Friday, December 16, 2022


  Eli-express       Friday, December 16, 2022

Preparation of Statement of Affairs
Prepare statements of affairs
Certainly, proper accounting is essential for non-trading institutions. These concerns maintain, generally, a cash book and later they prepare a summary of cash transactions appearing in the cash book. This summary takes the form of an account known as receipts and payments account.
Such concerns also prepare 'income and expenditure account' (which is more or less on the lines of profit and loss account) and the Balance Sheet.
The day-to-day accounting consists of maintaining.
  1. Cash book for recording receipts and payments, and
  2. Ledger for classification of transactions under proper heads.
Preparation of Income and Expenditure Account from a Receipts and Payments Account
Prepare income and expenditure account from a Receipts and payments account
Receipts and Payments account
It is a summary of cash book for a given period, but the Receipts and Payments account shows the totals of cash transactions under different heads. All the receipts, be cheque or cash are entered on the debit (receipts) side (as in cash book) whereas all the payments (both by cheque or cash) are shown on the credit (payments) side. Following features of the receipts and payments account will help to identify its nature clearly:
  1. It is a summary of cash book, like a cash book, receipts are shown on the debit side and payments on the credit side.
  2. Cash and bank items are merged in one column. That means receipts in cash as- well-as by , cheque are entered in one column on debit and payments in cash as-well- as by cheque are entered in one column on credit side. Contra entries between cash and bank get eliminated.
  3. It is not a part of double entry book-keeping. It is just a summary of cash book which is a , part of double entry system.
  4. Just like cash book, it starts with the opening balance of cash and bank and closes with the closing balance of cash and bank.
  5. Both revenue and capital receipts and payments are recorded in this account. For example, An organization that is exclusively set up to carryon with the object of carrying out social service or promo & organization of social activities, is a non- trading enterprise. payment for rent and payment for building and machinery both are recorded on its payments side. Similarly, receipts on account of subscription and machinery are shown on the receipts side.
  6. Usually, it shows a debit balance which represents cash in hand and at bank. However, in case of bank overdraft, which is larger than cash in hand, the account will show a credit balance.
  7. Receipts and payments account fails to disclose gain or loss made by the concern during the period because (a) it is prepared on actual receipt basis i.e. it records all receipts-irrespective of the period to which it relates (previous year, current year or future), (b) it also ignores the nature of the receipts and payments (whether capital or revenue). I
  8. Accounting concept of gain or loss is based on "accrual concept" which by its very nature "receipts and payments account" is not capable of considering. Therefore, fails to disclose gain or loss (earned or suffered by the concern) during the period. For example, this account ignores:
  • Decrease or increase i.e. depreciation or appreciation in the value of assets;
  • Increase or decrease in the value of stock;
  • Provision for expenses incurred but payments not made-outstanding expenses.
  • Accounting for payment in advance for the services to be utilized in the next accounting period-prepaid expenses. It also fails to distinguish between:
  • Capital and revenue payments-whether expenditure or purchase of an asset, and
  • Business charge and appropriation- whether business expenditure or drawings.
Limitations of receipts and payments account
Receipts and payments account suffers from following limitations:
  1. It does not show expenses and incomes on accrual basis.
  2. It does not show whether the club or society is able to meet its day-to-day expenses out of its incomes.
  3. It does not show expenses on account of depreciation of assets.
  4. It does not explain the details about many expenses and incomes. In order to explain such questions, treasurer of the club prepares 'Income and expenditure account' and balance sheet.
Income and Expenditure Account
This account is prepared by non-trading concerns who want to know if during the financial year their income has been more than their expenditure i.e. profit or vice versa ( i.e. loss). Since the object of these concerns is not primarily to' earn profit, therefore, they feel shy in giving it the name of profit and loss account. Because the word 'profit' is a taboo which any society 'looks down upon'. Of course, it discloses whether the concerned institution earned or lost.
It is equivalent to and serves the purpose of 'profit and loss account'.
It is prepared on "accrual basis" (not on receipt basis) meaning thereby that all incomes are to be included which have been earned in the relevant period (whether actually received or not). Similarly, it includes all expenses incurred in the relevant period (whether actually paid or not). This account serves exactly the purpose which 'profit and loss account' serves in a trading concern. On the pattern of 'profit and loss account' income is shown on the credit side and expenditure on the debit side. It also distinguishes between 'capital & revenue' items i.e. it does not take into consideration capital items {both receipts and payments). It follows double entry principles faithfully.
The Value of Accumulated Fund
Calculate the value of the accumulated fund
The term Capital, owner’s equity or shareholders’ equity is commonly used by profit oriented organizations, while it would be inappropriate to use owner’s equity or capital in non-profit accounting since they are owned by no one. Therefore, the term accumulated fund is usually used to refer to the capital of a non-profit organization.
The value of the accumulated funds can be calculated at any time by valuing the net assets (i.e. assets less liabilities) of the organization. The accumulated fund is the equivalent of the capital of a profit-making organization.
Calculation of Accumulated Funds:Funds = Assets - Liabilities OR Trial Balance OR Statement of Affairs
Reconstruction of Income Account and Expenditure Accounts
Reconstruct income account and expenditure accounts
Income and Expenditure account shows the summary of all incomes and expenditures of an organization for complete year. It is just like Profit and Loss Account. Following points should be noted in respect of Income and Expenditure Account:-
  • It is a nominal account.
  • All the expenses are shown in debit side.
  • All incomes are shown in credit side.
  • It shows income and expenditure of current year only on accrual basis.
  • Only revenue expenses are shown in this account. No capital expenditure is shown in this account.
Example 1
Prepare the Income and Expenditure Account of XYZ Club for the financial year 2014-15 from the following transactions
(IN RS.)(IN RS.)


(IN RS.)
(IN RS.)
  • Sale of investment is not revenue income.
  • Loss on sale of furniture is to be shown in expenditure side. i.e. Book value less sale value.
  • Purchase of Defence Bonds is not expenditure. It in an investment.
  • Furniture is a capital expenditure.
  • Cycle is also capital expenditure.
Preparation of Balance Sheet
Prepare the balance sheet
The balance sheet of a non-trading concern is on usual lines. Liabilities on left hand side and assets on right hand side. In trading concerns, excess of assets over liabilities is called 'capital'. Here, in non-trading concerns, excess of assets over liabilities is called 'capital fund'. The capital fund is built up out of surplus from income and expenditure account.
Peculiar items of non-trading concern's
Generally, in the exercises, the instructions are given as to the treatment of special items. Such instructions are based on the rules of the concern. These should be followed while solving the question. In cases, where no specific instructions are given, the following guidelines may be considered:
  1. Legacy: It is the amount received by the concern as per the 'will' of the 'donor'. It appears on the receipts side of receipts and payments account. It should not be considered as income but should be treated as capital receipt i.e. credited to capital fund account.
  2. Subscriptions: The members of the associations, as per rules, are, generally, required to make annual subscription to enable it to serve the purpose for which it was created. It appears on the receipts side of the receipts and payments account and is, usually, credited to income. Care must be exercised to take credit for only those subscriptions which are relevant.
  3. Life membership fees: Generally, the members are required to make the payment in a lump sum only once which enables them to become the members for whole of the life. Life members are not required to pay the annual membership fees. As 'life membership fees' is a substitute for 'annual membership fees', therefore, it is desirable that life membership fees should be credited to a separate fund and fair proportion be credited to income in subsequent years. In the examination question, if there is no instruction as to what proportion be treated as income then whole of it should be treated as capital.
  4. Entrance fees: This is also an item to be found on the receipts side of receipts and payments account. There are arguments that it should be treated as capital receipt because entrance fees is to be paid by every member only once (i.e. when enrolled as member, hence it is nonrecurring in nature. But another argument is that since members to be enrolled every year and receipt of entrance fees is a regular item, therefore, it should -be credited to income. In the absence of the instructions anyone of the above treatment may be followed but students should append a note justifying their treatment.
  5. Sale of newspapers, periodicals, etc.: As the old newspapers, magazines, and periodicals etc. are to be disposed of every year, the receipts on account of such sale should be treated as income, and therefore, to be credited to income and expenditure account.
  6. Sale of sports material: Sale of sports material (used) is also a regular feature of the clubs. Sale proceeds should be treated as income, and therefore, to be credited to income and expenditure account.
  7. Honorarium: Persons may be invited to deliver lectures or artists may be invited to give their performance by a club (for its members). Any money, paid to invitees, is termed as honorarium and not salary. Such honorarium represents expenditure and will be debited to income and expenditure account.
  8. Special fund: Legacies and donations may be received for specified purposes. As discussed above, these should be credited to special fund all expenses related to such fund are shown by way of deduction from the respective fund and not as expenditure in income and expenditure account.
  9. Sale of old asset: It is a non-recurring item. It cannot be taken to income and expenditure account. It leads to reduction in asset. Therefore, it is shown by way of deduction from the concerned asset. It is important to note that it is the "book value" that is to be deducted from asset. Profit or loss in such a case is taken to income and expenditure account. Where the book value of asset is nil, the entire proceeds of sale be treated as income.
  10. Specific Donations: These are received for specific purpose. For example: Donation for building; Donation for prizes; Donation for pavilion etc. These are capital receipts and shown on liabilities side. It is worthy to note that such donations should not be treated as income because if they are taken to income and expenditure account, it will increase income. The increased income may be utilized for any other purpose. Thus, the purpose of donation will not be served. Such donations appear on the liability side because they create a long term obligation (liability) on the institution. For example a donor may wish that prizes may be awarded year after year out of the income earned on his donations. Such a donation account can't be closed within a year by transferring to income and expenditure account.
  11. General donations: These donations are not for any specific purpose and being a recurring income they are to be treated as income and are shown on the income side of income and expenditure account.
  12. Endowment fund: It represents donation for a specific purpose. Here, the object of the donor is to provide a source of permanent income to the institution. Thus, it is shown in the liability side of balance sheet. Any income earned during the year in such fund is added to it and any expenditure incurred during the year is deducted from it.
Advantages and Disadvantages of Receipts and Payments Accounts
State the advantages and disadvantages of Receipts and payments accounts
Features Of Receipts And Payments Account
The essential features of receipts and payments account are as follows:
  1. Summary Of Cash Transactions: All cash receipts and payments made by the concern during the accounting period are recorded in this book. Therefore, receipts and payments account can be taken as a summary of cash transactions.
  2. Cash And Bank Items In One Column: All receipts either cash or bank are recorded in receipts column of receipts side where all cash and bank payments are recorded in one column of payment column of receipts and payments account. The cash and bank transactions are merged toavoidcontra entries of cash and bank transactions.
  3. No Distinction Between Capital And Revenue: All cash receipts and cash payments irrespective of capital and revenue nature are recorded in receipts and payments account. No distinct is made for capital receipts , revenue receipts, capital expenditures and revenue expenditures.
  4. Opening And Closing Balance Of Cash: Receipts and payments account starts from opening balance of cash and bank ends with the closing balance of cash and bank.
  5. Recording Of Cash Receipts And Payments: All cash and cheque receipts are recorded on debit side where as all cash and cheque payments are recorded on credit side of receipts and payments account.
  6. Ignores Non-cash Transactions: Receipts and payments account does not record non-cash transactions.
Limitations Of Receipts And Payments Account
The receipts and payments accounts suffers from the following limitations:
  1. Receipts and payments account does not differentiate capital and revenue expenses and incomes.
  2. Receipts and payments account fails to show expenses and incomes onaccrualbasis.
  3. Receipts and payments account fails to show surplus and deficiency.
  4. Receipts and payments account fails to show non-cash transactions such as depreciation of fixed assets, pilferage etc.



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