Study Session 3: Final Account of Non-profit Making Organization

Introduction

As you have learnt from study session 2, the major objective of Non-Trading Companies is to
carry out purely civil transactions. Non-profits organization do not have commercial owners and
must rely on funds from contributions, membership dues, program revenues, fund-raising events,
public and private grants, and investment income. Hence, there is need to study the kinds of
books of accounts kept by such organization.

The final accounts of a non-trading organization is quite different from that of trading
organization because a trading organization is after profit making while non-trading organization
is not after profit making.

In this study session, we will be discussing the final accounts of a non-trading organization; the
preparation of the final accounts as well as the differences between trading and non-trading
accounts.

Learning Outcomes for Study Session 3

On completion of this study session, you should be able to:

3.1 Explain the final accounts of a non-trading organization

3.2 Discuss the preparation of receipts and payment account
3.3 Explain the preparation of income and expenditure account
3.4 Discuss the preparation of balance sheet
3.5 Explain the differences between trading and non-trading accounts
3.1 Final Account of Non-Trading Organization

The final accounts of a trading organization include a Profit and Loss Account and a Balance
Sheet. However, in the case of non-trading organizations they include: Receipts and Payment
Account; Income and Expenditure Account; and Balance Sheet.

Receipts and
Payment Account

Income and
Expenditure Account

Balance Sheet

Figure 3.1: Final accounts of non-trading organization

In-text Question (ITQ) 3.1

What are the compositions of final account of a non-trading organization?

In-text Answer (ITA) 3.1

Receipts and Payment Account; Income and Expenditure Account; and Balance Sheet.

3.2 Receipts and payments Accounts

You will notice that a non-trading organization has to prepare Receipts and Payments Account
and the Income and Expenditure Account (it is similar to Profit and Loss Account) and the
Balance Sheet. You have also learnt that the Profit and Loss Account and the Balance Sheet are
usually prepared for profit making organizations with the aid of a Trial Balance. However, in
the case of non-trading organization, the practice is to prepare the Income and Expenditure
Account and the Balance Sheet straight from the Receipts and Payments Account and the
additional information.

Trading Non-trading
organization organization

Profit and Income

loss account statement

Balance sheet Balance sheet

Receipts and
Trial balance Payments
accounts

Figure 3.2: Final accounts of trading and Non-trading organizations

As a result, the Receipts and Payments accounts are very important for non-trading organizations
and should be prepared very carefully. It does not mean, however, that non-trading organizations
should not prepare trial balance at all. In fact, if the organizations have used the double entry
system, they must prepare a trial balance for checking the arithmetic accuracy of postings into
ledger accounts. This would also help the preparation of Receipts and Payments Account.

3.1.2 Features of Receipts and Payments Account

The main features of Receipts and Payments Account can be summarized as follows:

1. It is a real account.
2. It is a summary of Cash Book.
3. All receipts are shown on the debit side
 4. All payments are shown on the credit side.
5. Cash and bank items are merged except in the case of opening and closing balances.

Example 3.1: Receipts and Payments Account

The following information was extracted from the books of Fagbe Club, Idi-abebe for the year
ended 31st December, 2008.

Balances on 1-1-2008 1,800

Cash in hand 19,200

Cash at Bank 118,200

Subscriptions

2007 - 7,200

2008 - 110,100

2009 - 900

Restaurant and Bar Payment 300,000

Restaurant and Bar sales 360,000

Interest on Investments 3,150

Lighting and Heating 13,800

Secretary’s Honorarium 11,100

General Expenses 60,450

Life Membership Subscription 9,000

Furniture Purchased 9,000

Wages 102,000

Balances on 31-12-2008

Cash in hand 1,500

Cash at bank 13,500

You are required to prepare the Receipts and Payments Accounts for the club for the year ended
31st Dec. 2008.

Solution

FAGBE CLUB OF IDI-ABEBE

Receipts and Payments Account for the year ending December 31, 2008
Receipts Amount Payments Amounts
N N

Balance b/d Restaurant and Bar 300,000

Payments
Cash in hand 1,800 102,000
Wages
Cash at bank 19,200 21,000 13,800
Lighting and Heating
11,100
Secretary’s Honoraries
Annual subscriptions 60,450
General Expenses
2007 7200 9,000
 2008 11,0100 Furniture (purchase)

2009 900 118,200 Balance c/d

Cash in hand 1500 15,000

Cash at Bank 13500

Restaurant and Bar sales 360,000

Interest on Investments 3,150

Life Membership 9,000

subscriptions

511,350 511,350
511,350 511,350

In-text Question (ITQ) 3.2

What are the features of Receipts and Payments Account?

In-text Answer (ITA) 3.2

i. It is a real account.
ii. It is a summary of Cash Book.
iii. All receipts are shown on the debit side
iv. All payments are shown on the credit side.
v. Cash and bank items are merged except in the case of opening and closing balances.

3.3 Preparation of Income and Expenditure Account

The Income and Expenditure Account serves the same purpose for a non-trading organization as
the Profit and Loss Account for a trading organization. It is also prepared exactly in the same
manner as the Profit and Loss Account, i.e., all incomes are shown on the credit side and all
expenses and losses on the debit side. However, in case of non-trading organizations the excess
of income over expenses and losses is not termed ‘profit.’ It is called ‘Excess of Income over
Expenditure’ or ‘Surplus’. Similarly, the excess of expenses and losses over income is termed
‘Excess of Expenditure over Income’ or ‘Deficiency’.

Figure 3.3: Relationship between Income and Expenditure Account and Profit and Loss Account

As stated earlier, the Income and Expenditure Account is prepared with the help of Receipts and
Payments Account and the additional information available. You are aware that the Income and
Expenditure Account will show incomes and expenses only for the period to which it relates and
that too on accrual basis.

Hence, while taking figures from Receipts and Payments Account you will have to make the
necessary adjustments. For instance, if the amount of subscriptions received during 2008
includes N200 relating to 2009, it should be deducted for purposes of computing the income
from subscriptions. Similarly, if certain amounts of subscriptions relating to 2008 are still to be
received (outstanding) it would not appear in the Receipts and Payments Account. This is
because it has been included in the income from subscriptions for 2008 and so added thereto.

Another precaution you have to take relates to the distinction between capital and revenue items.
In the Income and Expenditure Account you are to include only the revenue items, the capital
items will be ignored. In addition, you will have to provide the necessary amount of depreciation
on all fixed assets and make provisions for doubtful debts. These items do not appear in the
Receipts and Payments Account.

3.3.1 Steps for preparing the Income and Expenditure Account

The following are steps for preparing the Income and Expenditure Account:

1. Go through their receipts side for ascertaining all items of incomes and the payment side
for all items of expenses and losses.
2. Ignore opening and closing balances.
3. Ignore capital receipts and capital payments.
4. Ignore receipts and payments relating to the preceding and the following years. If,
however, a receipt or a payment includes any amount which relates to the preceding or
the following year, the same should be deducted.
5. Add the outstanding amounts to the respective items of incomes and expenses.
6. Provide for depreciation and doubtful debts, if required.
7. If any fixed asset has been sold during the year, compute the amount of profit or loss on
such a sale and show the same in the Income and Expenditure Account. Note that the sale
of old sports material is not to be regarded as sale of a fixed asset. The total amount
received from such sale is an income.

Example 3.2: Income and Expenditure Account

Use the information given in Case 14.1 above to prepare the Income and Expenditure Account
for Fagbe Club of Idi-Abebe, a Non-Profit Organization.

Solution

FAGBE CLUB OF IDI-ABEBE

Income and Expenditure Account for the Year ending December 31, 2008

Dr. Cr.
Expenditure Amount Income Amount
 N N

Restaurant and Bar Expenses 300,000 Subscription 110,100

Wages 102,000 Restaurant and Bar Sales 360,000

Lighting and Heating 13,800 Interest on Investments 3,150

Secretary’s Honorarium 11,100 Excess of Expenditure over Income 14,100

General Expenses 60,450

487,350 487,350

Comment:

You will observe that in addition to opening and closing balances, the following items of receipts
and payments have been ignored.

i) Annual Subscription for 2007

ii) Annual Subscription for 2009
iii) Life Membership Subscription (it is regarded as capital receipt)
iv) Purchase of Furniture

In-text Question (ITQ) 3.3

In a non-trading organization, the excess of income over expense is referred to as what?

In-text Answer (ITA) 3.3

The excess of income over expense is termed excess of income over expenditure or surplus.

3.4 Preparation of Balance Sheet for Non-Profit Organization

The Balance sheet of a non-trading organization is prepared in the same manner as that of the
other organizations. It shows all assets and liabilities as at the end of the year in the usual way.
However, the excess of assets over liabilities in their case is termed ‘Capital Fund’ or ‘General
Fund’ and not ‘Capital’ as in the case of the trading organization.

The capital fund actually comprises the excess of income over expenditure and other incomes
like life-membership fees, and entrance fees which have been capitalized from time to time.
Effectively, it constitutes the capital of the institution. Sometimes you may also have to prepare
the Balance Sheet at the beginning. This requires mainly ascertaining the opening balance of
Capital Fund.
Example 3.4: Income and Expenditure Account and Balance sheet

The Receipts and Payments Account below, together with the additional information, was
extracted from the books of Alebiosu Social Club of Taki. You are required to prepare the final
accounts of the club for the year ended December 31, 2010.

Receipts and Payments Account for the year ending December 31, 2010

Dr Cr
Receipt N Payments N
Balance b/d 14,000 Tournament expenses 2,200
Donations for building 16,000 Furniture purchased 4,000
General Donations 400 Curtains 1,600
Legacies 12,000 Crockery 800
Sale of Old furniture (book 150 Sport materials 2,400
value N160)
Endowment Fund 20,000 Salaries 2,600
Sale of Newspapers 800 Honorarium 5,200
Sale of old sports materials 160 Charities 16,000
Advertisement in the year 3,800 Advertisement 500
book
Proceeds of Concerns 2,400 Rent and taxes 2,800
Subscriptions: Advance for construction of 10,000
building
2009 1,200

2010 28,000

2011 1,600 30,800

Entertainment Expenses 2,900
Payment to creditors of last year 800
Electric installation expenses 6,000
Library books 1,600
 Newspapers 2,600
Postages 1,400
Bar purchases & expenses 3,200
7% Investment purchase on July, 20,000
2010
Tournament Fund 3,000 Balance c/d 16,910
103,510 103,510

Additional Information:

i) Balance on December 31,2010 N

Sports materials 200

Bar stock 240

Postage 40

Furniture 3,160

ii) Subscription outstanding on December 31, 2010 were N1,400 and salaries outstanding on
the same date were N1,000.

iii) Salaries paid included N160 for 2009 and N20 for 2010

iv) Investment included investments out of building donations N16,000

v) Furniture is to be depreciated by 10%.

Solution
NDIGBO Social Club of Okija
Income and Expenditure Account for the Year ending December 31, 2010

Dr Cr
N N
Loss of sale of furniture 10 General donations 400
Salaries 2600 Sale of old Newspapers 800
Add Sal outstanding Sale of sport material 160
For 2008 100 Advert in the year book 3,800
2,700 Concert proceeds 2,400
Less Sal outstanding Subscriptions 28,000
For 2009 160 Add O/S Sub
Less Sal prepaid for 40 2,500 for 2010 1,400 29,400
2011
Honorarium 5,200 Interest on investment (7% for 6 140
months on N4,000)
Charities 16,000 Excess of Expenditure over 2,650
Income
Depreciation on furniture 700
Advertisement 500
Rent and taxes 2,800
Entertainment expenses 2,900
Newspapers 2,600
Postage 1,400
Less stock 40 1,360

Bar purchases 3,200

Less bar stock 240 2,960

Sports material 2,400

Less stock 31.12.2008 200 2,200
39,750 39,750
39,750 39,750

Balance Sheet as at year ended December 31, 2010

Dr Cr
Liabilities N Assets N
Capital fund 17,400 Cash 16,910
Less Excess 2,650 Furniture 7,160
of
Expenditure over income 14,750 Less sale 160
Endowment fund 20,000 7,000
Building fund 16,000 Less 700 6,300
depreciation
Add Interest on Crockery 800
Investment 560 16,560 Curtains 1,600
from building
fund
Legacies 12,000 Advance for construction 10,000
of Building
Tournament 3,000 Electric Installations 6,000
fund
Less 2,200 800 Library Books 1,600
Tournament
Expenses
Subscription received in 1,600 Investments 20,000
advance
Salaries outstanding 100 Stock of sports materials 200
Bar stock 240
Postage 40
 Subscription outstanding 1,400
Salaries paid in advance 20
Investment outstanding 700
advance (560 + 140)
65,810 65,810

Working Notes:

Balance Sheet as at year ended December 31, 2007

Dr Cr
Liabilities N Assets N
Capital fund 17,400 Cash in hand 14,000
(balancing figure)

Creditors 800 Subscription 1,200

Outstanding
Salary Outstanding 160 Furniture 3,160
18,360 18,360

Note:

1. Donation for building being donation for specific purpose has been credited to Building fund
and shown as such on the balance sheet.
2. Investment of N20,000 include N16,000 out of the Building fund. Hence, N650 of the
income from investment (7% on N16,000 for 6 months) has been added to the Building fund
and the balance (N140) has been credited to Income and Expenditure Account
3. The total amount of income from investments (N700) is outstanding and has been shown on
the balance sheet.
4. Legacies and endowment fund have been capitalized.

In-text Question (ITQ) 3.4

The excess of assets over liability is known as ……………………….

In-text Answer (ITA) 3.4

Capital fund comprises the excess of income over expenditure and other incomes like life-
membership fees, and entrance fees

3.5 Differences between trading and non-trading account

The differences between trading account and non-trading account can be summarized using the
table below:

Table 3.5.1: Differences between trading account and non-trading account

Trading account Non-trading account
The final accounts of a trading organization The final accounts include Receipts
include; Trial balance, Profit and Loss Account and Payment Account; Income and
and a Balance Sheet Expenditure Account; and Balance
Sheet
The excess of income over expenses and losses The excess of income over
is termed PROFIT expenses and losses is SURPLUS
The excess of expenses and losses over income The excess of expenses and losses
is termed LOSSES over income is termed
DEFICIENCY
The excess of assets over liability is termed The excess of assets over liability is
CAPITAL termed CAPITAL or GENERAL
FUND

In-text Question (ITQ) 3.5

Differentiate between trading account and non-trading account.

In-text Answer (ITA) 3.5

I. The final accounts of a trading organization include; Trial balance, Profit and Loss
Account and a Balance Sheet. While
II. The final accounts include Receipts and Payment Account; Income and Expenditure
Account; and Balance Sheet
Summary of Study Session 3

In this study session, you have learned the following:

1. The accounting records of the non-trading organizations are based on the same principles
as those applicable to trading organizations.
2. The final accounts of non-trading organizations consist of (i) Receipts and Payments (ii)
Income and Expenditure Account and (iii) Balance Sheet.
3. The Receipts and Payments is simply a summary of all cash transactions relating to the
accounting.
4. The Income and Expenditure Account is like Profit and Loss Account in a profit oriented
organization. It is prepared for ascertaining the surplus (excess of income over expenditure)
or deficiency (excess of expenditure over income).
5. The Balance Sheet is prepared in the usual manner which shows the assets and liabilities of
the organization including the Capital Fund.
6. In a non-trading organization, the excess of income over expenses and losses is not termed
‘profit.’ But it is called ‘Excess of Income over Expenditure’ or ‘Surplus’. Similarly, the
excess of expenses and losses over income is termed ‘Excess of Expenditure over Income’
or ‘Deficiency’.
Self-Assessment Questions (SAQs) for Study Session 3

Having completed this study session, you can measure how well you have achieved its learning
outcomes by answering these questions. You can check your answers with the Notes on Self-
Assessment Questions at the end of this Module.

SAQ 3.1 (Test Learning Outcome 3.1)

…………………..is a record showing the amounts of money coming in and going out of an
organization during a particular period of time. It is usually called the profit and loss account or
the income statement

SAQ 3.2 (Test Learning Outcome 3.2)

1. Highlight the elements of final accounts of a non-trading organization.

2. Highlight the features of receipt and payment account as discussed in this study
session.

SAQ 3.3 (Test Learning Outcome 3.3)

Distinguish between the treatment of sales of fixed asset and Old Sport Material in the Accounts
of Non-Profit Organization.

SAQ 3.4 (Test Learning Outcome 3.4)

The Receipts and Payments Account given below was prepared by the Ogbomoso Students’
Association. You are required to use the Receipt & Payment to prepare the Income &
Expenditure Account for the year ended 31st Dec. 2008.

Ogbomoso students’ Association, Ogbomoso

Receipts and Payments Account for the year ending December 31, 2008.
Receipt N Payments N
Balance b/d 10,000 Salaries paid 62,000
 Cash at hand 50,000 Additions to Library 135,000

Cash in bank 52,000 Typewriter purchased 13,000

Entrance fees 11,100 Repairs 5,000

Subscriptions: General Expenses 60,450

2007 3,000 Electric fittings in Union’s 90,000

office
2008 130,000
Printing and stationery 19,000
2009 10,000 170,000
Miscellaneous expenses 3,000
Sale of students Newsletter 1,300
Balance c/d
Rent of Library Hall 20,800
Cash in hand 4,000
Proceeds from Entertainment
Cash at bank 65,000
of students & lecturers 60,000

Special Subscriptions for union’s 32,000

president’s party
396,000 396,000

Please note that:

i. Addition to library, payments for electric fittings and typewriter are capital
expenditure, and so not included.
ii. A special subscription for Union’s Presidential party is a fund raised for specific
purpose, hence excluded. If, however, the party had been held and there was some
surplus or deficiency the same could be included.
SAQ 3.5 (Test Learning Outcome 3.5)

Distinguish between trading and non-trading account as discussed in this study session
Glossary of Terms

‘Capital Fund’ or ‘General Fund’: the excess of assets over liabilities in their case is termed

Capital fund: comprises the excess of income over expenditure and other incomes

Company: an entity that manufactures or sells products or provides services as a commercial

venture.

Deficiency: the excess of expenses and losses over income

Double entry system: is a system of accounting in which every transaction has a corresponding
positive and negative entry (debits and credits)

Receipt: it is a written acknowledgment of having received, or taken into one's possession, a

specified amount of money, goods, etc.

Surplus: the excess of income over expenses and losses

Trial Balance: A bookkeeping worksheet in which the balances of all ledgers are compiled into
debit and credit columns.