Class 12 Accountancy Notes Chapter 1 (Accounting for Not-for-Profit Organisation) – Accountancy-I Book

Detailed Notes with MCQs of Chapter 1: Accounting for Not-for-Profit Organisations (NPOs). This is a crucial chapter, not just for your board exams but also frequently tested in various government recruitment exams where accountancy knowledge is required. Pay close attention to the concepts and treatments of specific items.

Chapter 1: Accounting for Not-for-Profit Organisation - Detailed Notes

1. Meaning and Characteristics of NPOs:

• Meaning: NPOs are organisations established primarily for rendering services to their members or society at large, rather than for earning profits. Their main objective is social welfare, promotion of art, culture, education, health, sports, etc.
• Examples: Schools, colleges, hospitals, clubs, charitable trusts, trade unions, religious organisations, societies for promoting arts, science, culture etc.
• Key Characteristics:
  • Primary Motive: Service, not profit.
  • Entity: Separate legal entity distinct from its members (often registered under Societies Registration Act, 1860 or as Charitable Trusts or Section 8 Companies under Companies Act, 2013).
  • Form: Set up as charitable societies, trusts, or clubs.
  • Funding: Major sources include subscriptions from members, donations, grants-in-aid, legacies, income from investments, etc.
  • Management: Usually managed by an elected managing/executive committee.
  • Accounts: They prepare financial statements at the end of each accounting period to ascertain their financial position and performance, primarily for statutory compliance and accountability to members and contributors.
  • Surplus/Deficit: The excess of income over expenditure is called 'Surplus', and the excess of expenditure over income is called 'Deficit'. This surplus/deficit is generally added to/deducted from the Capital Fund (also known as General Fund or Accumulated Fund).

2. Distinction between NPO and Profit-Earning Organisation:

3. Financial Statements of NPOs:

NPOs generally prepare the following financial statements at the end of the accounting period:

• a) Receipts and Payments Account (R&P A/c):

  • Nature: It is a summary of the Cash Book (Cash and Bank transactions) for the accounting period. It is a Real Account.
  • Basis: Prepared on a Cash Basis. It records all cash receipts (debit side) and cash payments (credit side), irrespective of whether they relate to the current, previous, or subsequent accounting periods.
  • Capital vs Revenue: Records both capital and revenue nature receipts and payments.
  • Period: Includes transactions related to past, current, and future periods, as long as cash is received or paid during the current period.
  • Opening & Closing Balances: Starts with the opening balance of cash and bank and ends with the closing balance of cash and bank (or overdraft).
  • Non-Cash Items: Does not include non-cash items like depreciation, outstanding expenses, accrued income, etc.
  • Purpose: Shows the net effect of cash transactions during the period and the closing cash/bank balance. It does not show the surplus or deficit.

• b) Income and Expenditure Account (I&E A/c):

  • Nature: It is similar to the Profit & Loss Account of a profit-earning entity. It is a Nominal Account.
  • Basis: Prepared on an Accrual Basis. It records only revenue incomes and revenue expenditures pertaining to the current accounting period.
  • Capital vs Revenue: Records only items of revenue nature. Capital receipts and capital expenditures are excluded.
  • Period: Includes only incomes earned and expenses incurred during the current accounting period, whether cash has been received/paid or not. Adjustments for outstanding/prepaid expenses and accrued/unearned income are made.
  • Opening & Closing Balances: Does not have opening or closing balances of cash/bank.
  • Non-Cash Items: Includes non-cash items like depreciation, provision for doubtful debts, profit/loss on sale of fixed assets.
  • Purpose: To ascertain the Surplus (excess of income over expenditure) or Deficit (excess of expenditure over income) for the current accounting period.

• c) Balance Sheet (B/S):

  • Nature: A statement showing the financial position (Assets, Liabilities, and Capital Fund) of the NPO on a specific date (usually the last day of the accounting period).
  • Basis: Reflects assets and liabilities as per the accrual concept, incorporating adjustments.
  • Capital Fund: Instead of 'Capital', NPOs have a 'Capital Fund' or 'General Fund'. It represents the accumulated surplus of the organisation.
    • Calculation: Opening Capital Fund + Surplus (from I&E A/c) + Capitalised items (like Life Membership Fees, Legacies specifically capitalised) - Deficit (from I&E A/c) = Closing Capital Fund.
  • Opening Balance Sheet: Often prepared to find out the Opening Capital Fund if it's not given. It lists assets and liabilities at the beginning of the accounting period.
  • Purpose: To show the overall financial health and position of the NPO.

4. Important Items and Their Treatment:

• a) Subscriptions:

  • Main source of income for most NPOs. Amount received from members periodically.
  • Treatment: Subscription received during the year (shown in R&P A/c) needs adjustment to find the amount earned for the current year (credited to I&E A/c).
  • Calculation of Subscription Income for Current Year:
    • Subscription Received during the year
    • (+) Outstanding Subscriptions at the end of the current year
    • (+) Advance Subscriptions at the beginning of the current year
    • (-) Outstanding Subscriptions at the beginning of the current year
    • (-) Advance Subscriptions at the end of the current year
    • = Subscription Income (credited to I&E A/c)
  • Balance Sheet Treatment:
    • Outstanding Subscriptions: Asset (shown on the Asset side).
    • Advance Subscriptions: Liability (shown on the Liability side).

• b) Donations:

  • General Donations: Small amounts, received without any specific purpose. Treated as revenue income (credited to I&E A/c).
  • Specific Donations: Received for a specific purpose (e.g., Donation for Building, Donation for Library). Treated as capital receipt and shown on the Liability side of the Balance Sheet until utilised for the specified purpose. Income earned on investment of specific donation funds is added to the respective fund.

• c) Legacies:

  • Amount received as per the will of a deceased person.
  • Usually treated as a capital receipt and added directly to the Capital Fund (Liability side of B/S), unless it's a very small amount or specifically stated to be treated as income.

• d) Life Membership Fees:

  • Received from members in lump sum instead of periodic subscriptions.
  • Treated as a capital receipt and added directly to the Capital Fund (Liability side of B/S).

• e) Entrance Fees / Admission Fees:

  • Paid by new members at the time of joining.
  • Treatment varies:
    • Often treated as revenue income (credited to I&E A/c), especially if the amount is small and recurring.
    • Sometimes, as per the organisation's policy or if the amount is large/non-recurring, it may be capitalised (added to Capital Fund). Follow instructions given in the question; otherwise, treating it as revenue is common.

• f) Sale of Old Assets:

  • Amount received is shown in R&P A/c (Receipt side).
  • Profit or Loss on sale (Sale Price - Book Value) is shown in I&E A/c (Profit on Credit side, Loss on Debit side).
  • Book value of the asset sold is deducted from the respective asset in the Balance Sheet.

• g) Sale of Old Newspapers/Periodicals/Sports Material:

  • Treated as revenue income (credited to I&E A/c).

• h) Grants:

  • General Grants (Maintenance Grants): Treated as revenue income (credited to I&E A/c).
  • Specific Grants (e.g., Building Grant, Polio Eradication Grant): Treated like specific donations – shown on the Liability side of B/S until utilised.

• i) Endowment Fund:

  • A fund arising from a bequest or gift, the income of which is devoted to a specific purpose.
  • It's a capital receipt shown on the Liability side of the B/S permanently. Income earned from endowment fund investments is treated as revenue income (credited to I&E A/c) unless the terms of the endowment specify otherwise (e.g., income also to be added to the fund).

• j) Treatment of Consumable Stores (e.g., Stationery, Sports Materials, Medicines):

  • The amount consumed during the year is debited to I&E A/c.
  • Calculation of Amount Consumed:
    • Opening Stock of Consumables
    • (+) Purchases during the year (Cash + Credit)
    • (-) Closing Stock of Consumables
    • = Amount Consumed (debited to I&E A/c)
  • Finding Purchases: If 'Payment made for Consumables' is given instead of 'Purchases':
    • Payment made during the year
    • (+) Closing Creditors for Consumables
    • (+) Opening Advance paid for Consumables
    • (-) Opening Creditors for Consumables
    • (-) Closing Advance paid for Consumables
    • = Purchases during the year (Cash + Credit)
  • Balance Sheet Treatment:
    • Closing Stock of Consumables: Asset side.
    • Closing Creditors for Consumables: Liability side.
    • Closing Advance paid for Consumables: Asset side.

• k) Fund-Based Accounting:

  • Used when specific funds are created for specific purposes (e.g., Tournament Fund, Prize Fund, Building Fund).
  • Treatment:
    • The specific fund is shown on the Liability side of the B/S.
    • All incomes related to that fund (e.g., interest on fund investments, donations for the fund) are added to the fund.
    • All expenses related to that fund (e.g., tournament expenses, prizes awarded) are deducted from the fund.
    • These incomes/expenses are NOT shown in the I&E A/c.
    • Important: If the expenses exceed the available fund balance, the excess amount (negative balance) is debited to the Income and Expenditure Account.
    • Investments made out of specific funds (e.g., Tournament Fund Investments) are shown on the Asset side of the B/S.

5. Preparation of I&E A/c and B/S from R&P A/c:

• Steps:
  1. Consider the Opening Balance Sheet items (or prepare one if needed to find Opening Capital Fund).
  2. Take the R&P A/c. Exclude opening and closing cash/bank balances.
  3. Analyse each item of R&P A/c:
     • Identify Revenue Receipts and Payments. Adjust them for accruals, prepayments, depreciation, etc., related to the current year and transfer them to the I&E A/c.
     • Identify Capital Receipts (like specific donations, legacies, life membership fees) and Capital Payments (like purchase of assets). These will affect the Balance Sheet.
  4. Consider all additional information/adjustments (outstanding/prepaid items, depreciation, stock of consumables, profit/loss on sale of assets, etc.).
  5. Calculate Surplus or Deficit from the I&E A/c.
  6. Prepare the Closing Balance Sheet:
     • List all Assets (including closing cash/bank balance from R&P A/c, fixed assets adjusted for purchase/sale/depreciation, closing stock, outstanding incomes, prepaid expenses).
     • List all Liabilities (including outstanding expenses, income received in advance, specific funds, creditors).
     • Show the Opening Capital Fund, add Surplus (or deduct Deficit), add capitalised items (Life Membership Fees, Legacies etc.) to arrive at the Closing Capital Fund.
     • Ensure the Balance Sheet totals match.

Multiple Choice Questions (MCQs):

1. The Receipts and Payments Account is a summary of:
   a) Income and Expenditures
   b) Cash receipts and payments
   c) Assets and Liabilities
   d) Credit transactions

2. Income and Expenditure Account reveals:
   a) Cash in Hand
   b) Surplus or Deficit
   c) Capital Account balance
   d) Net Profit

3. Income and Expenditure Account is prepared on the basis of:
   a) Cash basis
   b) Accrual basis
   c) Mixed basis
   d) Actual payment basis

4. Life Membership Fees received by a club are generally treated as:
   a) Revenue Receipt
   b) Capital Receipt
   c) Asset
   d) Expense

5. Donations received for a specific purpose (e.g., Building Fund) should be:
   a) Credited to Income and Expenditure Account
   b) Credited to a separate Fund Account and shown in the Balance Sheet
   c) Treated as revenue income
   d) Debited to Income and Expenditure Account

6. Subscription received during the year ₹50,000; Subscription outstanding at the end of the year ₹8,000; Subscription received in advance at the end of the year ₹6,000. The amount to be credited to Income and Expenditure Account is:
   a) ₹50,000
   b) ₹52,000
   c) ₹58,000
   d) ₹48,000

7. Opening Stock of Stationery ₹3,000; Payment made for Stationery during the year ₹10,000; Closing Stock of Stationery ₹2,000. The amount of stationery consumed to be debited to I&E A/c is:
   a) ₹10,000
   b) ₹11,000
   c) ₹9,000
   d) ₹15,000

8. The main objective of a Not-for-Profit Organisation is:
   a) To earn profit
   b) To provide service to members or society
   c) To distribute profit among members
   d) To engage in trading activities

9. Excess of Expenditure over Income in the Income and Expenditure Account is termed as:
   a) Surplus
   b) Profit
   c) Deficit
   d) Loss

10. Tournament Fund ₹40,000. Tournament Expenses ₹15,000. Receipts from Tournament Tickets ₹20,000. What amount will be shown in the Balance Sheet?
    a) Tournament Fund ₹45,000 (Liability side)
    b) Tournament Fund ₹5,000 (Liability side)
    c) Debit to I&E A/c ₹5,000
    d) Credit to I&E A/c ₹5,000

Answers to MCQs:

1. b) Cash receipts and payments
2. b) Surplus or Deficit
3. b) Accrual basis
4. b) Capital Receipt
5. b) Credited to a separate Fund Account and shown in the Balance Sheet
6. b) ₹52,000 (Calculation: ₹50,000 + ₹8,000 - ₹6,000 = ₹52,000. Assuming no opening balances)
7. b) ₹11,000 (Calculation: Opening Stock ₹3,000 + Purchases (Payment) ₹10,000 - Closing Stock ₹2,000 = ₹11,000)
8. b) To provide service to members or society
9. c) Deficit
10. a) Tournament Fund ₹45,000 (Liability side) (Calculation: Opening Fund ₹40,000 + Receipts ₹20,000 - Expenses ₹15,000 = ₹45,000)

Study these notes thoroughly. Focus on understanding the why behind the treatment of each item, especially the difference between cash and accrual basis, and revenue vs capital items. Practice numerical problems involving the preparation of final accounts. Good luck!