Short Answer Type question:
Q.1 State the meaning of ‘Not-for-Profit’ Organisations.
ANSWER: Not-for-Profit Organisations (NPO) are set up with the prime objective of providing services and not to earn profit thereby enhancing the welfare of society. Such organisations include schools, hospitals, trade unions, religious organisations, etc. The person/s or the groups of individuals who govern and manage the working of an NPO are known as trustees. NPO’s main sources of income are donations, subscriptions, life membership fees, grants etc. As these organisations are not set up with profit motive, they do not prepare Trading and Profit and Loss Account. Instead, they maintain Receipt and Payments Account, Income and Expenditure Account and Balance Sheet.
Q.2 State the meaning of Receipt and Payment Account.
ANSWER: Receipts and Payments Account is a summary of the Cash Book. All cash receipts are recorded on the Receipts side (i.e. Debit side) and all cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all cash and bank transactions both of capital and revenue nature. It not only records the cash and bank transactions relating to the current accounting period, but also the cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period.
This account only helps us to ascertain the closing balance of the cash and bank and helps in assessing the cash position of an NPO.
Q.3 State the meaning of Income and Expenditure Account.
ANSWER: Income and Expenditure Account (I&E) is similar to the Profit and Loss Account in the sense that while the former is prepared to ascertain surplus or deficit during an accounting period, the latter is prepared to ascertain net profit or net loss incurred during an accounting period. I&E Account is a nominal account and is prepared on the accrual basis. It records all transactions of revenue nature that are related to the current accounting period (whether outstanding or prepaid) for which the books are maintained. All expenses and losses are recorded on the debit side (Expenditure side) and all income and gains are recorded on the credit side (Income side) of I&E Account. The closing balance or the balancing figure of I&E Account is termed as surplus (or deficit), if the sum total of the Income side exceeds (is lesser than) the sum total of the Expenditure side.
Q.4 What are the features of Receipt and Payment Account?
ANSWER: The following are the features of Receipt and Payment Account:
1. Nature: It is a Real Account. It is a summarised version of Cash Book.
2. Nature of Transactions: It records only cash and bank transactions. Transactions other than cash and bank like depreciation, loss/ profit on sale of assets, etc. are not recorded in this account.
3. No distinction between Capital and Revenue items: It records all cash and bank receipts and payments of both capital and revenue nature.
4. Opening and closing balance: It begins with the opening balance of cash and bank and ends with the closing balance of the cash and bank (balancing figure) at the end of the accounting period.
5. Purpose: It reveals the cash position of an organisation. It helps to ascertain the total amount paid and received during an accounting period.
Q.5 What steps are taken to prepare Income and Expenditure Account from a Receipt and Payment Account?
ANSWER: The following steps are taken to prepare Income and Expenditure Account (I&E) from Receipts and Payment Account (R&P).
Step 1: All the revenue expenditures paid for the current accounting period are transferred from the Payments side of R&P to the Expenditure side of I&E.
Step 2: All the revenue receipts for the current accounting period are transferred from the Receipts side of R&P to the Income side of I&E.
Step 3: Expenses outstanding for the current period and expenses paid in advance (prepaid expenses) for the current period in the preceding accounting periods are to be added (adjusted) to their related expenses in the Step 1.
Step 4: Income outstanding (accrued income) for the current period and income received in advance for the current period in the preceding accounting periods are to be added (adjusted) to their related incomes in Step 2.
Step 5: Non-cash items like depreciation, appreciation for the current accounting period are to be adjusted in the I&E.
Step 6: After adjusting all the revenue items for the current accounting period, the Income and the Expenditure sides are totaled. If the sum total of the Income side exceeds (or is lesser than) the sum total of the Expenditure side, then the balancing figure is termed as surplus (or deficit).
Q.6 What is subscription? How is it calculated?
ANSWER: Subscription is the main source of income for an NPO besides entrance fees, donations, grants, etc. Subscriptions refer to the amount of money paid by the members on periodic basis for keeping their membership with the organisation alive. It is paid monthly, quarterly, half yearly or annually by the members.
It is shown in the debit side of the Receipt and Payment Account with the total amount received during the year that may be related to the current period and to the previous and next accounting period.
While calculating subscription for the current period, advance subscription received for the current period in the previous period and outstanding subscription for the current period are added to the subscription received during the current period. Whereas, on the other hand, advance subscription received for the next accounting period during the current period and outstanding subscription for the preceding period are deducted from the subscription received during the current period.
Calculation of Subscription
| Subscription received during the year | *** | |
| Add: Subscription received (in advance) during previous year for current year | *** | |
| Add: Subscription outstanding at the end of the year | *** | |
| *** | ||
| Less: Subscription received in advance for the next year | *** | |
| Less: Subscription outstanding for the previous year | *** | *** |
| ## Subscription shown in Income and Expenditure Account | *** |
## This subscription is related to the current accounting period and is shown in the Income side of the Income and Expenditure Account.
Q.7 What is Capital Fund? How is it calculated?
ANSWER: Capital fund is the excess of NPOs’ assets over its liabilities. In other words, the excess of assets over the liabilities for a profit earning organisation is termed as capital and the same for an NPO is termed as capital fund. Any surplus or deficit ascertained from Income and Expenditure account is added to (deducted from) the capital fund. It is also termed as Accumulated Fund.
Calculation of Capital Fund
| Capital Fund at the beginning of the year | ** | |
| Add: Surplus from Income and Expenditure Account | ** | |
| Add: Subscription Amount (Capitalised amount) | ** | |
| Add: Life membership fee. | ** | ** |
| Less: Deficit from Income and Expenditure Account | ** | |
| Capital Fund at the end of the year | *** |
Long Answer Type Question.
Q.1 Explain the statement: “Receipt and Payment Account is a summarised version of Cash Book”.
ANSWER: A receipts and payments account (R & P Account) is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the R & P Account. All the cash and bank transactions are recorded in Cash Book and this book is created on the basis of all these transaction. All cash and bank transactions that are of revenue and capital nature gets recorded. It records all transactions i.e. bank receipts and cash receipts.
This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of a Not-for-profit organisation or NPO.
Here are some similarities between Cash Book and Receipts and Payments Account:
1. Both are real accounts.
2. Only transactions of cash and bank are recorded
3. There is no distinction between Revenue and Capital Items
4. Helps in assessing the cash position of an organisation
5. Starts with an opening balance consisting of cash and bank and concludes with closing balance of cash and bank.
Therefore, it can be said that Receipt and Payments Account is a summarised version of cash book.
Q.2 “Income and Expenditure Account of a Not-for-Profit Organisation is akin to Profit and Loss Account of a business concern”. Explain the statement.
ANSWER: The account containing all expenses and losses for current accounting period prepared by a Not-for-profit organisation is called as Income and Expenditure (I & E) account, while a similar account prepared by profit earning organisation is called as Profit and Loss Account (P & L).
Here are some of the similarities between I & E and P & L accounts:
1. Accrual basis is followed for the preparation of both accounts.
2. Expenses and losses are recorded on Expenditure (debit) side and gains and income are recorded on Income (credit) side.
3. Records only revenue items related to current accounting period.
4. Both exhibit nature similar to nominal accounts
Therefore, it can be said that from the above statements that Income and Expenditure account of a Not-for-Profit Organisation is akin to Profit and Loss Account of a business concern.
Q.3 Distinguish between Receipts and Payments Account and Income and Expenditure Account.
ANSWER:
| Basis of Comparison | Receipts and Payments Account | Income and Expenditure Account |
| Nature | Contains bank and cash transaction summary. | Contains summary of income and expenses of current year |
| Revenue and Capital | Both revenue and capital transactions are recorded | Only revenue transactions are recorded |
| Debit Side | Records cash and bank receipts are recorded | Records expenses and losses incurred for the current accounting year |
| Credit side | Records payments received in form of cash and cheques | Records incomes and gains during the current accounting year |
| Account Type | Real Account | Nominal Account |
| Accounting Period | Records receipts and payments made during the year which may be related to current, previous or next accounting year | Records only the expenditure and income made during the current accounting year |
| Object | Shows the cash position of NPO | Shows the net results in terms of deficits or surplus |
| Depreciation | Non-cash items like depreciation is not included | Includes non-cash items like depreciation, bad-debts for determining net profit or loss. |
| Adjustment | Before preparing financial statements the Payments and Receipts received during the year can be adjusted. | Cash and non-cash transactions can be adjusted |
| System | Cash basis | Accrual Basis |
Q.4 Explain the basic features of Income and Expenditure Account and of Receipt and Payment Account.
ANSWER: Income and Expenditure account is similar to the P & L account (Profit and Loss Account). In an income and expenditure account surplus and deficit is determined during the accounting period while in a P& L account the net profit or loss is determined during an accounting period. It is a nominal account and records transactions that are of revenue nature. The closing balance is called deficit or surplus based.
Basic Features of I & E Account are:
1. It is a nominal account
2. Prepared on the basis of R & P (Receipt and Payment Account). All revenue items irrespective of income or expenditure get transferred.
3. Transactions that are of capital nature are not included in the account.
4. It is similar to P & L account
5. Records only current accounting year items and excludes any other transactions
6. Items like prepaid expenses, depreciation, income received in advance can be adjusted.
7. Balancing figure is expressed as surplus or deficit based on the status of expenses and income.
A receipts and payments account is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the Receipts and Payments Account. This account is prepared on the basis of all the cash and bank transactions that are recorded in Cash Book. It records all cash and bank transactions that are of revenue and capital nature. It records all transactions i.e. bank receipts and cash receipts.
This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of an NPO.
Basic Features of R & P Account are:
1. It is a real account also known as summarised version of Cash Book
2. It records only bank and cash transactions.
3. Non-cash transactions like depreciation is not recorded
4. It begins with an opening balance of cash and bank and ends with closing balance of cash and bank.
5. Helps in assessing the cash position of an organisation
6. It does not distinguish between capital and revenue items
Q.5 Show the treatment of the following items by a Not-for-Profit Organisation
ANSWER:
| (i) | Annual subscription |
| (ii) | Specific donation |
| (iii) | Sale of fixed assets |
| (iv) | Sale of old periodicals |
| (v) | Sale of sports materials |
| (vi) | Life membership fee |
i) Annual Subscription
1. Subscriptions that are obtained during an accounting year (it may be related to current, previous or upcoming year) are reflected on the debit side of R & P Account.
2. Subscriptions related to the present year whether yet to be received or already received reflects on the credit side of I & E account (Income and Expenditure)
3. Advance subscriptions received for the following year are reflected on Liabilities side of balance sheet.
4. Subscriptions which are due but yet to be received are shown on Assets part of Balance Sheet.
5. Subscriptions that are due but yet to receive are reflected on asset side of balance sheet.
ii) Specific donation
1. Specific donation amount is reflected on Debit side of R & P Accounts.
2. Specific donation amount is shown on Liabilities side of Balance Sheet. Because it is used for that specific purpose for which it is received.
iii) Sale of fixed assets
1. Amount received recorded on debit side of R & P Account.
2. Profit/Loss is credited/debited to I & E Account.
3. Book value of asset deducted from the respective asset on Asset side of Balance Sheet
iv) Sale of old periodicals
1. Amount received reflects on the debit side of R & P Account.
2. Sale of old periodical is counted as revenue receipts, hence reflects on credit side of I & E Account.
v) Sale of sport Materials
1. Amount received is debited to R & P Account
2. Sport material sale is revenue earned, hence reflects on credit side of I & E Account.
vi) Life Membership Fees
1. It is considered as a receipt for a NPO. Hence, debited to R & P Account
2. It is one-time fee and hence treated as Capital receipts, hence, added to Capital Fund on liabilities side of Balance Sheet
Q.6 Show the treatment of items of Income and Expenditure Account when there is a specific fund for those items.
ANSWER: A NPO (Not-for-Profit organisation) has different sources of receipts in the form of subscriptions, donations, government grants etc. Of these some receipts are general while some are specific. Specific receipts are used only for the purpose for which it is received while general receipts can be used for any purpose. The specific receipts are not considered as revenue income for the Not-for-Profit organisation and therefore are reflected in I & E account.
In a way, specific receipts are considered as liabilities to the Not-for-Profit organisation as these amounts are received for specific purpose and cannot be used elsewhere. These are reflected in Liabilities side of Balance Sheet, until and unless it is completely used for the purpose it was received. If such amount is invested in the form of shares or debentures, then it is known as funds such as prize funds, match funds etc. The interest earned on such investment are not credited to I & E Account, instead it is credited to the respective fund account.
Similarly, any expense that is incurred for such funds gets debited from respective fund account. Such funds are shown in the liabilities side of Balance Sheet. If the expenses exceed the receipts of the fund, the difference gets reflected in I & E Account.
Treatment for items received for specific purpose
| (Tournament/Match/Prize, etc.) Fund Account | ||||||||
| Dr. | Cr. | |||||||
| Date | Particulars | L.F. | Amount | Date | Particulars | L.F. | Amount | |
| Expenses (expenses incurred like, match expenses, tournament expenses) | Balance b/d | |||||||
| Incomes (Income or interest earned on funds invested in the form of donation, interests, dividends, etc.) | ||||||||
| Balance c/d (see explanation) | (a) | Income and Expenditure A/c (see explanation) | (b) | |||||
Explanation (a)
When receipts are more than expenses meant for specific purpose, that time the difference between receipts and expenses is shown on balance sheet in the liabilities side.
| Balance Sheet | ||||
| Specific Fund (i.e. Tournament, Match, Prize Fund, etc.) | Tournament Fund Investment | |||
Explanation (b)
When expenses are more than receipts meant for specific purpose, that time the difference between expenses and receipts is shown in I & E account at the expenditure side.
| Income and Expenditure A/c | ||||
| Expenditure | Amount | Income | Amount | |
| Expenses (I.e. Tournament, Match, Prize Expenses etc. except capital expenditure like, i.e. expenses on construction of building) | ||||
Q.7 What is Receipt and Payment Account? How is it different from Income and Expenditure Account?
ANSWER: A receipts and payments account is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the Receipts and Payments Account. This account is prepared on the basis of all the cash and bank transactions that are recorded in Cash Book. It records all cash and bank transactions that are of revenue and capital nature. It records all transactions i.e. bank receipts and cash receipts.
This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of an NPO.
| Basis of Comparison | Receipts and Payments Account | Income and Expenditure Account |
| Nature | Contains bank and cash transaction summary. | Contains summary of income and expenses of current year |
| Revenue and Capital | Both revenue and capital transactions are recorded | Only revenue transactions are recorded |
| Debit Side | Records cash and bank receipts are recorded | Records expenses and losses incurred for the current accounting period |
| Credit side | Records payments received in form of cash and cheques | Records incomes and gains during the current accounting period |
| Account Type | Real Account | Nominal Account |
| Accounting Period | Records receipts and payments made during the year which may be related to current, previous or next accounting year | Records only the expenditure and income made during the current accounting year |
| Object | Shows the cash position of NPO | Shows the net results in terms of deficits or surplus |
| Depreciation | Non-cash items like depreciation is not included | Includes non-cash items like depreciation, bad-debts for determining net profit or loss. |
| Adjustment | Before preparing financial statements the Payments and Receipts received during the year can be adjusted. | Cash and non-cash transactions can be adjusted |
| System | Cash basis | Accrual Basis |
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