UNIT 2

NON-BUSINESS ORGANIZATIONS

UNIT OBJECTIVES
At the end of this unit, learners should be able to:
1. Explain and apply the different terminology used by NBOs.
2. Prepare the receipts and payments statement for NBOs.
3. Explain the accounting treatment of membership subscription fees, entrance fees,
legacies and special funds.
4. Prepare the statement of income and expenditure for NBOs.
5. Explain the difference in the statements used by NBOs and Profit trading entities.
1.0 INTRODUCTION
Most businesses are run to make profit for their owners. There are, however, other entities or
institutions in society who operate not to make profits but to provide useful services to other
people, or to promote activities which interest or amuse them. Such institutions are called
non- business organizations (NBOs) or non-profit-making organizations. They exist wherever
interested people come together to form a body of members, elect a committee, subscribe
funds, and proceed to conduct affairs. Examples of such organizations are football clubs,
orphanages, churches, social clubs, etc.

1.2 NBOs vs Trading organizations

The operations of an NBO vary from that of businesses trading for profit in many ways. For
starters NBOs are formed by members while trading organizations are formed by shareholders
who expect return on their investments. The main source of income for NBOs is membership
fees and donations from the members as well as collections from organizational fundraising
events. There are two fundamental accounting differences between trading organizations and
NBOs:
i. The need for special terminology more appropriate for communicating the financial
performance and position to the members of the organization.
ii. The administrative and financial tasks of the organization are performed by members
on a voluntary and unpaid basis, making the organization’s accounting systems very
simple, often on a cash basis and sometimes incomplete.
The administrative and financial tasks of an NBO are performed by the treasure. The duties
of the treasure involve amongst others collecting and paying out cash and keeping a record of
these transactions.
Below is a list of financial activities and the source documents that arise from them:
Financial activity Source documents/record
1. Maintaining a list or register of all Electronic register or file of entry or
members. membership.
2. Sending statements of account to Duplicate invoices/statements.
members for fees due.
3. Receiving monies and issuing Carbon copies of receipts.
receipts.
4. Banking cash received. Carbon copies of deposit slips.
 5. Receiving suppliers’ invoices and Originals of suppliers’ invoices/statements.
statements.
6. Paying suppliers and expenses. Cheques.
7. Reconciling the organization’s Bank statements and cash book.
cash/bank records with the bank
statements.

The treasurer in preparing the financial records, will prepare a record of cash and bank
transactions in the form of a cash book than using separate cash receipts and cash payments
journals.

Terminology
Since NBOs operate not to make profits, then the word profit is not used. Should income for
the year be more than the spending for that particular year, then the difference is referred to
as a surplus. However, if the expenditure for the year exceeds the income for that particular
year, then the difference is referred to as a deficit. Though NBOs do not operate to make
profit, they will strive to achieve a surplus than a deficit so as to counteract the consequences
of inflation or to finance further growth of the organizations or embark on other projects.
Trading businesses prepare cash payments and receipts journals, however the treasure in an
NBO will only keep a cash book for all cash transactions and for report purposes, a
summary of the cashbook will be made in the statement of receipts and payments.
The statement of receipts and payments is most appropriate for organizations operating
purely on a cash basis and have no or little investment on non-current assets. However some
NBOs are big enough to prepare accounting records on a double-entry accrual basis where a
full set of financial statements will be prepared. For organizations having much investment
on non-current assets, then the accrual system of accounting is generally used where the
adjustments for accruals and depreciation will be taken into account. Instead of simply
providing a summary of the cash book, an income and expenditure account will be prepared
which is similar to the profit and loss account. From the income and expenditure account, a
statement of income and expenditure is be prepared together with the statement of
financial position.
The statement of financial position is similar to the one prepared for trading organizations
except the word ‘capital’ is not used but whatever amounts contributed by the founding
members of the organization is referred to as accumulated fund.

Below is a summary of the terminology used in NBOs compared to that used in trading
organizations:

1.3 Special Items

NBOs have a number of items that are not familiar with trading organizations and these
items require a special treatment in the books of account.

Entrance fees
While shareholders contribute capital/equity to earn stake and have ownership in the business
of trading businesses, members of NBO gain membership by paying entrance fees which are
fixed amounts that each member of the NBO is expected to have paid in order for them to be
considered as members of the organization. These entrance fees are treated as a direct
contribution of capital hence they are capitalized and transferred directly to the accumulated
fund account. Since entrance fees are only received by the organization in the event there are
new members joining the organization, they are not a normal or recurring form of income
hence classifying them as operating income may not give a correct picture of the
performance of the organization in terms of surplus or deficit.

Membership subscription fees

These are monthly, semi-annual or annual payments that are made by the members of NBOs
to cater for the operation of the organization. Membership subscription fees form operational
income for the organization from which the daily expenditure can be made. If the accrual
basis of accounting is used, a separate account should be maintained for these fees so as to
appropriately account for any accruals and prepayments.

Fundraising activities
Even though NBOs do not operate for profit, they would from time to time do activities that
are meant to bring in extra income for the organization so as to ensure survival and improved
financial position. For example a church may organize music events where people attending
the event will pay entrance fees and also sell snacks and drinks as a way to raise money. The
snacks and drinks will be sold on a profit basis and the total profits/income made in the event
will be transferred to the income and expenditure account of the organization. Such events
will be entrusted to a sub-committee where the financial affairs relating to the event will be
accounted for separately and only the profit/loss made will be transferred to the main
accounting records of the organization.

Legacies and donations

These are gifts in money received from either members of the NBO or the general public
which are normally treated as capital items since they are not in recurring form. Legacies are
inherited by the organization from deceased members or other individuals who had decided
to leave a certain percentage of their inheritance to the organization. Such amounts are
transferred directly to the accumulated fund. The accounting treatment for donations on the
other hand may differ as per the amounts involved. Large amounts of donations may be
directly added to the accumulated fund while smaller amounts are treated as income and not
capitalized, otherwise each organization will have a policy in place on the accounting
treatment of donations.

1.4 Financial Reporting for NBOs

1.4.1 The statement of receipts and payments

Small organizations that have little or no investment on non-current assets do not require the
use of sophisticated accounting systems. Their financial performance can be reported to the
members in a form of a statement of receipts and payments which is a summary of the
cashbook. The cashbook records all cash receipts and payments, however for the purposes of
reporting to members in the Annual General Meeting (AGM), the cash book will be
summarized into the statement of receipts and payments.
The disadvantages of this form of financial statement are that:
 it includes receipts and payments relating to the sale or purchase of non-current
assets.
 it does not take account of increases or decreases in inventories of items such as
consumable stores or refreshments.
 it may include receipts of capital nature e.g legacies, entrance fees.
 it does not take account of adjusting entries like accruals, prepayments or
depreciation.
Due to the fact that the statement of receipts and payments is prepared on a single-entry
cash basis, it does not adequately disclose the results of the organization’s activities.

Example
Following is a summary of transactions of the Hopeville Club for the year ending 31
December 20X8:
1. The bank statement at the beginning of the year (1 January 20X8) showed a
favourable balance of SZL 207.
2. Eighteen new members joined the club during the year and paid an entrance fee of
SZL 12
3. The annual subscription was SZL 18. During the year 194 members paid their annual
membership subscription fees, while six members were in arrears with their
membership subscription fees for the year.
Eight members paid their subscription fees for the next year in advance and five
members who had not paid their subscription fees for the previous year paid these
during the current reporting year.
4. Maintenance of tennis courts and squash courts paid SZL 362.
5. A cleaner received a monthly payment of SZL 171.
6. Refreshments purchased amounted to SZL 138.40.
7. Sale of refreshments amounted to SZL 196.20.
8. Tennis balls bought costed SZL184.
9. Sales of old tennis balls amounted to SZL 16.80.
10. Donations to charity, SZL 40.
 11. Proceeds from social functions, SZL 630.
12. Expenses in connection with annual dance, SZL 403.40.
13. Honorarium paid to the secretary, SZL 80.
14. Crockery bought, SZL 36.
Note: all payments were made cash.
You are required to:
i. Prepare the receipts and payments account for the year ended 31 December 20X8.
ii. Prepare the statement of receipts and payments for the year ended 31 December
20X8.

Solution
i.
HOPEVILLE CLUB
RECEIPTS AND PAYMENTS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER
SZL SZL
Balance b/d 207 Maintenance of court 362
Entrance fees 216 Wages 171
Subscriptions 1,692 Refreshments inventory 138.40
Subscriptions in advance 144 Tennis balls 184
Subscriptions in arrears 90 Donations 40
Sale of refreshments 196 Dance expenses 403.40
Tennis balls sales 17 Honorarium 80
Social functions 630 Crockery 36
Balance c/d 1,777.20
3,192.00 3,192.00
Balance b/d 1,777.20
 ii. Statement of receipts and payments for the year ended 31 December
SZL
Opening bank balance 207
(+) Receipts 2,985
Entrance fees 216
Subscriptions 1,692
Subscriptions in advance 144
Subscriptions in arrears 90
Sale of refreshments 196.20
Tennis balls sales 16.80
Social functions 630
(-) Payments 1,414.80
Maintenance of court 362
Wages 171
Refreshments inventory 138.40
Tennis balls 184
Donations 40
Dance expenses 403.40
Honorarium 80
Crockery 36
Closing bank balance 1,777.20

1.4.2 The statement of income and expenditure

This statement is an improvement to the statement of receipts and payments in that the
organization presents statements that are prepared on the double-entry accrual basis. The
recording procedures will follow the same principle to those of profit making organizations,
hence the use of the subsidiary journals, general ledger and the trial balance. However since
the volume of transactions is not large, the cash receipts and cash payments journals will be
the only subsidiary journals used, then postings to the general ledger and a trial balance
extracted. Just like in profit making organizations, the nominal accounts are closed off to the
income and expenditure account and the real accounts are displayed in the statement of
financial position. The statement of income and expenditure is a financial report from the
income and expenditure account, which will show the organization’s surplus or deficit for the
period.

Following is a procedure that is used by NBOs who may have grown from preparing their
financial statements from single-entry cash basis to double-entry accrual basis:
  Prepare SOFP at beginning of the year and determine accumulated funds figure
(balancing figure) and enter all balances in suitably titled ledger accounts in general
ledger.
 Complete double entry for cash transactions by posting from the cash book or
receipts and payments to ledger accounts.
 Record double entries for outstanding items at year end i.e AR, AP, accrued and
deferred expenses and income.
 Record double entries for the non-routine adjustments e.g depreciation, bad debts
 Extract a trial balance.
 Prepare the statement of income and expenditure and statement of financial position.
 Close off and balance the ledger accounts

Example
Using the statement of receipts and payments of Hopeville Club provided above (example),
prepare the statement of income and expenditure for the year ending 31 December.
Hopeville Club
Statement of income and Expenditure for the year ended 31 December
SZL
Income 2,535
Subscriptions 1,692
Sale of refreshments 196.20
Tennis balls sales 16.80
Social functions 630
Expenditure 1,414.80
Maintenance of court 362
Wages 171
Refreshments inventory 138.40
Tennis balls 184
Donations 40
Dance expenses 403.40
Honorarium 80
Crockery 36
Surplus 1,120.20
1.5 Special Funds
NBOs would at times set aside certain amounts of money for a particular purpose or project.
This decision is often made by the board and how these resources will be used is stated. For
example a football club may decide to put aside an amount of money to fund the school fees
of disadvantaged children. These resources will need to be placed in a different bank account
from the main current account of the organization. This is to ensure that the money is used
only for its designated purpose and not in the general operations of the business. The bank
account opened for such resources is usually an interest bearing investment account. Having
this separate account also helps in that members or any member of the public who wish to
make donations towards the initiative, will just make a direct deposit into the account. Any
expenses relating to the fund will also be paid from the resources in the account.
The fundamental accounting principles of special funds are:
 All dealings with the fund should be kept separate from the income and expenditure
account and accumulated fund
 Cash representing the fund should appear in a fund investment account, which will be
an asset account with a debit balance and the corresponding credit entry will be in a
fund account which appears under equity after the accumulated fund in the statement
of financial position.

Example
Junior Aces Football Club had the following balances at the beginning of the year 1 January
20X8:
Accumulated fund SZL 16,000
Equipment SZL 8,500
Bank SZL 7,500
During the year, the members decided at the annual general meeting to set aside SZL 5,000
to build a store room which is expected to cost SZL 15,000. The following were their
receipts and payments for the year:
Membership subscription fees SZL 4,750
Donations SZL 8,100
Equipment purchased SZL 3,700
Investment in 10% special savings SZL 5,000
General operations expenses SZL 4,320
The following information was established at the end of the year:
1. Donations of SZL 6,000 (specifically for the building project) were transferred to the
special savings account just after being received.
2. Interest totaling SZL 550 has accrued on the special savings account
3. Equipment is depreciated at 10% per annum on the year-end balance
You are required to:
i. Prepare the general ledger accounts for the year.
ii. Prepare the income and expenditure account for the year.
iii. Prepare the statement of income and expenditure for the year ending 31 December
20X8.
iv. Prepare a summarised statement of financial position as at 31 December 20X8.

Solution
i.
Dr General Ledger of Junior Aces Football Club Cr
Amount Amount
Date Details Folio (SZL) Date Details Folio (SZL)
Real Accounts Section
Accumulate Fund A/c
Dec-31 Building fund GJ 5,000 Jan-01 Balance b/d 16,000
Balance c/d 12,110 Dec-31 Income & exp. GJ 1,110
17,110 17,110
Jan-01 Balance b/d 12,110

Equipment A/c
Jan-01 Balance b/d 8,500 Dec-31 Balance c/d 12,200
Dec-31 Bank CPJ 3,700
12,200 12,200
Jan-01 Balance b/d 12,200

Bank (Receipts and Payments) A/c

Jan-01 Balance b/d 7,500 Dec-31 Equipment CB 3,700
Dec-31 Subscription fees CB 4,750 Special savings CB 5,000
Donation CB 8,100 General expenses CB 4,320
Special savings CB 6,200
Balance c/d 1,130
20,350 20,350
Jan-01 Balance b/d 1,130
 Building project Investment A/c
Dec-31 Bank CB 5,000 Dec-31 Balance c/d 11,750
Bank CB 6,200
Interest GJ 550
11,750 11,750
Jan-01 Balance b/d 11,750

Building Project Fund A/c

Dec-31 Balance c/d 11,750 Dec-31 Accumulated fund GJ 5,000
Donations received GJ 6,200
Building proj.investment GJ 550
11,750 11,750
Jan-01 Balance b/d 11,750

Accumulated Depreciation A/c

Dec-31 Balance c/d 1,220 Dec-31 Depreciation GJ 1,220
1,220 1,220
Jan-01 Balance b/d 1,220

Nominal Accounts Section

Membership Subscription Fees A/c
Dec-31 Income & Exp. GJ 4,750 Dec-31 Bank CB 4,750

Donations Received A/c

Dec-31 Buiding proj. fund GJ 6,200 Dec-31 Bank CB 8,100
Income & Exp. GJ 1,900
8,100 8,100

General expenses A/c

Dec-31 Bank CB 4,320 Dec-31 Income & exp. GJ 4,320

Depreciation A/c
Dec-31 Acc. Depreciation GJ 1,220 Dec-31 Income & exp. GJ 1,220

ii.
Final Accounts Section
Income and Expenditure A/c
Dec-31 Depreciation GJ 1,220 Dec-31 Subscription fees GJ 4,750
General expenses GJ 4,320 Donations GJ 1,900
Surplus (Acc.fund) GJ 1,110
6,650 6,650
 iii. Statement of Income and Expenditure for the year ended 31 December 20X8
SZL
Income 6,650
Subscription fees 4,750
Donations received 1,900
Expenditure 5,540
Depreciation 1,220
General expenses 4,320
Surplus 1,110

iv. Abridged Statement of Financial Position as at 31 December 20X8

ASSETS SZL
Equipment 10,980
Building proj. investment 11,750
Bank 1,130
Total assets 23,860
EQUITY & LIABILITIES
Accumulated fund 12,110
Building proj.fund 11,750
Total equity 23,860

The accounting treatment of special funds varies among the two categories:
i. Funds established for specific purpose where the aim is realized by the expenditure of
the capital sum.
ii. Special funds existing in perpetuity, where the capital sum remain intact and only the
interest or proceeds of the investment are used to pay expenses arising from
maintenance of the fund

1.5.1 Funds requiring expenditure of the capital sum

In the case where the fund is aimed at acquiring an asset, e.g buying a car or buying
equipment, the point will be reached where the amount in the investment account is
sufficient to acquire the asset. In that case, the resources in the fund investment account will
be used to acquire the asset and the investment account (asset) will be replaced by the
physical asset acquired. The special fund account (credit) will be closed by transferring it
back to the accumulated fund account. The interest earned by the investment account and
additional donations made by members and the general public will boost the special fund into
having sufficient resources to acquire.
Example
Refer to Junior Aces example. The following events occurred in the next new year:
1. Donations of SZL 2,600 and interest increase the Building project fund to SZL
15,200.
2. The club agrees to build the store room (total cost SZL 15,800), using the
Building project investment account, the balance being taken from the club’s
bank account.
3. The surplus for the year was SZL 3,120.
You are required to prepare the following ledger accounts:
i. Accumulated fund
ii. Building project investment
iii. Building project fund
iv. Building

Solution
i.
Dr General Ledger of Junior Aces Football Club Cr
Amount Amount
Date Details Folio (SZL) Date Details Folio (SZL)
Accumulate Fund A/c
Dec-31 Balance c/d 30,430 Jan-01 Balance b/d 12,110
Building fund GJ 15,200
Dec-31 Income & exp. GJ 3,120
30,430 30,430
Jan-01 Balance b/d 30,430
ii.
Building Investment A/c
Jan-01 Balance b/d 11,750 Dec-31 Bank CB 15,200
Dec-31 Donations GJ 2,600
Interest 850
15,200 15,200
 iii.
Building project A/c
Dec-31 Accumulated fund GJ 15,200 Jan-01 Balance b/d 11,750
Dec-31 Donations GJ 2,600
Building invest. GJ 850
15,200 15,200
iv.
Building (sore room) A/c
Dec-31 Bank CB 15,800 Dec-31 Balance c/d 15,800

1.5.2 Funds requiring the capital sum to remain intact

In cases where the special funds are expected to exist in perpetuity, the fund investment
account is expected to have a minimum amount equal to the original amount that members
agreed on. To pay for expenses relating to the fund only the interest or proceeds may be used
not the capital amount. Things to note:
 If a lesser amount is used in a given year, the balance on the fund and fund
investment accounts will be greater than the original capital and may be used in
subsequent years.
 If the expenditure for the year is greater than the proceeds earned on the capital
investment, the additional expenditure will have to be subsidized from the ordinary
income of the organization, requiring an entry to the income and expenditure account
for the over expenditure.

Example
SOS Children’s Village recently received an amount of SZL 10,000 from a benefactor.
 The benefactor requested that a fund be established for the purpose of granting
bursaries to students from interest accruing, but that the capital sum must remain
intact in perpetuity.
 On 1 January of the present year, the funds were invested at 15% in a fixed deposit
account at SBS, interest being available for withdrawal at the end of each year.
 Later in the year (September 30, 20X9), a bursary of SZL 1,200 was paid to a student
 from the bank account, to be replaced from the fund investment at year end, the
balance remaining invested.
You are required to prepare the general journal entries and the relevant statement of
financial position entries as 31 December 20X9.

Solution

Ge ne ral Journal of SOS Childre n's Home GJ

Day De tails Folio Dr Cr
01-Jan Bank 10,000
Bursary fund 10,000
Cash received from
benefactor
Bursary fund invest. 10,000
Bank 10,000
Funds invested at
15% p.a with SBS
30-Sep Bursary fund expense 1,200
Bank 1,200
Bursary granted and
paid
31-Dec Bursary fund invest. 300
Bank 1,200
Bursary fund 1,500
Interest received &
cash reimbursed
Bursary fund 1,200
Bursary fund expense 1,200
Bursary fund expense
written off
1.6 Coupons
To minimize the handling of cash by staff and ensuring that all cash is controlled and
collected at a specific point, most organizations make use of coupons (also known as tokens).
These coupons are invariably marked distinctively and are sold to customers at a central
place. For example churches hosting conferences would have church members in attendance
buy tickets from a central paying point and these tickets entitles them to refreshments and
accommodation during the conference.
There is usually a maximum period during which coupons may be validly redeemed for
goods and services and to make provision for customers to exchange unused coupons and
receive cash refunds.
A system of coupon accounting should provide for:
 Adequate control over the printing, receipt, storage and issue of coupons
 Control over cash when coupons are sold and a record of the value of coupons sold
 A record of the value of coupons surrendered by customers for goods and services
received
 A record of the liability for coupons sold to customers but not yet exchanged by
them for goods and services
Separate ledger accounts are used to account for coupons since they are valid for limited
periods only. When coupons are used, it is important to note that:
 A sale transaction takes place only when the coupons are redeemed or exchanged for
goods and services, not when the coupons are sold to the customers
 The face value or exchange value of any valid but unredeemed coupons held by
customers should be disclosed as a current liability on the statement of financial
position

Example
More Fire Club sells books of coupons to facilitate payments for drinks and also reduce the
risk of theft of cash by waiters. The coupons are sold at a discount of 5% on their face value.
Each book contains coupons of varying denominations with a total face value of SZL 2. The
books of coupons are sold and kept by the club’s secretary who punctures the year of issue on
each book sold. The coupons are valid only in the financial year of issue and in the financial
year immediately following.
The following transactions relate to coupons during the years up to 31 December 20X9
Coupons No. of SZL 2 books Value Discount Cash received
issued SZL SZL SZL SZL
20X7 3300 6,600 330 6,270
20X8 5200 10,400 520 9,880
20X9 4800 9,600 480 9,120

Value of coupons surrendered by members for drinks:

Coupons marked 20X7 20X8 20X9
20X7 5,165 0 0
20X8 1,230 9,380 0
20X9 0 750 8,450

You are required to:

i. Record all entries (including closing entries) relating to coupons in the general journal
of the club for the years ending 31 December 20X7, 20X8, 20X9.
ii. Post the journal entries to the ledger accounts and balance the real accounts and
balance the real accounts at the end of each year.

Solution
 i.
GENERAL JOURNAL Dr Cr
20X7 SZL SZL
Dec-31 Cash 6,270
Discount allowed 330
Coupons 20X7 *6,600
Coupons sold to members at a discount of 5% of face value
Coupons 20X7 5,165
Bar sales 5,165
Coupons surrendered for drinks
Bar sales 5,165
Bar trading 5,165
Closing transfer
Income and expenditure ***330
Discount allowed 330
Closing transfer
20X8
Dec-31 Cash 9,880
Discount allowed 520
Coupons 20X8 10,400
Coupons sold to members at a discount of 5% of face value
Coupons 20X7 1,230
Coupons 20X8 9,380
Bar sales 10,610
Coupons surrendered for drinks
Coupons 20X7 205
Income and expenditure 205
Value of 20X7 coupons no longer valid and treated as revenue
Bar sales 10,610
Bar trading 10,610
Closing transfer
Income and expenditure 520
Discount allowed 520
Closing transfer
20X9
Dec-31 Cash 9,120
Discount allowed 480
Coupons 20X9 9,600
Coupons sold to members at a discount of 5% of face value
Coupons 20X8 750
Coupons 20X9 8,450
Bar sales 9,200
Coupons surrendered for drinks
Coupons 20X8 270
Income and expenditure 270
Coupons issued in 20X8 and no longer valid – treated as revenue
Bar sales 9,200
Bar trading 9,200
Closing transfer
Income and expenditure 480
Discount allowed 480
Closing transfer
Note
Credit balances on coupon accounts at the end of the financial year should be disclosed on the
statement of financial position as ‘unredeemed coupons’, under current liabilities.
* It is advisable to keep separate coupon accounts for each year of issue, especially
where there is a time period imposed on the use of coupons.
*** Alternatively discount may be treated as a ‘trade’ discount and deducted from sales.
ii.
Dr General Ledger Cr
Amount Amount
Date Details Folio (SZL) Date Details Folio (SZL)
20X7 Coupons A/c 20X7
Dec-31 Bar sales 5,165 Dec-31 Cash 6,270
Balance c/d 1,435 Discount allowed 330
6,600 6,600
20X8 20X8
Dec-31 Bar sales 1,230 Jan-01 Balance b/d 1,435
Income & expenditure 205
1,435 1,435

20X8 Coupons A/c 20X8

Dec-31 Bar sales 9,380 Dec-31 Cash 9,880
Balance c/d 1,020 Discount allowed 520
10,400 10,400
20X8 20X8
Dec-31 Bar sales 750 Jan-01 Balance b/d 1,020
Income & expenditure 270
1,020 1,020

20X8 Coupons A/c 20X9

Dec-31 Bar sales 8,450 Dec-31 Cash 9,120
Balance c/d 1,150 Discount allowed 480
9,600 9,600

20X7 Bar sales A/c

Dec-31 Bar Trading 5,165 Dec-31 Coupons 5,165
20X8
Dec-31 Bar Trading 10,610 Dec-31 Coupons (9,380+1,230) 10,610
20X9
Dec-31 Bar Trading 9,200 Dec-31 Coupons (750+8,450) 9,200
20X7 Cash Acount
Dec-31 Coupons 20X7 6,270
20X8
Dec-31 Coupons20X8 9,880
20X9
Dec-31 Coupons 20X9 9,120

20X7 Discount allowed A/c

Dec-31 Coupons 20X7 330 Dec-31 Income & expenditure 330
20X8
Dec-31 Coupons 20X8 520 Dec-31 Income & expenditure 520
20X9
Dec-31 Coupons20X9 480 Dec-31 Income & expenditure 480

1.7 Income generating projects

Though the main aim of NBOs is to provide a necessary service not to make profits, they do
need to generate income so that they do not just rely on donations and subscriptions from
members. This income generated also ensures a continued existence of the organizations. The
income generating or fundraising projects may be on-going or a single event and will usually
result in a profit or a loss in some instances or the entity. The profit or loss is calculated using
a trading account or trading statement and once the profit or loss is calculated it is transferred
to the general statement of income and expenditure.

Example
The True Vine Church usually hosts a music concert which is an income generating project.
During this concert entrance tickets are sold to people who would like to partake in the
concert and refreshments are served after the concert. Below is financial information relating
to the project the year ending 31 December 20X9:
 Purchases of groceries SZL 8,500
 Water and electricity used for concert SZL 550
 Salaries paid to those who help during concert SZL 4,000
 Cash collected at entrance point SZL 17,500
 Closing inventory groceries SZL 1,050
You are required to prepare the trading account for the music concert.
Solution
The True Vine Church
General Ledger
Dr Trading A/c: Music concert Cr
Dec-31 Purchases 8,500 31-Dec Sales 17,500
Water and electricity 550 Inventory c/d 1,050
Salaries 4,000
Income & exp. 5,500
18,550 18,550

Note: the amount of SZL 5,500 represents the profit for the year made by the event which
must be transferred to the general income and expenditure account.
 Practice exercises

Question 1
The following balances and totals are for the books of Slim Fit Health Club as at 31
December 20X6:
SZL
Membership subscription fees received for year 20X5 2,200
Membership subscription fees received for year 20X6 24,000
Membership subscriptions fees received for year 20X7 1,200
Sales - fruit juices 3,650
Sports equipment purchased during the year 24,600
Sports equipment sold at book value during the year (cost SZL
2,000, Depreciation SZL 1,500) 500
Purchases of fruit juices 1,650
Salaries and wages 6,600
Assessment rates 900
Depreciation of sports equipment for year 20X6 12,800
Insurance 490
Accumulated funds as at 1 January 20X6 72,180
Enterance fees received 4,800
Land and buildings at cost 37,300
Sports equipment at cost - 1 January 20X6 60,420
Accumulated depreciation -sports equipment 1 January 20X6 30,420
Membership subscription fees outstanding - 31 December 20X6 1,700
Bank balance - 1 January 20X6 2,680
Additional information:
 Salary bonus of SZL 400 to be provided.
 SZL 150 of assessment rates is for the 20X7 calendar year.
 Entrance fees are credited to the accumulated fund
You are required to prepare the statement of receipts and payments for the year ended
31 December 20X6.
Question 2
New Hope Children’s Home provided the following information for the year ending 31
December 20X5:
1 The home had 36 members during 20X4 of whom only 31 members paid their
membership subscription fees for 20X4, while 2 members also paid their 20X5 fees.
2 Four new members joined on 1 January 20X5.
3 The home increased its membership subscription fees by SZL 5 per year for the
previous three years and will continue to do so in the future. Membership subscription
fees for 20X5 was SZL 40 per year.
4 SZL 1,555 was received for membership subscription fees during 20X5 (and included
the balance of the outstanding 20X4 fees), as well as for two members who paid for
20X6.
5 Two members (whose fees were outstanding on 31 December 20X4, see note above),
disappeared and the membership subscription fees due by them had to be written off.
You are required to:
i. Prepare the membership subscription fees account in the ledger of the home.
ii. Show how the SZL 1,555 received was determined.
iii. Calculate the number of members who did not pay their 20X5 fees.
Question 3
The treasurer of Matsapha Tennis Club has prepared a draft Statement of Receipts and
Payments for the year ended 30 June 20X8. The club committee however wants the financial
statements for 20X8 and the following periods to be in the form of a Statement of Income and
Expenditure and a Statement of Financial Position. They have asked you to fix the 20X8
financial statements.
Matsapha Tennis Club
Statement of Receipts and Payments for the year ended 30 June 20X8
Opening balances 3,260
Cash on hand: 1 July 20X7 100
Cash in bank: 1 July 20X7
Current account 1,160
Deposit account 2,000
(+) Receipts
Membership subscription fees:
20X7 620
20X8 8,220
20X9 125
Interest on deposit 85
Entry fees for club championship 210
Tickets sold for annual dinner 420
(-) Payments
Groundsman's wages 4,000
Purchase of equipment (31 December 20X7) 8,000
Rent for the year up to 31 Mach 20X8 2,000
Rates for the year up to 30 September 20X7 1,800
Cost of annual dinner 500
Secretarial expenses 400
Prizes for club championship 90
Miscellaneous expenses 100
(-) Cash on hand: 30 June 20X8 (50)
Closing bank balance: 30 June 20X8 (overdraft) (4,000)
Additional information:
1 On 30 June 20X8, SZL 700 was outstanding for membership subscription fees for
20X8.
2 During the year ended 30 June 20X7, SZL 230 was received for membership
subscription fees for the year ending 30 June 20X8.
3 The cost of equipment purchased in previous years was:
- 31 December 19X5 SZL 5,000
- 1 July 19X9 SZL 1,000
- 31 March 20X6 SZL 1,000
 4 The committee decides that equipment should be depreciated at 10% per annum on
cost.
5 Rent has been at the rate of SZL 2,000 per annum for the last two years and is not
expected to change in the immediate future.
6 Rates of SZL 750 for the six months to 30 September 20X8 were paid on 2 May
20X7.
7 Interest of SZL 250 on the bank overdraft had accrued at 30 June 20X8.
8 Taxation can be ignored.
You are required to:
i. Prepare the Statement of Income and Expenditure for the year ended 30 June 20X8.
ii. Prepare a Statement of Financial Position as at 30 June 20X8

Question 4
 On 1 January 20X7, these balances appeared in the books of the HighFive Club:
SZL
Inventory: Refreshments 120
Stationery 30
Bank (Dr) 147
Account payables 50
Equipment (book value) 4,000
Membership subscription fees owing 53
Loan from Standard Bank 600
Accumulated fund 3,700

 Listed below are the receipts and payments for the year ended 31 December 20X7:
Receipts SZL Payments SZL
Membership sbscriptions: Account payables 50
20X6 41 Stationery bought 36
20X7 1,375 Honorarium to secretary 200
20X8 30 Salaries 480
Sale of refreshments 836 Purchasaes: Refreshments 356
Entrance fees 92 Crockery 160
Donations received 160 Donations 48
Water and electricity 210
Repairs 31
Standard Bank loan
(paid 1 July 20X7) 400
Equipment bought
(1 October 20X7) 120
Additional information:
1. Entrance fees are to be posted to the accumulated fund account.
2. Donations received may be used to cover operating expenses.
 Inventory on hand, 31 December 20X7:
- Stationery SZL 14
- Refreshments SZL 40
 Crockery is valued at SZL 150 on 31 December 20X7.
 Equipment is to be depreciated by 20% per annum using the straight line
method.
 Unpaid membership subscription fees for 20X6 are to be written off as
irrecoverable.
 Membership subscription fees in arrears for 20X7 amounted to SZL 45.
 Interest on the loan from Standard Bank is payable at 12% per annum.

You are required to:

i. Prepare a refreshments trading statement and a Statement of Income and Expenditure
for the year ended 31 December 20X7.
ii. Prepare a Statement of Financial Position as at 31 December 20X7.
 UNIT 3

INCOMPETE RECORDS

Unit Objectives
At the end of this unit you will be able to:
1. Estimate the profit or loss for an entity from limited (incomplete) information.
2. Prepare the accounting records for entities from limited information
1.0 Introduction
Most small businesses and NBOs do not maintain a full set of double entry financial records,
but annual financial reports still have to be prepared not only for the owners of the businesses
or members of the NBOs but also for external users of financial statements (e.g financial
providers). The Accountant may have a full set of information from which to prepare a full
set of accounting records. Such set of information may include a complete cash analysis, filed
source documents and bank statements. However sometimes accountants may have a
disorderly set of incomplete information to prepare financial records from. This unit provides
a solution on how financial records can be prepared from missing or incomplete information.

1.1 Causes of incomplete records

Businesses may not have a full set of accounting records due to the following reasons:
 Lack of knowledge by owners of small businesses or the people responsible for
accounting records on how to keep records or how to write up the double entry records.
 Some of the records might have been accidentally destroyed or lost e.g. through
unfortunate events like office flooding or fire.
 Records may be destroyed by employees responsible for fraud, hence as a cover up
they may steal or steal such records

1.2 Preparing financial records from incomplete information

The extent to which financial statements can be prepared from incomplete records depends
on the amount of information that can be obtained from the entity.
1. If minimum information is available, only the profit or loss can be estimated
2. If more detailed information is available, it is possible to prepare a compete set of
financial statements

1.2.1 Estimating profit or loss from basic information

From the knowledge of the accounting equation, it can be established that unless there has
been an introduction of extra cash or resources in the business, the only way that capital can
be increased is by making profits. On the other hand, capital can be reduced when it is
withdrawn from the business or by a loss incurred during the trading period. Therefore profit
or loss can be found by comparing capital at the end of last period with that at the end of the
present period.If the balance of capital at the start of the trading period and the capital at end
of the period is known, then the profit figure can be found by subtracting capital at the start
of the period from that at the end of the period.
Example 1
From the records of Stiba Ltd, a business selling import cars, it is established that the
opening balance of capital is SZL 150,000. During the year there has been no drawings and
no extra capital introduced by the owner of the business. At year end the capital amount is
SZL 176,000.
You are required to determine the profit for the year.
Solution:
Profit = Capital c/d - Capital b/d
= SZL 176,000 – SZL 150,000
= SZL 26,000
If there were drawings, say of SZL 3,500, the profit would be calculated as follows:
Capital b/d + Profit - Drawings = Capital c/d
SZL 150,000 + ? - SZL 3,500 = SZL 176,000
Profit = SZL 29,500

Example 2
Mahle Emakholo Shop buys handsets and sells them at a mark-up of 50% on cost. No
accurate records are kept, however the following information is available:
 Inventory at the beginning of the year was SZL 30,000.
 The shop has only one supplier from which their inventory is purchased.
 The supplier has provided a detailed statement for the year ended and from the
statement it is determined that the total purchase cost for the year was SZL 340,000.
 It has been established from the stock count at year end that inventory cost amounts
to SZL 48,200.

You are required to:

i. Calculate the cost of sales
ii. Calculate the gross profit and total sales for the year.
Solution:
i. Cost of sales = Inventory b/d + purchases – Inventory c/d
= (30,000 + 340,000) – 48,200
= SZL 321,800
ii. Sales: since inventory is sold at 50% mark-up, then:
Sales = Cost of sales x 150%/100
= 321,800 x 1.50
= SZL 482,700
Gross profit = Sales – Cost of sales
= 428,700 – 321,800
= SZL 106,900

1.3 Preparing a complete set of financial statements from incomplete records

From more detailed information a complete set of financial statements can be prepared. Any
missing information can be obtained from the available information. For instance given the
information for the statement of financial position, sales and purchases figures can be
calculated by using account receivables and payables. Information relating to expenses and
income can also be obtained from available information.

Example
The owner of Sweet Sound Suppliers did not keep proper accounting records. However the
following information was established from existing records:
 List of assets and liabilities:

31 Dec.20X8 31 Dec.20X9
Assets and liabilities: SZL SZL
Non-current assets 20,000 20,000
Accounts receivable 5,000 15,000
Accounts payable 15,000 9,000
Water and electricity (accrued expenses) - 3,000
Bank 15,000 15,000
Cash 2,000 1,000
Inventory 20,000 10,000
Long-term borrowings 30,000 30,000
  Bank statement:
- Suppliers were paid SZL 12,000 by cheque during the year.
- Received from receivables and banked SZL 25,000. The owner also informs
you that one receivable paid him SZL 5,000 cash.
 Expenses paid during the year:
Amount (SZL) Payment method
Water and electricity 4,000 Cheque
General expenses 9,000 Cheque
Water and electricity 1,000 Cash
Drawings 5,000 Cash

You are required to:

i. Prepare the following general ledger accounts:
 Accounts payable
 Accounts receivable
 Water and electricity
 Bank and cash in columnar form
ii. Prepare the Statement of Comprehensive Income for the year ended 31 December
20X9.
iii. Statement of Financial Position as at 31 December 20X9.

Solution
i.
Dr General Ledger of Sweet Sound Suppliers Cr
Amount Amount
Date Details Folio SZL Date Details Folio SZL
Real Accounts Section
Accounts Receivable A/c
01-Dec Balance b/d 5,000 31-Dec Bank (25,000+5,000) CRJ 30,000
31-Dec Sales ARJ 40,000 Balance 15,000
45,000 45,000
01-Jan Balance b/d 15,000

Accounts Payable A/c

31-Dec Bank CPJ 12,000 01-Dec Balance b/d 15,000
Balance c/d 9,000 31-Dec Purchases APJ 6,000
21,000 21,000
 Nominal Accounts Section
Water and electricity A/c
31-Dec Bank (4,000+1,000)
CPJ 5,000 31-Dec Profit & loss 8,000
Accrued expenses
GJ 3,000
8,000 8,000

Sweet Sound Supplies

Dr Cash Book Cr
Date Details Folio Bank Cash Date Details Folio Bank Cash
01-Jan Balance b/d 15,000 2,000 31-Dec Accounts payable 12,000
31-Dec Account receivables 25,000 5,000 Water & electricity 4,000 1,000
General expenses 9,000
Drawings 5,000
Balance c/d 15,000 1,000
40,000 7,000 40,000 7,000
01-Jan Balance b/d 15,000 1,000

ii. Abridged Statement of Comprehensive Income for the year ended 31 December
20X9
SZL SZL
Sales (credit) 40,000
(-) Cost of sales (16,000)
Opening inventory 20,000
Purchases 6,000
26,000
(-) Closing inventory (10,000)
Gross profit 24,000
(-) Operating expense (17,000)
Water and electricity 8,000
General expenses 9,000
Net profit 7,000
iii. Statement of Financial Position as at 31 December 20X9
ASSETS SZL SZL
Non-current assets
Property, plant and equipment 20,000
Current assets
Inventories 10,000
Accounts receivable 15,000
Cash and cash equivalents (15,000+1,000) 16,000 41,000
Total assets 61,000
Equity and Liabilities
Owner's equity and reserves
Capital* 17,000
(+) Net profit 7,000
(-) Drawings (5,000) 19,000
Non-current liabities
Long-term borrowings 30,000
Current liabilies
Accounts payable (9,000+3,000) 12,000
Total equity and liabilities 61,000

Calculations
Calculations SZL
Property, plant and equipment 20,000
Accounts receivable 5,000
Bank 15,000
Cash 2,000
Inventory 20,000
Accounts payable (15,000)
Long-term liability (30,000)
Capital amount for Statement of Financial Position* 17,000
 Practice Exercises

Question 1

On 1 January 20X8, Phillip Black opened a photographic studio and paid SZL 14,000 into the
business bank account as the commencing capital. He kept no proper books of account for his
first year in business, but the summary given below, covering the year to 31 December 20X8
has been prepared from statements supplied by the bank.

Payments into the bank account: SZL

Capital (1 January 20X8) 14,000
Payments received for photographic work done (after deducting Black's drawings and
other expenses) 9,554
Cheques drawn on the business bank account:
Purchase of equipment (furniture and fittings, cameras,dark-room equipment, etc.) 11,220
Advertising 265
Lighting and heating 656
Rent, rates and insurance 3,490
Miscellaneous expenses 214
Payment to suppliers of photographic materials 2,730

Mr. Black tells you that the total amounts received by him for photographic work done was
SZL 19,560. He explains that the difference between the total and the amount paid into bank
is accounted for by:
 Drawings SZL 8,100
 Wages of a part-time assistant SZL l,840
 Miscellaneous expenses SZL 66.
Take the following matters into consideration:
 Unpaid bills from suppliers of photographic materials amounted to SZL 525 at 31
December 20X8.
 SZL 950 is to be allowed for depreciation of equipment.
 At 31 December 20X8, the stock of photographic materials is valued at SZL 620.
 The item above for rent, rates and insurance (SZL 3,490) includes the premium paid
(SZL 144) on an insurance policy covering a 12 months' period starting on 1 April
20X8.
 Mr Black tells you that at 31 December 20X8 SZL 2,270 is owing to him for work
done. He estimates, however, that only three-quarters of this amount will be collected
eventually.
You are required to prepare a Statement of Comprehensive Income and Statement of
Financial Position for the year ended 31 December 20X8.

Question 2
Jannet Mabaso has run a small business for many years, however she has never kept adequate
accounting records. A need to obtain a bank load for expansion has however necessitated the
preparation of proper financial records for the year ended 30 June 20X9. As a result the following
information has been obtained after much careful research:
1. Janet Mabaso’s business assets and liabilities are as follows:
1 July 20X8 30 June 20X9
SZL SZL
Inventory 8,600 16,800
Accounts receivable 3,900 4,300
Accounts payable 7,400 8,900
Rent prepaid 300 420
Electricity accrued 210 160
Balance at bank 2,300 1,650
Cash in hand 360 330
2. All receipts have been banked after deducting the following payments:
• Cash drawings (estimate) SZL 8,000
• Casual labour SZL 1,200
• Purchase of goods for sale SZL 1,800
3. Bank payments during the year ended 30 June 20X9 have been summarised as
follows:
SZL
Purchases 101,500
Rent 5,040
Electricity 1,390
Delivery costs (to customers) 3,000
Casual labour 6,620

4. It has been established that the gross profit of 33.3% on cost has been obtained on all
goods sold.
5. Despite her apparent lack of precise accounting records, Janet Mabaso is able to
confirm that she has taken out of business during the year under review goods for her
 own use costing SZL 600.
You are required to:
i. Prepare a computation of total purchases for the year ending 30 June 20X9.
ii. Prepare the Statement of Comprehensive Income for the year ending 30 June 20X9.
iii. Prepare the Statement of Financial Position as at 30 June 20X9.

Question 3
Akwandze Traders, a sole proprietor, did not keep proper accounting records. Mrs Hlanze,
the business owner furnished you with the following information relating to the business that
she extracted from her note book:
31 Dec.20X8 31 Dec.20X9
Assets and liabilities SZL SZL
Delivery vehicle - carrying value 20,000 ?
Shop equipment - carrying value 30,000 ?
Accounts receivable 10,000 10,000
Accounts payable 70,000 20,000
Bank 20,000 10,000
Cash 15,000 30,000
Inventory 30,000 20,000
Accumulated profit 10,000 ?

Summary of bank payments and receipts SZL

Delivery vehicle purchased on 1 January 20X8 30,000
Shop equipment purchased on 1 January 20X8 20,000
Cash sales deposits for the year 40,000
Purchase of inventory 2,000
Payment of accounts payable 50,000
Receipts of accounts receivable 70,000

Summary of cash expenses SZL

Motor vehicle expenses 5,000
Purchase of goods for sale 1,000
Additional information:
1. Mrs Hlanze paid most major items of expenditure by cheque. Certain other items
were paid out of cash receipts and the balance of the cash receipts was banked every
week.
2. Depreciation must be provided for at 20% per annum on the reducing balance method
for the delivery vehicle and shop equipment.
 3. On 1 January 20X6, the delivery vehicle and shop equipment (shown on 31 December
20X8) were bought.

You are required to:

i. Prepare the Statement of Comprehensive Income for the year ended 31 December
20X9.
ii. Prepare the Statement of Financial Position as as 31 December 20X9.