  • Profit on Sale (Sale Proceeds > Book Value) is shown on the Credit (Income) side.
  • Loss on Sale (Sale Proceeds < Book Value) is shown on the Debit (Expenditure) side.
  (Note: Only the profit or loss is a revenue item, not the entire sale proceeds).
• Balance Sheet: The specific asset account on the Assets side is reduced by the book value (Original Cost - Accumulated Depreciation) of the asset sold. The cash received increases the cash balance (an asset). The Profit/Loss affects the Capital Fund via the Income and Expenditure Account.

Book Value of Asset Sold = Original Cost - Accumulated Depreciation up to date of sale

Profit/Loss on Sale = Sale Proceeds - Book Value

Answer:

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Sale Of Periodicals

Sale of Periodicals refers to the income earned from selling old newspapers, magazines, or other periodicals by the NPO (e.g., a library or club selling scrap paper).

Accounting Treatment:

• Receipt and Payment Account: The cash received is shown on the Debit (Receipts) side.
• Income and Expenditure Account: Treated as a revenue income and shown on the Credit (Income) side.
• Balance Sheet: Does not directly affect the Balance Sheet unless the amount is outstanding (accrued income) or received in advance.

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Sale Of Sports Materials

This refers to the income earned from selling used or old sports equipment or consumables (like old balls, nets, bats) by a sports club or similar NPO.

Accounting Treatment:

• Receipt and Payment Account: The cash received is shown on the Debit (Receipts) side.
• Income and Expenditure Account: Treated as a revenue income and shown on the Credit (Income) side. Note: Consumables like balls, nets, etc., are treated as expenses when consumed (Opening Stock + Purchases - Closing Stock), similar to stationery. Selling old, used consumables is a minor revenue income. Selling a major sports asset (like a cricket roller) would be treated as Sale of Old Asset.
• Balance Sheet: Does not directly affect the Balance Sheet, unless it relates to stock of sports consumables which needs adjustment.

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Payments Of Honorarium

Honorarium is a payment made to a person for rendering services who is not an employee of the organisation. For example, payment to a guest speaker, a visiting expert, or a professional for occasional services.

Accounting Treatment:

• Receipt and Payment Account: The cash paid is shown on the Credit (Payments) side.
• Income and Expenditure Account: Treated as a revenue expense and shown on the Debit (Expenditure) side.
• Balance Sheet: Does not directly affect the Balance Sheet unless it is outstanding (outstanding expense).

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Endowment Fund

An Endowment Fund is a fund created from a donation or legacy, the condition of which is that only the income earned from the investment of this fund can be used by the NPO for its general or a specific purpose. The principal amount of the fund is kept intact and invested.

Accounting Treatment:

• Receipt and Payment Account: The initial amount received for the Endowment Fund is shown on the Debit (Receipts) side. This is a Capital Receipt. Income received from the investment of this fund is also shown on the Debit side.
• Income and Expenditure Account: Income earned from the investment of the Endowment Fund is generally treated as revenue income (unless specified otherwise) and shown on the Credit (Income) side. The fund principal is NOT shown here.
• Balance Sheet: The Endowment Fund itself is shown as a separate Liability on the Liabilities side. The investments made out of this fund are shown as Assets on the Assets side.

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Government Grant

Government Grants are financial assistance received from the government or other statutory bodies.

Accounting Treatment:

The treatment depends on the nature and purpose of the grant.

• Receipt and Payment Account: The cash received is shown on the Debit (Receipts) side.
• Income and Expenditure Account:
  • General Grants (for revenue purposes): If the grant is for meeting routine expenses or is small, it is treated as a revenue income and shown on the Credit (Income) side.
  • Specific Grants (for capital purposes): If the grant is for a specific purpose (e.g., purchase of asset, construction of building) or is large, it is treated as a capital receipt and NOT shown here.
• Balance Sheet:
  • Specific Grants are shown as a separate Liability on the Liabilities side.
  • Sometimes, a specific grant for an asset might be deducted from the cost of that asset on the Assets side.

Accounting standards (like AS 12 in India for Accounting for Government Grants) provide detailed guidance on the treatment of government grants.

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Special Funds

Special Funds are funds created for specific purposes (e.g., Tournament Fund, Prize Fund, Building Fund, Sports Fund). These funds are created from specific donations, grants, or appropriations from surplus, and any income earned from the investment of these funds must be used only for the specified purpose.

Accounting Treatment:

• Receipt and Payment Account: Receipts related to the fund (donations, income from investment) are shown on the Debit (Receipts) side. Payments related to the fund are shown on the Credit (Payments) side.
• Income and Expenditure Account: Generally, items related to Special Funds (donations, income, expenses) are NOT shown in the Income and Expenditure Account, as they are tied to a specific purpose fund. (Exception: If a revenue item related to the fund exceeds the fund balance and its income, the excess expense/loss may be shown in I&E A/c).
• Balance Sheet: The Special Fund is shown as a separate Liability on the Liabilities side. The balance of the fund is calculated as:

  Special Fund Balance = Opening Fund Balance + Receipts for Fund + Income from Fund Investments - Expenses of Fund - Payments for Fund Assets (if any)

  Investments made out of the fund are shown as Assets on the Assets side.

Answer:

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Stationery

Stationery (paper, pens, etc.) are consumables used by the NPO in its operations.

Accounting Treatment:

• Receipt and Payment Account: The cash paid for purchasing stationery during the period is shown on the Credit (Payments) side.
• Income and Expenditure Account: Only the value of stationery consumed during the current period is shown as an expense on the Debit (Expenditure) side, following the Accrual Basis.

  Stationery Consumed = Opening Stock of Stationery + Purchases of Stationery (Cash + Credit) - Closing Stock of Stationery

  (Note: Purchases from R&P are cash purchases. If credit purchases exist, they would be in the Journal Proper/Trial Balance). Assuming purchases from R&P are total purchases for simplicity in many problems derived from R&P.
• Balance Sheet:
  • Opening Stock of Stationery is shown as an Asset in the Opening Balance Sheet.
  • Closing Stock of Stationery is shown as an Asset (Current Asset) in the Closing Balance Sheet.
  • Any Outstanding Stationery Expenses (payable to supplier) at the end are a Current Liability.
  • Any Prepaid Stationery (e.g., annual subscription for magazines not yet received) at the end is a Current Asset.

Answer:

These peculiar items, and their correct treatment, are key to accurately preparing the financial statements for NPOs, ensuring compliance and transparency.