Some Peculiar Items of Non-profit
Seeking Concerns:
Learning Objectives:
-
Treatment of various peculiar items in
non-profit organizations.
1. Depreciation:
Depreciation means
loss on account of use of an asset or decrease in
its value on account of passage of time. Suppose, an
almirah is bought for $1,000. Its value must
diminish gradually on account of use - the more it
is used, the more will it diminish in value. After
sometime it will become unfit for use. Then a new
almirah is to be bought. Suppose, the almirah can be
used for 10 years. In that case the annual loss on
account of depreciation will be $100 (1,000 / 10).
It must be debited to
Income and Expenditure Account; otherwise the
true result cannot be obtained. Similarly,
depreciation must be taken into account in respect
of all other assets like building, typewriter,
furniture etc.
NOTE:
In examination
problems depreciation is usually mentioned at
certain percent per annum (% p.a.) on the cost of
asset. If an asset is purchased in the current year,
depreciation is to be charged for the period from
the date of purchase up to the end of the year. If
the almirah is purchased on 1.10.05, depreciation is
to be charged for 3 months (Oct. to Dec.) on
31.12.2005. So the amount of depreciation will be
$25 (1000 x 10/100 x 3/12). If the date of purchase
is not mentioned, depreciation should be charged for
6 months, on the assumption that the asset has been
purchased in the middle of the year. A note to that
effect must be added.
2. Sale of Assets:
Sale proceeds of
assets will not be included in
Income and Expenditure Account, since it is not
a revenue item. But in the event of profit or loss
on sale, loss will be debited to
Income and Expenditure Account, but profit will
not be taken to the credit of Income and Expenditure
Account - it being capital income, will be credited
to Capital Fund Account. If, however, the amount of
profit is small, it may be credited to Income and
Expenditure Account, since it will not affect the
annual result in any significant manner.
3. Purchase and Sale of Newspaper:
Purchase of
newspaper does not result in acquisition of any
asset - so it is revenue expenditure. When
purchased, it is debited to Income and Expenditure
Account. When old newspapers are sold, the treatment
is just the reverse.
4. Purchase and Sale of Newspaper:
Sports materials,
viz. bat, ball etc. are spoiled in a very short time
- so they are treated as revenue expenditure. Their
sale or purchase will be dealt with in the same
manner as "Purchase and Sale of Newspaper". However
if depreciation of sports material is given in the
question then amount of depreciation will be written
on debit side of income and expenditure account and
remaining amount after deducing depreciation on
asset side of balance sheet.
5. Subscription:
The monthly or
annual subscription paid by members is revenue
income and hence credited to Income & Expenditure
Account. The amount of subscription received in
current year may include
subscription for last year or next year, which are
to be excluded. Again, current year's subscription
may be accrued or it might have been received last
year in advance. Since these two items of
subscription relate to current year, they are to be
included. Thus we see that the following four
adjustments are necessary for subscription:
|
With the
amount of subscription received |
Last
year's subscription received this year |
Deduct |
Next
year's subscription received this year |
Deduct |
Current
year's subscription received last year |
Add |
Current
year's subscription not yet received |
Add |
|
|
HINTS:
If the item relates to current year, add to
subscription received this year; if the item does
not relate to current year, deduct. |
6. Special Subscription:
Sometimes additional subscription is collected from
members over and above the regular subscription for
some special purposes such as construction of club's
own building, charities to the poor, awarding of
prizes etc. Such subscription will not be included
in Income & Expenditure Account, since it is not a
regular or recurring income. Such subscription is
credited to Special Fund Account, viz., Building
Fund Account, Charity Fund Account, Prize Fund
Account etc. The amount of such fund is kept
deposited with a bank or invested in Government Papers or
in gilt-edged securities. Income derived from such
investment is credited to concerned Fund Account and
all relative expenses are debited to the Fund
Account, Such incomes and expenses will not be taken to
Income & Expenditure Account. Fund is a liability
- it will be shown on Liabilities side of Balance
Sheet. But investment of fund money is an asset and
hence it is shown on Assets side of Balance Sheet.
7. Admission Fee:
At the time of admission every new member is to pay
admission fee in addition to subscription. It is
just like the admission fee that you pay in addition
to monthly tuition fee at the time of your admission
into a school or college. There is a difference of
opinion among the accountants as to whether the
income on account of admission fee is to be treated
as capital income or revenue income. Generally,
admission fee is regarded as revenue income and
credited to Income & Expenditure Account. If,
however, there is any stipulation in the bye-laws of
the institution, it must be observed, if it is
stipulated that admission fee will be regarded as
capital income, it cannot be included in Income &
Expenditure Account - it will be credited to Capital
Fund Account and shown on Liabilities side of
Balance Sheet as an addition to that fund. Again, it
may be so stipulated that admission fee is to be
regarded partly as capital and partly revenue.
8. Legacy:
Legacy refers to property received by virtue of a
will of a person after his death. Acquisition of
such property by an institution is regarded as
capital receipt. Hence it will not appear in Income
& Expenditure Account. Properties or cash received
on account of Legacy is shown on asset side on-the
balance sheet on one hand and on the other hand it
is added to the capital fund account on the
liabilities side of the balance sheet.
9. Life Membership Fee:
In some institutions one may become a life member
by paying a lump sum at a time - he is not required
to pay monthly or annual subscription. So life
membership fee is in effect regular subscription
paid in advance. The subscriptions collected from
the members are utilized for rendering services to
them, so it is revenue income. But only a portion of
subscription collected from life members is spent in
the current year for rendering services to them. The
portion which is spent in the current year, is
revenue income and the unspent portion is regarded
as capital income. The revenue portion is credited
to Income & Expenditure Account, while the capital
portion is shown in Balance Sheet on "Liabilities"
side under the head "Life Membership Fee".
Suppose, life membership fee collected is
$1,000,
10 % of which is to be treated as revenue. In
examination problem if no direction is given, a
portion of life membership fee (say 10%) should be
treated as revenue adding a suitable note to that
effect.
10. Donation:
Sometimes institution like Club, Hospital etc.
collect donation from members and general public.
Whether such donation is to be treated as capital or
revenue depends upon the purpose for which the
donation is collected. If the donation is collected
for any special purpose, it must be treated as
capital and credited to a special fund account and
shown on Liabilities side of Balance Sheet, e.g.,
Building Fund, Charity Fund, Prize Fund etc. On the
other hand, if the donation is collected not for any
special purpose, it is treated as revenue and
credited to Income & Expenditure Account.
11. Capital Fund:
Any concern - whether profit-seeking or
non-profit-seeking - requires money for conducting
day to day functions. In the case of profit-seeking
concerns such money is called Capital, while in the
case of non-profit-seeking concerns it is called
Capital Fund. The excess of total assets over total
external liabilities of a concern is called Capital
Fund. Capital Fund is created with surplus revenue
and capital receipts and incomes, such as surplus
(excess of income over expenditure). Donation, Life
Membership Fee, Admission Fee, Profit on Sale of
Fixed Assets etc. It is also called General Fund or
Accumulated Fund or surplus Account It is shown on Liabilities side of Balance Sheet as
the first item. In practice, Capital Fund is the capital of a non
profit-seeking concern.
Relevant Articles:
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