Chapter 8 Solutions: Accounting for Non-Profit Organizations (NPOs)
Answers to the Chapter 8 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, five clear points or a five-row table for 5 marks, and full working for numerical problems.
Group A: Very Short Answer Questions (1 Mark Each)
1. What is a Non-Profit Organization? Give two examples.
A Non-Profit Organization (NPO) is an institution set up to render social, educational, charitable, healthcare, cultural, sporting or professional welfare services to its members and society, rather than to earn and distribute profit. Two examples are a hospital such as Tilganga Institute of Ophthalmology and a sports or youth club.
2. Define Receipts and Payments Account.
A Receipts and Payments Account is a summary of the cash and bank transactions of an NPO for the year, prepared on the cash basis. It starts with the opening cash and bank balance, records every receipt on the Debit side and every payment on the Credit side, whether capital or revenue and whatever year it relates to, and ends with the closing cash and bank balance; it is a Real Account.
3. How are Life Membership Fees and Specific Donations treated in the accounts of an NPO?
Both are capital receipts, so neither is credited to the Income and Expenditure Account. Life Membership Fees are added directly to the Capital Fund (or shown as a separate liability), and Specific Donations (such as a Donation for Building) are shown as a separate item on the Liabilities side of the Balance Sheet.
4. What is Honorarium? Where is it shown in NPO accounts?
Honorarium is a token payment made to an invited guest speaker, doctor or artist, who is not a regular employee, as a mark of gratitude for their services. It is a revenue expense, shown on the Debit side of the Income and Expenditure Account (and on the Payments side of the Receipts and Payments Account when it is paid).
5. What is meant by Capital Fund?
Capital Fund (General Fund) is the excess of the total assets of an NPO over its external liabilities, equivalent to the capital of a trading firm. It is shown on the Liabilities side of the Balance Sheet; the year’s surplus is added to it and a deficit is deducted from it.
Group B & C: Short and Long Numerical Questions (5 / 8 Marks)
1. Differentiate between Receipts and Payments Account and Income and Expenditure Account on any five bases.
The Receipts and Payments Account summarizes the cash an NPO actually received and paid, while the Income and Expenditure Account works out its surplus or deficit for the year. They differ as follows:
| Basis of Difference | Receipts and Payments Account | Income and Expenditure Account |
|---|---|---|
| Nature of account | A Real Account, a summarized Cash and Bank Book | A Nominal Account, equivalent to the Profit and Loss Account of a trading firm |
| Basis of accounting | Prepared on the cash basis: only cash actually received or paid is recorded, so non-cash items like depreciation and outstanding or prepaid adjustments are left out | Prepared on the accrual basis: all income earned and expenses incurred are recorded, including depreciation and outstanding and prepaid adjustments |
| Capital and revenue items | Records both capital and revenue receipts and payments, such as life membership fees, donation for building and purchase of sports equipment | Records only revenue incomes and expenditures |
| Period of items | Includes cash received or paid for the previous year, current year and next year | Includes only the incomes and expenses that belong to the current year |
| Opening and closing balances | Starts with the opening cash and bank balance and ends with the closing cash and bank balance | Has no opening balance and ends with a Surplus (excess of income over expenditure) or a Deficit (excess of expenditure over income) |
Their sides also differ: the Receipts and Payments Account shows receipts on the Debit side and payments on the Credit side, while the Income and Expenditure Account shows expenditures on the Debit side and incomes on the Credit side.
2. Subscription Calculation (5 Marks): During 2081/82, a club received Rs. 96,000 as subscription. Calculate the subscription to be credited to the Income and Expenditure Account for 2081/82 from the following information:
- Subscription outstanding on 1st Shrawan 2081: Rs. 9,000 (out of which Rs. 7,500 was received in 2081/82).
- Subscription received in advance on 1st Shrawan 2081: Rs. 4,000.
- Subscription received in advance on the last day of Ashadh 2082: Rs. 6,500.
- Total Subscription outstanding on the last day of Ashadh 2082: Rs. 11,500 (Note: Since “Total” O/S on the last day of Ashadh is Rs. 11,500, it already includes the Rs. 1,500 still unpaid from 2080/81; so O/S for current year 2081/82 alone is Rs. 10,000).
Calculation of Subscription Income for 2081/82
| Particulars | Details (Rs.) | Amount (Rs.) |
|---|---|---|
| Subscription received in cash during 2081/82 | 96,000 | |
| Add: Outstanding subscription for 2081/82 on the last day of Ashadh 2082 (11,500 - 1,500) | 10,000 | |
| Add: Subscription received in advance on 1st Shrawan 2081 (received last year for this year) | 4,000 | 14,000 |
| Sub-total | 1,10,000 | |
| Less: Subscription for 2080/81 received during 2081/82 | (7,500) | |
| Less: Subscription received in advance on the last day of Ashadh 2082 (for 2082/83) | (6,500) | (14,000) |
| Subscription credited to the Income and Expenditure Account for 2081/82 | 96,000 |
Answer: Subscription to be credited to the Income and Expenditure Account for 2081/82 = Rs. 96,000.
Working notes:
- Arrears of 2080/81 still unpaid:
9,000 - 7,500 = 1,500. The total outstanding of Rs. 11,500 on the last day of Ashadh 2082 includes these arrears, so the outstanding subscription for 2081/82 alone is11,500 - 1,500 = 10,000. - Why only Rs. 7,500 is deducted: Of the Rs. 96,000 received, only the Rs. 7,500 collected for 2080/81 belongs to the previous year. The Rs. 1,500 still unpaid was never part of this year’s cash, so it is not deducted.
- Calculation:
96,000 + 10,000 + 4,000 - 7,500 - 6,500 = 96,000. Of the cash received,96,000 - 7,500 - 6,500 = 82,000relates to 2081/82; adding the Rs. 4,000 received in advance last year and the Rs. 10,000 still outstanding gives82,000 + 4,000 + 10,000 = 96,000. - Check using the total outstanding figures:
96,000 - 9,000 + 11,500 + 4,000 - 6,500 = 96,000. The Rs. 1,500 of arrears is in both the opening and the closing outstanding figures, so it cancels out and the answer is the same. - Balance Sheet as on the last day of Ashadh 2082: Outstanding Subscription of Rs. 11,500 (2080/81: Rs. 1,500; 2081/82: Rs. 10,000) is shown on the Assets side, and Subscription Received in Advance of Rs. 6,500 is shown on the Liabilities side.