Accounting For Financial Statements Of Not-For-Profit Organizations LEARNING OBJECTIVES

CHAPTER 8
Accounting for Financial Statements of
Not-for-Profit Organizations
LEARNING OBJECTIVES
After studying the chapter, you will be able to:
● state the meaning of Not-for-profit organizations.
● differentiate between Not-for-profit and other business
organizations.
● explain the concept of fund accounting.
● understand the fund-based accounting entities.
● understand the types and mode of receipts, payments and
transfers by Government.
● prepare receipt and payment account.
● prepare financial statements of Not-for-profit organizations.

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Accounting is always done with respect
to an entity. An accounting entity may be
an individual such as a sole proprietor, a
doctor, a lawyer or a chartered accountant.
An accounting entity may also be a group
of persons such as a Hindu Undivided
Family, a Partnership Firm, a Joint Stock
Company, a Cooperative Society, a Club,
a Hospital, School, etc. On the basis of the
objectives to be achieved accounting
entities can be divided into two categories.
These are: (i) Entities for profit, and (ii)
Not-for-profit entities (See Exhibit 8.1).
Entities for profit: The objective of such
entities is to conduct business and earn
profit. These entities include manufac-
turers, wholesalers, retailers, service
providers such as transporters, bankers,
insurance agencies, and professionals such
as doctor’s lawyer, engineers, architects,
professional advisors, etc.
Not-for-profit entities: The objective of
such entities is to provide services to the
people without any intentions to seek
profit. The main objective of these entities
may be social, educational, religious,
cultural or charitable. These entities may
be in the form of sports club, social or
literary club, religious institutions,
libraries, hospitals, educational institu-
tions, professional bodies, societies and
charitable institutions like orphanage
homes, and old age homes.
Some not-for-profit entities such as
sports and recreation clubs exist with the
primary objective of providing services to
its members. These may consist one or
more sub entity, which may undertake
trading in order to add the income from
memberships, subscriptions, donations
and grants. For example, a cricket club, a
not-for-profit organization may run a
restaurant as a sub entity of cricket club
to earn profit and the same fund may be
used for the furtherance of the objectives
of the club.
So far you have studied about
accounting of the transactions of Business
Organizations, which are profit-making
and follow accrual system of accounting.
This chapter seeks to explain the concepts
and procedures of accounting followed by
not-for-profit organizations. Not-for-
profit organizations follow usually the
Cash system of accounting and partly the
Accrual system of accounting and hence,
the system is hybrid in nature or Modified
Accrual Accounting. This chapter is
divided into two parts. Part I deals
with Accounting for Governmental
Organi-zations and Part II deals
with Non-Governmental Not-for-Profit
Organizations.
8.1 Concept of Not-for-Profit
Organizations
The primary reason of the existence of not-
for-profit organizations is the existence of
many social and political groups within
our present-day society, which provide
service and carry on activities in the
interest of society. Thus, the interest of
society is considered to be of prime
importance because it is desirable to make
available certain services which
economically and physically challenged
people cannot afford, but are required to
be provided for the empowerment of the
deprived people or for promotion of
certain activities, which cannot be pursued
individually. The not-for-profit organi-
zations grow in any society with the

STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 339
growth of its collective social
consciousness, which propels the people
to ameliorate the hardships and sufferings
of the common people. It is for these
reasons that during the last decade a large
number of Non-Governmental
Organizations (NGOs) have flourished. A
not-for-profit organization does not
restrict itself from earning surplus from
its activities. Rather such surplus is used
for the furtherance of the activities
emanating from the objectives for which
the organization was created.
Not-for-profit organizations are those
organizations, which operate with the
purpose of achieving the objectives for
which they are created and not necessarily
for profit motive. It can be defined as “an
entity that provides, without profit, a
service beneficial to society and that has
an equity interest that cannot be sold or
traded.” According to Emerson O. Henke,
the term “without profit” in case of Not-
for-profit organizations is not intended to
imply that such an organization cannot
plan or realize profit, but it implies that
the activities pursued are not solely
governed by the profit motive. Hence, in
normal course of activities a Not-for-profit
organization can have excess of revenues
over expenditure, called surplus. When
such addition takes place to the net assets,
it is used to implement and enlarge the
services of the organization. Equity to
Not-for-profit organizations is provided
by membership contributions, alloca-
tions, contributions, grants or membership
solicitations. It is to be noted that this is
true only in c ase of Non-Governmental
Not-for-profit organizations such as clubs,
hospitals, colleges, sports-boards (such as
Cricket Control Board), Museums,
Temples, Gurudwaras, Wakf Boards and
Churches. In case of Not-for-profit
organizations in Government sector
(Universities, Research Institutions,
Scientific Institutions, Municipal
Corporations) do not have equity in
the same sense as that in the case
of commercial enterprises. Since there is
no equity in Government sector,
financing is done through tax-collections,
surpluses from Public enterprises and
borrowings.
ENTITIES
COMMERCIAL ENTITIES
MANUFACTURING
MINING
FARMING/FISHING
TRADING
AGENCY SERVICES
FINANCING, Banking, Insurance
PROFESSIONALS
NOT-FOR-PROFIT ENTITIES
GOVERNMENTAL NON-GOVERNMENTAL
• CENTRAL
• STATE
• LOCAL
• UNIVERSITIES
• INSTITUTIONS
• COLLEGES
• SCHOOLS
• TRUSTS
• HOSPITALS
• CLUBS
• RELIGIOUS
INSTITUTIONS
• PRIVATE
EDUCATIONAL
INSTITUTIONS
→
→
→
→
→
(Contd. at Page 440)

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340
PRIMARY MOTIVES is carry on the above mentioned
activities and thereby bring financial gain to the
owner(s)
PROPRIETORSHIP or interest of the owner(s) or
owners equity represents the proprietors investment
in the business which consists of the original money
put into the business plus the profits not withdrawn
RESULT OF ENTITY’S ACTIVITIES is profit, which
represents the difference between sales revenue and
other incomes, if any, over the cost of sales and financial
charges. The profit and may either be withdrawn, or
retained in the business.
ACCOUNTING STATEMENT prepared to serve the
information needs of decision makers include all or
some of the following:
(i) Manufacturing or Production a/c
(ii) Profit & Loss Account
(iii) Balance Sheet
PRIMARY MOTIVES is to provide services to the
members or to the society at large. Profits arising out
of any trading activities are used to further service
objectives.
PROPRIETORSHIP or interest of the members is
known as Capital Fund or Accumulated Fund which
represents the Accumulated surplus of subscriptions,
donations and profits from trading and social activities
over expenses.
RESULT OF ENTITY’S ACTIVITIES is the surplus,
which represents the excess of revenue income over
revenue expenditure during a period, and indicates the
extent of utilization of incomes for the pursuit of service
objects. It increases the Accumulated Fund of the
members and cannot be withdrawn by them.
ACCOUNTING STATEMENTS prepared to serve the
information needs of decision makers include
(i) Receipt & Payment Account,
(ii) Income & Expenditure Account,
(iii) Balance Sheet.
8.2 Distinction between Not-for-Profit and Commercial Entities
A Not-for-profit organization can be differentiated from a profit seeking organization
on the following basis:
Exhibit : 8.1
Basis Commercial entity Not-for-Profit entity
1. Primary motive
2. Ownership
3. Distributions of profit.
4. Result
To carry on the activities for earning
profits.
Proprietors of business are owners and
hence, entitled to share the profits.
Profits are distributed among the
owners.
Result of the entity’s activities is called
profit, which is the difference between
sales and other incomes, if any, over the
expenses. The profit either be
withdrawn or retained in a business.
Excess of expenses over incomes is
called loss.
To provide services to the members or
to the public at large. Profits earned out
of any trading activities are used to
further the service objectives.
Subscribers to the membership of the
Not-for-profit entity are called the
members.
Profits are not distributed among the
members.
Result of the entity’s activities is called
the surplus, which is the excess of
income over expenses. It increases the
Capital Fund and cannot be withdrawn
by the members. The excess of
expenses over incomes is called deficit.

8.3 Concept of Fund Accounting
Government and Not-for-profit organi-
zations are required to organize their
accounting systems on a fund basis. A
fund is defined as an independent fiscal
and accounting entity with a self-
balancing set of accounts recording cash
and/or other resources together with
liabilities, obligations, reserves, and
equities which are segregated for the
purpose of specific activities to achieve
certain objectives in accordance with
special regulations, restrictions and
limitations. Thus, each type of fund is a
sub accounting entity for the purpose of
internal as well as external reporting of
financial estimates, budgets and
performances to the stakeholders. Not-for-
profit organization uses it, which are
legally responsible for ensuring that
certain funds are used only for such
specific purpose for which the same have
been contributed by the donors. Hence,
there is a need for separate accountability
whenever, a Not-for-profit organization
receives such restricted contributions.
8.3.1 Features of Fund Accounting
Following are the features of fund
accounting:
1. This system of accounting is used by
Not-for-profit organizations of both
types, viz., Governmental and Non-
Governmental.
2. Each fund is a separate entity for
accounting and accountability.
3. Each fund has to balance for income
received and expenditure made in
accordance with the restrictions
placed on their use.
4. Budget approval and appropriation is
the basis of income generation and
spending.
5. Despite restrictions being placed on
the use of specific funds, there will
always be a general fund from which
organizational expenses will be
passed.
6. In addition to fund accounting
entities, there will be memo-account
groups which disclose the assets
required and liabilities incurred. In
case of large borrowings, organization
may choose to crate “Debt Fund”. It
is to be noted that cash generated to
raising of debt is treated as revenue.
In order to better understand the
mechanism of accounting under Fund
Accounting System, the relationship of
various accounts can be expressed as
follows:
Assets + Expenditure + Encumbrances +
Estimated revenues + Interfund Claims =
Basis Commercial entity Not-for-Profit entity
5. Accounting
Statements
The accounting statements are prepared
to serve the information needs of the
users include all or some of the
following:
(i) Manufacturing Account
(ii) Profit and Loss Account
The accounting statements prepared to
serve the information needs of the users
include:
(i) Receipts and Payments
Account,
(ii) Income and Expenditure
Account and

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342
Liabilities + Appropriations + Revenues +
Interfund Obligations + Fund Balance.
8.3.2 Terminology of Fund
Accounting
Some of the new terms used in the above
equation as also the other terms used in
fund accounting are explained hereunder:
Expenditure: It is an amount paid for
transfer of an asset, for acquiring services
or assets or for settling a loss.
Encumbrances: Obligations/liabilities
committed during the accounting year by
agreement of purchase or contract. A
portion of general funds may be set aside
to meet the obligations on account of
purchase orders.
Interfund Claims/Transfers: This implies
earmarking of resources for specific
purpose or use. Usually, this is done by
transfers from general revenues or from
other funds. For the purpose of full-
disclosure, it is necessary that Interfund
transfers/claims be shown clearly to avoid
the mis-reading of financial statement. If
not properly presented along with
explanations, such transfers may give the
impression of willful manipulation of
reported income. Since, transfers are
merely internal allocations, they must not
be shown as income of the receiving fund
and expense of transferring fund.
Appropriation: Appropriations are
internal authorizations to spend money on
a given expenditure head. It is defined as
one that sets out the amount earmarked
or authorized to be spent for a particular
activity or function. Expenses incurred
out of Appropriate Funds should be
charged as expenses in the year incurred,
and the related appropriations should be
reversed if there is excess. Disclosure
should be made by way of a note.
Revenues: Revenues are the current
incomes received by way of cash inflows
through gifts, fees, grants, interest,
dividend, rent etc.
8.4 Objectives of Accounting for
Not-for-Profit Entities:
Following are the objectives of accounting
for Not-for-profit entities:
● To compare the actual financial
results of operations with
organization’s approved and legally
adopted budget.
● To assess financial performance of the
entity during the current accounting
year.
● To determine the compliance with
rules, regulations and laws under
which Not-for-profit accounting
system is operating.
● To evaluate the organization’s
efficiency in spending money on
meeting the assigned tasks and
responsibilities.
8.5 Types of Funds
Following are the most commonly used
group of funds:
● Current Unrestricted or General
Funds: This fund is created to carry
out the general activities and is also
called “Operating Fund”,
“Unrestricted Fund” or “General
Fund”. This fund does not contain
any restrictions on the use of assets
contributed to it. This fund is used
for the attainment of objectives for

which the organization was
established. All unrestricted grants,
gifts, contributions and incomes are
recorded in this fund. If the
organization does not receive any
restricted fund, this fund would show
all activities of the organization.
Common example of Unrestricted
funds are – annual membership fee,
non-specified gifts and grants,
contributions.
Accounting Entries for General Fund
(a) Receipt of Fund:
Bank/Cash a/c Dr.
Contributions a/c
(b) Use of Funds:
Contributions a/c Dr.
Fund Balance a/c
● Current Restricted fund: This fund
accounts for contributions received by
the Not-for-profit organization for
carrying out those activities for which
such contributions are made. This
fund is also called “Donor-restricted
Fund” or “Fund for Specified
Purposes”. For example, a school may
receive Rs. 1 Lakh for a programme
of Public Education for Drug Abuse.
In this case, this is a restricted fund,
which is to be used for promoting
Drug abuse programme. Such
amounts are recorded in the specific
funds. In the given example, the
amount will be recorded in Drug
Abuse Fund Account. Often the
Current Restricted Funds are
relatively small in amount and are
used either in the current year or in
the following year. Usually, all
Good Luck Community Service Centre
Current Unrestricted Fund
Statement of Income, Expenses and Charge in
Fund Balances for the year ended 31 March 2002
Particulars Amount Rs. Amount Rs.
Income: 5,40,000
Contribution and Gifts 4,00,000
Service Fees 1,00,000
Investment Income from endowment fund 25,000
Other Incomes 15,000
Expenses: 3,50,000
Salaries 2,00,000
Rent 75,000
Utilities 50,000
Other 25,000
Excess of income: 1,90,000
Over expenses 10,000
Fund balance, beginning of the year 2,00,000
Less: Transfer to fixed asset fund 1,50,000
Fund balance at the end of the year 50,000

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344
Current Restricted Funds are clubbed
under one head. Another example
would be, the Research Grants Fund
which is the sum-total of the grants
received by different teachers in
different departments of a college to
carry out specific individual research
projects. It is to be noted that details
of each research project with respect
to the amount sanctioned, amount
received, amount spent and balance
will be shown for each scheme of
research project.
Accounting Entries
If a Not-for-Profit Organization:
(a) For Receipt of Funds:
Cash Operating a/c Dr.
Restricted Fund a/c
(b) Use of Fund:
Restricted Fund a/c Dr.
Contributions for Research a/c
● Endowment Fund: Endowment
Funds are the assets donated to Not-
for-profit organizations with the legal
condition that the principal amount
will be maintained in perpetuity and
only the income earned from these
assets can be used for the various
activities of the organization. Usually,
income arising from the investment of
Endowment Fund, is unrestricted for
use hence, should be reported in the
Current Unrestricted Funds.
In some cases, endowment donations
are received with restriction on the use of
income from the fund investment. In such
cases, the income is added to the
Endowment Fund and related
expenditure is subtracted from the fund
Current Restricted Fund
Statement of Income, Expenses and Charge in
Particulars Amount Rs. Amount Rs.
Income: 3,00,000
Contributions 2,00,000
Gifts 75,000
Other Incomes 25,000
Expenses: 2,58,000
Sports prizes 1,75,000
Welfare Programme 45,000
Other expenses 38,000
Excess of income:
Over expenses 42,000
Fund balance, beginning of the year 18,000
Fund balance at the end of the year 60,000

income. Any excess of income over
expense is added to the fund and is
invested to generate further income for the
original purpose. For example, a
University may receive Rs. 1 Lakh for
awarding gold medal to the meritorious
student. In this case, the endowment for
Gold Medal is a restriction and hence, the
expenditure on the Gold Medal will be
less than or equal to the interest income
arising from the investment In case of
surplus, the same will be invested and
added to the fund.
Another possibility is that a donation/
grant may be received by the organization.
Such donation is invested and income is
paid to the beneficiary as per the directives
of the donor. For example, an organization
may donate Rs10 lakh for promoting study
of literature. In this case the Rs10 lakh will
be invested and income arising out of that
will be distributed by way of Scholarship
to people pursuing study of Literature.
The donations so received will be shown
as “Scholarship Fund”.
Accounting entries:
(a) Receipt of Endowment:
Cash/bank a/c Dr.
Endowment Fund a/c
(b) Making of Investment:
Investment a/c Dr.
Cash/Bank a/c
(c) Receipt of Interest/Dividend:
Cash/bank a/c Dr.
Interest/Dividend a/c
(d) Transferring interest to
Endowment and matching
expenses
Interest/dividend a/c Dr.
Expenditure
Endowment
(e) Purchase of Medals etc.
Expenditure a/c Dr.
Cash/Bank
(f) Transfer to Unrestricted Fund
Endowment Fund a/c Dr.
Unrestricted Fund
● Fixed Asset Fund: The gifts and
contributions received by Not-for-
profit organisations for the
acquisition/creation of assets are
recorded in “Fixed Assets Fund”/
“Building & Equipment Fund”/
“Plant Fund”. Often amount spent are
funded by both donor restricted and
unrestricted gifts. This fund will also
include unspent Building Fund
contributions. Creating a separate
fund and thereby indicating that this
amount is not available for day-to-
day operations of the Not-for-Profit
Organizations. Sometimes, the
Abstract Balance Sheet as at 31 March 2001
Liabilities Amount Rs. Assets Amount Rs.
Current Restricted Fund 60,000 Current Restricted Fund 60,000
Investment with
HDFC Bank 30,000
Bank of Baroda 20,000
Cash 10,000 60,000

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346
amount of unrestricted gifts/general
fund may be transferred to another
fund.Suchtransferofamountisknown
as Interfund transfer. Depreciation is
shown in the Plant Fund or in the
unrestricted fund. In the latter case, an
amount equal to the depreciation
charge is transferred from the unres-
tricted funds to Plant Fund. The
following explains this process:
Unrestricted Fund
Particulars Rs. Rs.
Provision for Depreciation XXXXXX
Transfer to Plant Fund XXXXXX
Plant Fund
Particulars Rs. Rs.
Transfer from Unrestricted Fund XXXXXX
Accumulated Depreciation XXXXXX
Fixed Asset Fund
Statement of Change in
Particulars Amount Rs.
Fund balance in the beginning of the year 8,00,000
Add: Transfer from ensuer fund 1,50,000
Fund balance at the end of the year 9,50,000
Abstract Balance Sheet as on 31 March, 2001.
(Rs. In lakhs)
Liabilities Amount Rs. Assets Amount Rs.
Sir SayajiRao Diamond Sir SayajiRao Diamond
Jubilee Fund 20 Jubilee Fund 20
Investment with
As per last Account 15 HDFC Bank 10
Exp. As per last Account 3 Bank of Baroda 5
Add: Donations 2 Addition to Building 5

Difference between Fund Accounting and Non-fund Accounting
Fund Accounting Non-Fund Accounting
1. Basis of Book-
keeping
2. Use of Money
Cash Basis.
Except general funds, all other funds are
used for specific purpose and separate
funds are created for recording.
Accrual Basis.
All resources are used for any of the
objectives or basis and all resources are
classified as owner’s equity and loans.
Abstract Balance Sheet as on 31st
March, 2001.
(Rs. In lakhs)
Liabilities Rs. Assets Rs.
Fixed Assets Fund 9.5 Fixed Assets 9.5
Fund Accounting Non-Fund Accounting
3. Equity
Accounting
4. Entity of
Accounting
5. Accountability
6. Financial
Statements
7. Surplus v/s.
income
8. Budget
There is no individual or group of persons
who have economic interest and hence
there is no equity.
Each fund is a fiscal and financial
accounting entity.
Accountability is towards law,
regulations, legislature, Parliament,
contributors and donors of funds.
Budget, income and expenditure account,
statement of changes in funds alongwith
their utilization, summary of debts.
Usually expenditures are more or equal
to receipts, hence deficit is the common
feature. Sometimes individual funds may
have excess of current income over
expenses because of restrictions.
Approval of budget is fundamental for
financial transactions. Hence,
authorizations and appropriations are
sacrosanct. Moreover, all account heads
emanate from budget.
Equity accounting is of primary focus as
these are ownership equities.
Business enterprise is the accounting
entity for recording and reporting
business transactions.
Accountability is towards all
stakeholders viz., owners, creditors,
workers, Government, regulators,
consumers and all other general public.
Profit & Loss Account, Balance sheet,
cash-flow statement and statement of
changes in financial position of business
entity.
The result of matching of revenues and
expenses may either be profit or loss.
Commercial principles of codification of
accounting are followed and budget
system is optional.

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348
8.4 Governmental Accounting System
It is to be noted that the discusstion that
follows hereunder is to give a synoptic view
of Government Accounting System of the
Government of India. For further details,
one can refer to Government Accounting
Rules framed and enforced from time-to-
time.
The fundamental objective of
Governmental Accounting System is to
forecast with greatest possible accuracy
what is expected to be received and paid
during the year and whether the receipts
along with previous years balance of fund
is sufficient to cover the expenses. For this,
every year a Budget is laid before the
Parliament/State Legislature showing the
Capital and Revenue receipts and capital
and revenue disbursements. Further,
division is made between plan and non-
plan expenditure. The budget has to be
voted and passed by the Parliament/
Legislature and a separate Appropriation
Bill is to be passed to indicate autho-
rizations for different receipts and
disbursements. On the basis of the budget
and accounts the Government determines
(a) whether it will be justified in curtailing
the expenditure or expanding the
activities, and (b) whether it can or should
raise revenues accordingly. In brief,
following are the purposes of Government
Accounting System:
1. Historical record of financial
operations of the Government
alongwith the legally adopted budget.
2. Report expenditure incurred on
various activities.
3. Provide information about how
Government financed its activities
and met its cash requirements.
4. Provide aggregate information useful
in evaluating the Governments
performatnce in terms of services,
cost–efficiency and accomplishments.
5. Provide help in the financial
management of the country/state/
union territory through periodical
reporting.
8.4.1 Method of Governmental
Accounting
The mass of Government transactions are
cash based, hence cash system of
accounting is followed. However, for
certain transactions for which
Government acts as banker, remitter,
borrower or lender, accrual System of
Accounting is followed. There are three
pillars viz., elements (expense, revenue,
receipt, disbursements, liabilities, cash
balance), measurement and recongnition.
9. Adjustment
10. Depreciation
Under cash system, outstanding and pre-
paid expenses, accrued income are not
recorded. However, for restricted
purposes under modified accrual system,
such adjustments are recorded.
Depreciation is not recorded as cost of
carrying on operations. Depre-ciation is
treated as allocation of funds based on
replacement cost of the asset in use as is
followed in Indian Railways.
All adjustments are made by invoking
the Generally Accepted Accounting
Principles (GAAP).
Depreciation is recorded as Business
expense and proper asset accounting is
done.
Exhibit : 8.2

These are explained below:
1. Element is and item of transaction
relating to expense, income, receipt,
disbursement, liability, or asset.
2. Measurement is the process of
determining the monetary amounts at
which elements are to be recorded.
3. Recognition is the processs of
incorporating in a financial statement
an item that is within the definition
of an element and satisfies the criteria
for recognition.
Cash Basis of Accounting:
● Recognises transaction at exchange of
cash.
● Financial result is expressed in terms
of cash received and cash paid.
● Elements covered are:
(a) Receipts
(b) Expenditure
(c) Cash balance
Accrual Basis of Accounting: Accrual
system of Accounting follows Generally
Accepted Accounting Principles and is
recommended for use in case of trusts,
capital projects, special assessment, and
Inter-Governmental transfer of funds. The
modified Accrual basis of accounting is
used for general funds, special reverues
and Debt Service Funds. The modified
accrual basis of accounting is defined as
that method of accounting in which
expenditures and revenues are recorded
at the exchange of cash except for material
and approved revenues. Revenue sources
which give rise to legally enforceable
claims (such as property taxes, which can
be duly ascertained and Inter-
Governmental transfers are recorded on
accrual basis. Following are the elements
covered:
● Revenues
● Expenses
● Assets including physical assets
● Liabilities
● Net assets
● Cash flows
Receipts: Receipts are cash inflows arising
from reciprocal and non-reciprocal
transactions, borrowings, interest, or
custodial contributions/receipts.
Non-Reciprocal Transactions:
● Taxation
● Issue of currency
● Grants
● Donations
● Contributions
Reciprocal Transactions:
● Sale of goods and services
● Sale of Assets.
Financial Inflows:
● Interest receipts
● Borrowings
● Capital contributions
● Custodial receipts
Payments:
Reciprocal Transactions:
● Purchase of goods and services
● Acquisition of asssets
● Capital investment and loans
Non-reciprocal Transactions:
● Governmental transfers
● Grants
● Contributions
● Donations

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350
Financial Outflows:
● Interest payment
● Repayment of debt
Custodial payments
Assets: An asset is a resource controlled
by the entity as a result of past event and
from which future economic benefits are
expected to flow. Assets may be financial
(bonds, securities, shares, debentures etc.),
physical (gold, silver, land & building,
bridges, furniture, fixtures, equipment
and plant, currency) and intangible
(patents, copyrights, licences etc.).
Liabilities: A present obligation arising
from past events settlement of which is
expected to result in the outflow of
resources embodying economic benefits.
Examples of liabilities are accounts
payable, accrued interest payable, accrued
wages and salaries, pension and other
accrued terminal benefits, guarantees and
indemnities likely to be invoked, currency
issued, debt, obligation under accident
compensation.
Commitment: It is a Government
responsibitlity for a future liability based
on contractual agreement. Obligation is
not certain but when it occurs, it is to be
recognized as a liability because it ceases
to be a commitment.
8.4.2 Classification of Government
Accounts
Government accounts are kept in three
parts, viz., Part I Consolidated Fund of
India, Part II Contingency Fund of India
and Part III Public Account of India (See
Exhibit 8.3)
Consolidated Fund of India
It is the account of all revenues received,
all loans raised and all money received by
the Government in repayment of loans.
This account has two divisions. The first
Government Account
Consolidated Fund of India Contingency Fund
of India
Public Account of India
Receipts
● Tax Revenue.
● Non-Tax Revenue.
● Grants in aid &
Contributions.
Expenditures
● General Services.
● Social Services.
● Economic Services.●
Grants in aid &
Contributions.
Revenue
Section
Capital
Section
Receipts
● Small Savings.
● Deposits & Advances.
● Reserve Fund.
● Suspense &
Miscellanceous.
● Remittances.
● Cash Balance
Expenditures
● General Services.
● Social Services.
● Economic Services.●
Grants in aid &
Contributions.
Exhibit 8.3: Structure of Government Account

division consists of revenue account,
detailing about revenue receipts and
expenditure heads. The second division
comprises capital receipts and capital
expenditure. The third section relates to
Public Debt and Loans and Advances
which include loans raised and their
repayment by Government such as
Internal debt, external debt of Central
Government, Loans and Advances made
by Government and their recoveries.
Contingency Fund: It is Part II of
Government Accounts. The Contingency
Fund is in the nature of an imprest created
through the law by the Parliament and
placed at the disposal of the Government
to enable advances to be made for meeting
unforeseen expenditure, pending
authorization by the Parliament.
Public Account of India: This is the third
part of Government Accounts. All other
moneys received by or on behalf of the
Government of India shall be credited to
the Public account of India. The
transactions leading to debt (other than in
Part I), deposits, advances, remittances
and suspense are recorded in this account.
Sectors and Sub-sectors of Accounts:
Under each division and section of the
Consolidated Fund of India, the
transactions are grouped into Sectors such
as General Services, Social and Commu-
nity Services. This classifi-cation
highlights the Function or the Service
carried on by the Government. The Sectors
may be divided into Sub-sectors. Each
Sector in a section is distinguished by an
alphabet.
Major, Minor and Detailed Heads: Major
head of account falling in the Consolidated
Fund of India corresponds to the functions
of Government such as services like
agriculture, defense provided by the
Government. A Minor head identifies a
programme undertaken and a
sub-minor head indicates the scheme or
activity undertaken. A detailed head is
termed as an object classification. It is
meant for itemized control over
expenditure such as salaries, office
expenses, grant-in aid, loans, and
investments.
Codification of Accounts: A four-digit
Arabic-numerical code is assigned to
Major Heads followed by two-digit code
for the relevant Major Sub-head followed
by a three-digit code for Minor Heads (See
Exhibit 8.4). This is illustrated by the
following example:
Procedure for Receipts, Payments and
Inter-Government Transfers: All receipts
(taxes, borrowings, interest receipts and
Major Head Code in the section for
Receipt Heads Expenditure Expenditure Loans and
Function Revenue Heads Heads Capital Advances
Account Revenue Account
Account
1. Medical and
Public Health 0210 2210 4210 6210
2. Shipping 1052 3052 5052 7052

ACCOUNTANCY
352
others), payments (expenses for civil,
defense, and general services for each
head) and inter-governmental transfers
are carried out through the use of
vouchers, formats whereof are prescribed
in Government of India Accounting Rules,
1990. The procedure for receipts,
payments and inter-governmental
transfers is presented in a synoptic form
in Exhibit 8.5.
Classification and
Codification of Accounts
Characteristics of the Function
Part
Division
Section
Sector
Sub-sector
Sub-sub-sector
Function Itself
Major Head
Function
4 Digit Code
Sub-Major Head
Sub-Function
2 Digit Code
Minor Head
Programme
3 Digit Code
Sub-Minor Head
Scheme
2 Digit Code
Detailed Head
Sub-Scheme
2 Digit Code
Object Head
Item Class
2 Digit Code
▼
▼ ▼
Exhibit 8.4: Coding System
Reserve Bank of India

Exhibit 8.5: Procedure for Receipts, Payments and Transfers.

ACCOUNTANCY
354
As revenues are received, cash account is debited and revenue account is credited.
Assuming that (out of Rs. 5,00,000 tax revenue) Rs. 4,50,000 is collected (and distributed
as follows)
Recording of Transactions
1. Recording Estimated Revenue
Estimated revenue is, being an Asset account is debited and Fund Balance is credited.
General Ledger (Rs.) Subsidiary Ledger (Rs.)
Debit Credit Debit Credit
Estimated Revenue 9,00,000
Fund Balance 9,00,000
Estimated Revenues Ledger
Tax Revenue 5,00,000
Licenses and Permits 2,00,000
Service charges 1,20,000
Fines and others 80,000
2. Recording Appropriations
Fund Balance 8,00,000
Estimated other uses 30,000
Appropriations 7,70,000
Appropriations Ledger
General Government 4,00,000
Public Safety 2,00,000
Public Parks 60,000
Health and Welfare 1,10,000
Estimated other uses 30,000
Cash 4,50,000
Revenue 4,50,000
Revenue Ledger
General Government 3,00,000
Public Safety 30,000
Public Parks 40,000
Health and Welfare 80,000

3. Recording Expenditure
When the authorized liabilities have been
incurred, an appropriation is considered
expended. Expected liabilities are called
encumbrances/obligations. In order to
record an encumbrance, usually in case of
purchase or other commitments, the
Encumbrances Controlling Account is
debited and Reserve for Encumbrances is
credited. For example, encumbrances for
the year 2002 are of Rs. 1,00,000. The
transaction is recorded as follows:
Encumbrances 2002 1,00,000
Reserve for Encumbrances 2002 1,00,000
Revenue Ledger
General Government 50,000
Public Parks 20,000
Encumbrances 2002 1,00,000
Reserve for Encumbrances 2002 1,00,000
Revenue Ledger
Public Parks 20,000
When expenditures are actually paid,
expenditures (and its subsidiary account)
is debited and liability account is created
for the amount paid to the creditor. For
example, Rs. 90,000 of Rs. 1,00,000 of the
encumbrances is paid as follows:
Reserve for Encumbrances 2002 90,000
Encumbrances 2002 90,000
Encumbrances Ledger
Public Parks 20,000
Expenditure 2002 90,000
Vouchers Payable 90,000
Expenditure Ledger
Public Parks 20,000

ACCOUNTANCY
356
In this way, all transactions are
recorded in the General Fund
(Consolidated Fund of India) and entries
are made in the Budgeting Process. A
Illustration 1
A college has received endowments for furtherance of research. Following are the details
of the various endowments:
Balances as on 1 April, 2000 Rs.
IPCL Research fund in Management 20,00,000
IPCL Research fund in Microbiology 10,00,000
GSFC Fellowship 20,00,000
Interest Balance as on 1 April, 2000
Interest received during the year ending 31 March, 2001.
Expenditure during the year
Contribution received for GSFC Fellowship Fund. 2,00,000
Investment at the end of the year
IPCL Research fund in Microbiology
(In Government Bonds) 14,00,000
GSFC Fellowship (LIC Annuities) 36,00,000
pictorial representation of the flow of
receipts and payment procedure is shown
in exhibit 8.5.
Balances of funds are maintained in the Bank Account with the State Bank of India.
From the above information, you are required to prepare Statement of Change in
Endowment Fund. Show the relevant items in the Statement of Affairs.

Solution
Statement of Change in Endowment Fund
Particulars Amount Amount
Rs. Rs.
A. IPCL Research fund in Management
Opening Balance of Interest 40,00,000
Add: Interest Received 6,00,000
46,00,000
Less: Expenditure during the year 5,00,000
Closing Balance of Interest 41,00,000
Opening Balance of Fund 20,00,000
Closing Balance of Fund 61,00,000
B. IPCL Research Fund in Microbiology
Add: Interest Received 1,50,000
6,50,000
Opening Balance of Fund 10,00,000
Fund received during the year 2,00,000
C. GSFC Fellowship Fund
Add: Interest Received during the year 3,00,000
6,00,000
Add: Opening Balance of Fund 30,00,000
Add: Contributions Received 2,00,000
Total Endowment Fund 1,12,00,000
Statement of Affairs as at 31 March 2001
Liabilities Amount Assets Amount
Rs. Rs.
Endowment Fund: Endowment Fund:
A. IPCL Research fund
in Management 61,00,000 A. IPCL Research fund in
Management
Govt. Bonds 50,00,000
Bank Balance* 11,00,000 61,00,000
B. IPCL Research fund B. IPCL Research fund in
in Microbiology 15,00,000 Microbiology
Govt. Bonds 14,00,000
Bank Balance* 1,00,000 15,00,000
C. GSFC Fellowship C. GSFC Fellowship Fund
Fund 36,00,000 LIC Annuities 36,00,000
TOTAL 1,12,00,000 TOTAL 1,12,00,000
* Balance of Bank account for respective fund

ACCOUNTANCY
358
8.2 Accounting Statement for Non-
Governmental Not-for-Profit
Organizations
The Not-for-Profit organization being a
different type of entity necessitates a
different type of accounting treatment. This
need arises on account of the type of
information required to be generated to
support the various decisions of the
management. Besides,theirfundingpattern
is also different as these entities receive
money from members and other agencies
to promote their activities, which is usually
not in the case of business enterprises.
All the accounts are compiled at the end
of the financial year and presented in the
form of following statements:
1. Receipt and payment account (also
known as Receipt and Disbursement
account) stating the actual receipts
and payments made during the year.
This includes for revenue receipts and
payments.
2. Budget is an estimate of receipts and
payments of next financial year-
presented to the Parliament/Legislature
indicating expenses to be charged, voted,
expenditure to be voted on account and
the receipts under various head such as
tax collection, interest and other receipts
such as revenue receipts and capital
receipts. The capital receipts and disbur-
sement and revenue receipts and disbur-
sement are shown in two sub-heads :
● Planned expenditure
● Non-Planned expenditure.
3. Appropriation bill is placed in the
Parliament for seeking approval of
the house for the proposal made in
the budget for raising revenue from
receipts, disbursements and payments.
4. Along with receipt and payment
account, a statement of position of
consolidated fund is presented in the
form of a statement.
8.3 Receipt and Payment Account
Receipt and Payment account is a similar
to cashbook; therefore it serves the
purpose of cashbook. Proper classification
of receipts and payments help in
differentiating receipt of capital nature
and revenue nature and of the expenses.
Apart from this, it indicates the opening
and closing balance of cash. Such a
classification can help in the preparation
of cashbook from the receipt and payment
account. It is also called Receipt and
Disbursement Account.
The Receipt and Payment Account is
generally presented horizontally (in T-
form) with cash receipts on the left hand
or debit side and cash payments on the
right hand or credit side, as:
Debit || Credit
Receipts Payments
8.3.1 Preparation of Receipt and
Payment Account
Receipt and payment account is prepared
by keeping in view the following points:
1. This account starts with the opening
balance of cash in hand and cash at
bank. Cash in hand always have a
debit balance and, therefore, appears
on the debit side. Cash at bank have
either a debit or favourable balance
or a credit (overdraft) or on
favourable balance. If it has a
favourable balance (debit balance) it
will be shown on the debit side and
an overdraft (credit balance) will be
shown on the credit side.

2. All cash collections made during the
accounting year as shown on the
receipts or debit side and all cash
payment made during the year as
shown on the payments (credit) side.
The period to which the transactions
may belong (i.e. previous year (s),
current year or future years (s)) and the
nature of the transaction, (whether
capital or revenue) is recorded on the
debit side. For example the payment of
rent, (revenue item) outstanding rent
or prepaid rent will be shown on the
credit side. Similarly, the payment
for the purchase of furniture (capital
item) will also be shown on the credit
side.
3. Only actual receipt of cash and payment
of cash are recorded. All non-cash items
such as outstanding expenses,
depreciation on fixed assets and accrued
incomes do not form the part of the
Receipts and Payments account.
4. The Receipts and Payments account
is balanced at the end of the
accounting year to show the closing
balance of cash in hand and at bank
or bank overdraft, as the case may be.
The format of the Receipt and Payment
Account is as given below:
Receipt and Payment Account
Receipts Amount Rs. Payments Amount Rs.
Salary xxx
Wages xxx
Honorarium xxx
Rent xxx
Taxes xxx
Insurance xxx
Electric Changes xxx
Printing xxx
Postage and Stationary xxx
Repairs xxx
Refreshments purchased xxx
Conveyance xxx
Tournament xxx
Interest on Loan xxx
Interest on Bank xxx
Overdraft xxx
Building xxx
Furniture xxx
Office Equipment xxx
Books xxx
Sports Goods xxx
Sports Equipment xxx
Investments xxx
Loan Advanced xxx
Fixed Deposit xxx
Balance c/f xxx
Cash—————
Bank—————
(Balancing fig.—————) xxx
Balance b/f xxx
Cash ———-
Bank———— xxx
Subscriptions
2000————-
2001————-
2002————- xxx
Donations xxx
Locker Room Rent xxx
Cloak Rent xxx
Hall Rent xxx
Sale of old news papers xxx
and magazines xxx
Sale of refreshments xxx
Interest received xxx
Life membership xxx
Tournament Fund xxx
Subscriptions xxx
Admission Fee xxx
Specific Donations xxx
Grants xxx
Loan Obtained xxx
Sale of Investments xxx
Sale of Fixed Assets xxx

ACCOUNTANCY
360
8.3.2. Items of Receipt and
Payment Account
These items may be classified as follows:
(i) Revenue Receipts
(ii) Capital Receipts
(iii) Revenue Payments, and
(iv) Capital Payments.
These items have been discussed on the
following lines.
(i) Revenue Receipts: These are the
amounts received on a recurring
business and include:
a) Annual membership subscriptions;
b) Donations, grants and legacies
received regularly for general
purposes;
c) Admission fees not capitalized;
d) Locker rent and cloakroom rent from
members for the use of locker and
cloakroom;
e) Hall rent received from outsiders for
the use of hall;
f) Receipts from sale of old newspapers
and magazines;
g) Receipts from sale of refreshments,
dinner coupons, tickets for dances and
other social functions;
h) Interest received on investment, fixed
deposit and loans advanced;
i) Any other item of the similar nature.
(ii) Capital Receipts: These refer to those
amounts received during the year
which will yield benefits to the
organization during the current year
as well as in the future years.
Amounts of capital receipts are not
received at regular intervals.
Following items are included in the
capital receipts-
a) Life membership subscriptions i.e.
amounts received for the life time
membership of the organizations;
b) Admission fees to the extent
capitalized;
c) Donations from outsiders or members
for specific purposes such as
constructions of building;
d) Legacies i.e. amounts given to the
organizations under a will on the
death of the contributors for specific
purposes such as prizes and
scholarships;
e) Grants received for meeting capital
expenditure from the government
such as construction of a public
dispensary;
f) Amount received as loan;
g) Sale proceeds of fixed assets such as
investment, furniture, books etc.
h) Amount received on account of any
other similar item.
iii) Revenue Payments: These are the
payments for amounts spent at
regular intervals not resulting in the
formations of fixed assets. Revenue
payments include the following-
(a) Payments for the salaries, wages and
honorarium;
(b) Payments made for rent, taxes,
insurance premia, electricity charges,
printing, postage and stationary
charges and repairs.
(c) Payments for travelling and
conveyance

(d) Payments for purchase of
refreshments, dinners;
(e) Payments for organizing sport meets
and tournaments;
(f) Interest paid on loans and on bank
overdraft and
(g) Payments for other items of similar
nature.
iv) Capital Payments: These are
payments for those items whose
benefits are available to the
organization during the current
accounting year as well as future
accounting year also. Capital
payments are not made at regular
intervals. Following are included in
the capital payments-
(a) Payments for construction and
extension of building, purchase of
furniture and office equipment;
(b) Payments for purchase of books for
the library;
(c) Payments made for purchase of sports
goods and equipment by a sports
clock;
(d) Cost investments purchased;
(e) Amounts invested in banks as fixed
deposits;
(f) Amounts advanced to outsiders as
loans and;
(g) Any other payment of similar nature.
8.3.3. Uses of Receipt and
Payment Account
On the basis of accounting system adopted
by an organization the Receipt and
Payment account can be used in two
alternative ways.
i. Those organizations, which follow
cash basis of accounting, this account
plays a vital role. On the one hand, it
serves the purpose of cashbook, while
on the other hand it provides support
in the preparation of financial
statements, income statement, and
statement of affairs to be presented to
the members at the year-end as a
result of the enterprise’s activities. In
suchacase,thesurpluswillbethediffe-
rence of receipts and payments. When
payments will be more than receipts
then it will be a situation of deficit.
ii. In organizations using accrual basis
of accounting the Receipt and
Payment account works as a
summarized cashbook and is a
supplement to the Income and
Expenditure account and the Balance
Sheet. These are the basic statements
presented to the members to show
surplus or deficit and the financial
position respectively.
Illustration 2
Membership subscription received by
Modern Cricket Club during the year 2001
amounted to Rs 15,600, which includes Rs
900 received in arrears for the year 2000
and Rs 2,100 received in advance for 2002.
It is found that Rs 2,500 has not been
received as subscription for the current
year (2001) and that Rs 1,000 was received
in advance in 2000 as subscription for 2001.
Calculate the income from subscription for
the year 2001.
In the above illustration the total
subscription of the current year have been
worked out by doing additions and

ACCOUNTANCY
362
subtractions of the items of information to
thesubscriptionsreceivedincashduringthe
current year. The total amount of
subscriptions due for the current year con
alsobepreparedbypreparingsubscriptions
account as has been illustrated in the
illustrations given below:
Illustration 3
Rs.51.500 subscriptions were received by
Sita Tracking Club during the year 2001,
which includes Rs 1,500 received in arrears
for the year 2000 and Rs2,500 received in
advance for the year 2002. It is found that
Rs3000 has not been received as
subscriptions for the current year and that
Rs 1,800 was received in advance in the
2000 for the year 2001. Find out the income
from subscriptions for the year 2001 by
preparing a subscription account.
Solution: Rs
Amount collected for subscription in cash. 15,600
Add subscriptions received in 2000 for 2001 1,000
Add subscriptions received in 2001 not yet received 2,500
________
18,100
Less subscriptions received in arrears for 2000 900
Subscriptions received in advanced for 2002 1,200
2,100
Income from subscriptions to be transferred to Income and
Expenditure Account 17000
Dr. Subscription Account Cr.
Date Particulars Amount Date Particulars Amount
Rs. Rs.
1 Balance b/f Cash-
outstanding 1,500 subscription
subscription received 51,500
received for 2000 Advance
Advance subscription 1,800
subscription received in 2000
(Income and balance c/f
Expenditure 2,500 outstanding
Account) subscription of 3,000
Subscription for current year)
current year 52,300
56,300 56,300
Solution:

Illustration 4
With the help of the following information extracted from the books of Rajdhani Club,
Calculate Sub-scriptions for the Current Year, 2001.
Subscriptions received during the year Rs.1,50,000
Additional Information
Year 2000 Year 2001
Rs. Rs.
Outstanding Subscription 3,700 4,200
Advance Subscriptions 3,900 5,000
Solution
Statement showing calculations of subscription of the current year 2001.
Rs.
Subscriptions received in cash for 2001 1,50,000
Add: Outstanding received in cash Rs.4,200
Advance Subscription received Rs.3,900 8,100
In 2000 for 2001. 1,58,100
Less: Outstanding subscription of Rs.3,700
the year 2000 received in 2001
Advance subscriptions received Rs.5,000 8,700
in 2001 for 2002.
Subscription 2001 14,940
Dr. Subscription Account Cr.
Rs. Rs.
Balance b/f 3,700 Pay Balance c/f 3,900
(outstanding (advance
Subscription in subscriptions
the beginning) in the beginning.)
Income & 1,49,400 Cash - Subscription 1,50,000
Expenditure received.
Account By Balance c/f 4,200
Subscription (outstanding
for current year. subscription
Balance c/f 5,000 in the end.)
(advance
subscription
in the end.)
1,58,100 1,58,100
Alternatively the problem can be solved by preparing a subscription account as shown
below:

ACCOUNTANCY
364
Illustration 5
In 2001 the subscriptions received were
Rs.2,10,000/-. These subscriptions include
Rs.3,000/- for the year, 2000 and Rs4,000/
- for the year, 2002. On 31.12.2001
subscription due but not received were
Rs.5,000/. Pass necessary journal entries
to record the above transactions, prepare
subscriptions account, subscriptions
outstanding account and subscription
received in advance account of Royal
Gym.
Royal Gym
Journal
Date Particulars L.F. Debit Credit
Amount Amount
2001 Rs. Rs.
Dec. 31 Cash a/c Dr. 2,10,000
Subscription a/c 2,10,000
(Subscriptions received during, 2001)
Dec. 31 Subscriptions a/c Dr. 3,000
Subscriptions Outstanding a/c 3,000
(Amount of subscriptions relating to 2000
transferred from subscriptions A/c to
subscription outstanding account)
Dec. 31 Subscriptions a/c Dr. 4,000
Subscriptions received in advance a/c 4,000
(Advance subscriptions received in 2001 for
2002 transferred to subscriptions received in
advance account)
Dec. 31 Subscription outstanding a/c Dr. 5,000
Subscriptions a/c 5,000
(Amount of subscriptions still due for
2001 but not yet received. Credited to
subscriptions account)
Dec. 31 Subscription a/c Dr. 2,08,000
Income & Expenditure a/c 2,08,000
(Subscription for 2001 credited to
Subscription a/c)
Dr. Subscriptions Account Cr.
2001 Rs. 2001 Rs.
March 31 Subscription 3,000
Outstanding Dec. 31 Cash 2,10,000
2001 Outstanding 5,000
March 31 Subscription 4,000 Dec. 31 Subscription
received in advance
Income & Expenditure 2,08,000
Dec. 31 2,15,000 2,15,000

Illustration 6
From the following particulars relating to Golden Point Club, prepare a Receipts and Payments account for
the year ending 31st
March 2002.
Sale of old sports materials 1,200
Rs. Donation received for pavilion 4,600
Opening cash balance 1,000 Rent paid 3,000
Opening bank balance 7,200 Sports materials purchased 4,800
Subscriptions collected for: Purchase of refreshments 600
Expenses for maintenance of tennis:
1999 Rs. 500 court 2,000
2000 Rs. 7,600 Salary paid 2,500
2001 Rs. 900 9,000 Tournament expenses 2,400
Furniture purchased 1,500
Office expenses 1,200
Sale of refreshments 1,000 Closing cash in hand 400
Entrance fees received 1,000
Solution
Golden Point Club,
Receipts and Payments Account
For the year ending 31st
March 2002
Dr. Cr.
Receipts Amount Payments Amount
Rs. Rs.
Balance b/f Rent 3,000
Cash 1,000 Sports materials purchased 4,800
Bank 7,200 Purchase of refreshments 600
Subscriptions Maintenance expenses for tennis court
1999 500 Salary 2,000
2000 7,600 Tournament 2,500
2001 900 9,000 Furniture purchased 1,500
Sale of refreshments 1,000 Office expenses 1,200
Entrance fees 1,000 Balance c/f:
Sale of old sports 1,200 Cash 400
materials Bank (balancing figure) 6,600
Donation for 4,600
pavilion 25,000 25,000
Dr. Subscriptions Outstanding Account Cr.
2001 Rs. 2001 Rs.
Dec. 31 Balance b/f 3,000 Dec. 31 Cash 2,10,000
Subscription 5,000 Outstanding
Subscription 5,000
2002 8,000 8,000
Jan., 1 Balance c/f 5,000

ACCOUNTANCY
366
8.4 The Income and Expenditure
Account
The Income and Expenditure account is a
revenue account of a Not-for-Profit entity,
like a charitable or cultural society,
educational institutions, hospitals, sports
club etc. It is a type of income statement
similar to profit and loss of other business
organizations. The income and
expenditure account is prepared on the
basis of some principles, which are
applicable in the preparation of profit and
loss account. Fund based expenses are
first matched against the income arising/
accrued from the same fund. Fund based
expenses cannot be in excess of the income
accrued from the fund however a transfer
may be made from general fund to the
specific fund to set off the deficit.
Any surplus arising on the income of
a firm has to either accumulate in the fund
itself or is to be disposed off as for the
specific provisions. Items of revenue
nature alone are dealt with in this account
but they are not confined to actual cash
transacted during the accounting period.
Gains whether received or accrued are
credited and expenses and loses whether
paid or incurred are debited to the Income
and Expenditure Account. Any advance
receipt of income on payment or expense
is duly adjusted. After due adjustment of
accruals, prepayments, provisions,
depreciation etc, the final balance of the
account represent an excess of income over
expenditure which is called surplus.
When the expenditure is in excess over the
income then the balance is called deficit.
[Incomes- Expenditures = Surplus],
[Expenditures-Income = Deficit]. It must
be kept in mind that in the context of
income and Expenditure account the term
‘ expenditure’ is used interchangeably but
in the same sense the word ‘expense’.
8.4.1 Preparation of Income and
Expenditure Account
Following steps are involved in the
preparation of the Income and
Expenditure Account:
(i) It is generally prepared in ‘T’ form
with revenue expenditure on the debit
side (left hand side) and revenue
income on the credit side (right hand
side). It follows the rules given below:
Debit Expenditure || Credit Income
(ii) This account can also be prepared in
a vertical form where in incomes are
first shown and added up. There after,
the expenditures are presented and
added up. From the totals of the
income s the totals of expenditure are
deducted to ascertain surplus or
deficit.
(iii) The Income and Expenditure account
does not start with any opening
balance, because it is prepared to
ascertain only the current year’s
surplus or deficit. The previous year’s
surplus or deficit is therefore , not
relevant.
(iv) This account shows only the revenue
items and hence the capital items are
not recorded. For example building
owned by a sport club should not be
taken into consideration.
(v) In this account only the expenses and
incomes of the particular current

accounting year are shown. Hence,
the revenue receipt and payment
pertaining to the pervious year(s) and
future year(s) should be suitably or all
to be adjusted. Similarly, outstanding
expenses and accrual incomes
pertaining to the previous accounting
year of which the income and
expenditure account is being
prepared must be included in the total
of the expenses and incomes.
(vi) The closing balance of this account
shows surplus i.e. excess of revenue
income and revenue expenses. The
surplus is added to and the deficit is
deducted from the ‘Not-for-Profit’
organization’s ‘capital fund ‘.
8.4.2 Items of Income and
Expenditure Account
The above discussion makes it clear that the
Income and Expenditure account includes
only the revenue items of the particular
accounting year for which it is prepared.
Some of the important items, which are
relevant to this account, have been discussed
in the following lines:
Revenue Expenditure: It generally refers
to the revenue expenses paid and due for
a particular year and non-cash losses. It
can be shown as follows in the form of an
equation.
Revenue Expenditure = Revenue
Payments made during the year +
(outstanding revenue payments of the
year + prepaid revenue payments of the
year at the beginning of the year) -
(outstanding revenue payments in the
beginning of the year + prepaid revenue
payments at the end of the year)
Revenue Income: It refers to the revenue
receipts accruing during a particular year.
Therefore;
Revenue Income = Revenue Receipt
during the year + (accrued revenue receipt
at the end of the year + revenue receipts
received in advance at the beginning of the
year) - (accrued revenue receipts in the
beginning of the year + revenue receipts
received in advance at the end of the year)
+ gain on sale of fixed assets.
The format of Income and expenditure
account is given below:
Subscription
Total received in current year
Add outstanding at the end
Less outstanding in the beginning
Add advance receipt in the previous year
Less advanced received in current year
Total subscription of current year
Gain on sale of assets
Sale price of assets
Expenses
Total paid in current year
Add outstanding at the end
Less outstanding in the beginning
Add Advance paid in previous year
Less Advance paid in current year
Current year’s expenditure
Purchase of consumable stores:
Opening stock of the item
Add payment /or credits for the items
Income and Expenditure Account of (Name of the Not-for-Profit organizations)
for the year ended (date)
......... .........

ACCOUNTANCY
368
Less closing stock of the item
Less creditors for the items in the beginning
Add creditors for the items at the end
Add advance payments in the previous year
Less advance payment in the current year
Value of items actually used
Expenses out of special collections
Expenses paid
Less collection
Net Expenses
Loss on sale of assets
Book of value of assets sold
Less sale price
Net loss
Other expenses and loses with adjustment
Depreciation
Excessofincomeoverexpenditurecarriedover
to balance sheet-surplus
Less book value of assets sold
Net gain on sale of assets
Receipt for special expenses
Amount received
Less expenses paid
Net income
Other incomes and gains with adjustment
Excessofexpenditureoverincomecarriedover
to balance sheet -deficit
Note:Thereshallbeoneoftheseitemsatatime
not both.
Note: There shall be one of these items at a time not both.
Difference between Receipt and Payment Account and Income and Expenditure Account
S.No Basis Receipt and Payment Income and Expenditure
Account Account
1. Assets
v/s
Revenue
2. Opening
balance
3. Capital
v/s
Revenue
4. Cash
v/s
Non-cash
5 Cash
balance v/s
Surplus/
deficit
It is a summary of the cash transactions
of a not-for-profit organization showing
cash inflows (Receipt) on the debit side
and cash out flows (Payments) a the
credit side as in case of a cash book.
It starts with an opening balance of cash
in hand and cash at bank.
Capital receipt and payment in cash are
included in this account.
Revenue receipts and payments in cash
are also included in this account.
Non-cash expenses such as depreciation
on fixed assets; bad debts, provisions etc.
are not included in this account.
The closing balance of this account
represent the closing cash in hand and
at bank or bank overdraft.
It is the revenue account of a not -for -profit
organization similar to profit and loss account
of a profit seeking organization. Incomes are
shown on the credit side and expenditure on
the debit side.
It does not start with any balance.
Capital receipts and payments are excluded
from this account only.
Revenue receipts and payments in cash
concerning the current year are also shown in
this account and hence capital receipt is
excluded.
Non-cash expenses relating to the current
accounting year are also included in this
account.
The closing balance of this account excess of
income over expenditure i.e. surplus. When
expenditure is more than income the difference
is called deficit.
.........
.........
.........
.........
.........
.........
.........
.........
.........

8.4.3 Difference between Income
and Expenditure Account
and Profit and Loss Account
Though Income and Expenditure Account
and Profit and Loss Account are seems to
be similar still they differentiate on the
following grounds:
● Type of organizations
● End results
● Sharing surplus and profit
S.No. Income and Expenditure Account Profit and Loss Account
1. It is presented to ascertain the amount of
surplus or deficit as a result of the not-
for- profit entity’s activities.
2. The surplus always increases the capital
fund of the entity and can be used for
further enhancing the objectives of the
organization. It can never be distributed
among the members in any form.
It is prepared to ascertain the net profit earned
which will be paid out to the proprietors, partners,
or shareholders, as the case may be, or retained in
the business.
The net profit obtained belongs to the owner(s) who
may withdrawn it or retain in the business.
Rs.
Prepaid expenses on 31.12.2000 1,500
Expenses Outstanding on 31.12.2000 2,300
Expenses Outstanding on 31.12.2001 2,500
Prepaid Expenses on 31.12.2001 1,400
Ascertain the amount of expenses, which will be debited to the income and expenditure
account for the year, 2001.
Solution
Rupees Rupees
Amount of expenses actually paid. 12,650
Add: Expenses of 2001 paid in advance
In 2000. 1,500
Expenses Outstanding on 31.12.2001 2,500 4,000
Less: Expenses of 2000 paid in 2000. 2,300
Expenses paid in advance in 2001 1,400 3,700
Expenses of 2001 to be debited to Income &
Expenditure Account.
12,950
Illustration 7
Miscellaneous expenses actually paid
during the year, 2001 amounted to
Rs.12,650.00. Information about prepaid
and outstanding expenses is as under:

ACCOUNTANCY
370
Illustration 8
From the following particulars of Faridabad Sports Club, prepare the Income and Expenditure account for
the year ending 31 March 2002
Subscriptions collected (including Rs. 2,000 for 2001 and Rs. 1,5000 for 2003) 30,000
Subscriptions due but not received in 2002 3,000
Salary paid (including Rs. 300 for 2001 4,500
Salary outstanding for 2002 400
Donations received 1,000
Entrance fees (of which 40 percent is to be treated as capital receipt) 2,000
Entertainment expense 600
Tournament expense 1,500
Rent 1,800
Printing, postage and stationary 1,200
Purchase of sports equipment 5,000
Solution
Faridabad Sports Club
Income and Expenditure Account
For the year ended 31 March 2002
Dr. Cr.
Expenditure Amount (Rs.) Income Amount (Rs.)
Salary 4,600 Subscription 29,500
Entertainment expenses 600 Donation 1,000
Rent 1,500 Entrance fees 1,200
Tournament expenses 1,800
Printing postage and stationery 1,200
Excess of income over expenditure
transferred to Capital Fund 22,000
31,700 31,700
Notes
(1) The income from subscriptions for 2002 is as follows: Rs
Subscriptions received in cash 30,000
Add: Subscriptions due for 2002 but not received during the year 3,000
33,000
Less: Subscriptions received in arrears for 2001 2,000
Subscriptions received in advance for 2002 1,500 3,500
29,500
(2) Donation received is not for any special purpose and is thus treated as a revenue item.
(3) Since it is the policy of the Club to treat 40 per cent of entrance fees received during
the year as a capital receipt, the remaining 60 per cent is a revenue receipt.
(4) Expenses for salary during 2002 is ascertained below: Rs.
Salary paid in cash during 2002 4,500
Add: Salary outstanding for the year 400
4,900
Less: Salary paid for 2001 300
4,600

Nagi’s Club
Receipts and Payments Account
for the year ending 31.3.2002
Dr. Cr.
Balance c/d – Bank 25,000
Subscriptions
2001 1,500
2002 10,000
2003 500 12,000
Donations 2,000
Hall rent 300
Interest on bank 450
deposits
Entrance fees 1,000
40,750
Purchase of furniture (1.4.88) 5,000
Salaries 2,000
Telephone expenses 300
Electricity charges 600
Postage and Stationery 150
Purchase of books 2,500
Entertainment expenses 900
Purchase of 5% Government 8,000
papers (1.7.88)
Miscellaneous expenses 600
Balance c/d 300
Cash 20,400
Bank
40,750
The following additional information is available:
(i) salaries outstanding – Rs 1500;
(ii) entertainment expenses outstanding – Rs 500;
(iii) bank interest receivable – Rs 150;
(iv) subscriptions accrued – Rs 400;
(v) 50 per cent of entrance fees is to be capitalised;
(vi) furniture is to be depreciated at 10 per cent per annum.
Nagi’s Club
Income and Expenditure Account
for the year ending 31.3.2002
Dr. Cr.
Salaries paid 2,000
Add: Outstanding 1,500 3,500 Subscriptions 10,400
Telephone expenses 300 Donation 2,000
Entrance Fees (50% of 500
Electricity charges 600 Rs.1,000)
Postage and stationery 150 Bank interest 600
Entertainment expenses 1,400 Interest on investment 200
Miscellaneous expenses 600 Hall rent 300
Depreciation on furniture 375
Excess of Income over 7,075
Expenditure transferred to
the Capital Fund
14,000 14,000
Illustration 9
From the undermentioned Receipts and
Payments Account for the year ending 31st
March 2002 of Nagi’s Club, prepare an
Income and Expenditure Account for the
same period:

ACCOUNTANCY
372
Rs.
Notes
(1) Income from subscriptions for 2002
Subscriptions received for 2002 10,000
Add: Accrued Outstanding subscriptions 400
10,400
(2) Donations are not for any specific purpose and are,
therefore, treated as revenue income
(3) Income from bank interest for 2002
Bank interest received 450
Add: Interest receivable 150
600
(4) Interest receivable from investments for 2002
5 6
–––– × 8000 × –––– = Rs. 200 200
100 12
(5) Entertainment expenses for 2002:
Entertainment expenses paid 900
Add: Outstanding amount 500
1400
(6) Depreciation on furniture for 2002
10 9
–––– × 5000 × –––– = Rs. 375 375
100 12
8.5 Balance Sheet for Not-for-Profit Organization
The proforma Balance Sheet of a Not-for-Profit organization is given below:
Balance Sheet of (Name) of Not-for-Profit Organisation as at (Date on which it is prepared)
Assets
Last balance b/f
Add purchase in current year
Less book value of assets sold
Less depreciation
Closing balance –––––––
Stock of consumable items
Closing stock as given or
Last balance b/f
Add purchases in current year
Less value actually consume in
current year.
Closing balance –––––––
Cash/bank saving A/c
Capital Fund
Last balance b/f
Add capitalized incomes
of current year
a) General Donations
b) Entrance fee
c) Legacies
d) Life membership fee etc.
Special Fund Donation –––––––
Last balance b/f
Add a) receipts for the
items during the current years
b) income arising from fund.
Less expenses out of fund/

Illustration 10
Goodlucksportsclubhas2000members. The
annual subscriptions per member is Rs.50/-
duringtheyear,2001only1900memberspaid
the subscriptions for the current year. On
1.1.2001,thesubscriptionsinarrearswerefrom
50 members out of which 30members cleared
Solution
Good Luck Sports Club,
Balance Sheet (Memorandum)
of as on 31.12.2000.
Rs. Rs.
Advance 1,250 Outstanding 2,500
subscriptions subscriptions
Illustration 11
The receipt and payment account of Royal
Gym shows a payment of Rs.25,000/-
towards salary for the year, 2001 ended
31.3.2001. In the records of the Royal Gym
indicate the following details:
31.3.2000
31.3.2001
Rs. Rs.
Outstanding Salary 3,000 2,700
Prepaid Salary 4,000 1,500
donation
Creditors for purchase –––––––
Bank overdraft
Outstanding expenses
Last balance b/f
Less paid in current year
Add o/s for current year –––––––
Income received in advance
Income and Expenditure A/c
Last balance (Cr) b/f
Add surplus
Less deficit if any –––––––
Fixed deposit account
Accrued incomes –––––––
Last balance b/f
Less received in current year
Add accrued for current year
Prepaid expenses –––––––
their arrears. 25 members paid the subscrip-
tions in advance in the year 2000 and
30members paid the subscriptions in advance
during the year, 2001. Show how the
subscriptionsoutstandingwillbeshowninthe
balance sheet as on 31.12.2000 and 31.12.2001
respectively.
Good Luck Sports Club,
Memorandum Balance Sheet
of as on 31.12.2000.
Rs. Rs.
Advance 1,500 Outstanding
subscriptions subscriptions
Year,2000:1,000
Year,2001:3,750 4,750
Pass the necessary adjustment journal
entries and find out the amount of
salary which will be debited to the
income and expenditure account ended
31.3.2001, also indicate on which side
of the balance sheets as on 31.3.2000
and 31.3.2001 respectively these item
will appear.

ACCOUNTANCY
374
Royal Gym
Journal
Date Particulars L.F. Debit Credit
Amount Amount
2001 Rs. Rs.
March 31 Salary a/c Dr. 25,000
Cash a/c 25,000
(salary paid during the year ended 31.3.2001)
March 31 Outstanding salary a/c Dr. 3,000
Salary a/c 3,000
(salary for the year ended 31.3.2000
paid during the current year)
Outstanding Salary a/c 2,700
(outstanding salary for the current year ended
31.3.2001 recorded)
Prepaid salary a/c 4,000
(salary paid in advance during the year ended
31.3.2000 transferred to salary account)
March 31 Prepaid salary a/c Dr. 1,500
Salary a/c 1,500
(advance salary paid during the
year ended 31.3.2001)
March 31 Income and Expenditure a/c Dr. 27,200
Salary a/c 27,200
(Total salary for the current year ended
31.3.2001 transferred to Income and
Expenditure account)
Dr. Salary Account Cr.
2001 Rs. Rs.
March 31 Cash 25,000 2001 Salary 3,000
March 31 outstanding
March 31 Prepaid Salary 4,000 March 31 Prepaid Salary 1,500
March 31 Outstanding 2,700 Income and
salary Expenditure A/c 27,200
31,700 31,700

Salaries outstanding are liabilities
and prepaid salaries are assets,
therefore, outstanding salary Rs 3000
as on 31.3.2000 will be shown on the
liabilities side of the balance sheet as
on 31.3.2000 and the outstanding salary
of Rs 2,700 as on 31.3.2001 will be
shown on the liabilities side of the
balance sheet as on 31.3.2001. Prepaid
salary 4,000 for the year-ended
31.3.2000 will be shown. On the asset
side of the balance sheet as on 31.3.2000
and the prepaid salary Rs 1,500 for the
year ended 31.3.2001 will be shown on
the asset side of the balance sheet as
on 31.3.2001.
Dr. Outstanding Salary Account Cr.
2001 Rs. 2001 Rs.
March 31 Salary 3,000 March 31 Balance b/f 3,000
March 31 Balance c/f 2,700 March 31 Salary 2,700
5,700 5,700
Balance b/f 2,700
Dr. Prepaid Salary Account Cr.
2001 Rs. 2001 Rs.
March 31 Balance b/f 4,000 March 31 Salary 4,000
March 31 Salary 1,500 Balance c/f 1,500
5,500 5,500
April 1 Balance b/f 1,500
TERMS INTRODUCED IN THIS CHAPTER
● Entity
● Non-profit seeking entity
● Receipt and Payment Account
● Income and Expenditure Account
● Surplus
● Deficit
● Entrance Fees
● Subscriptions
● Donations and Legacies
● Subscription in arrears or accrued
subscription
● Subscription paid in advance
● Accumulated/Capital/General Fund
● Special Funds

ACCOUNTANCY
376
SUMMARY WITH REFERENCE TO
LEARNING OBJECTIVES
1. Not-for-Profit Organization is an entity to carry on activities of social and welfare
nature and whose primary purpose is not profit-making.
2. Fund Accounting is a system of accounting that combines fiscal and accounting entity.
3. Appropriation is the process of authorizing the future payments from budgeted income.
4. Budget is the estimate of future income and expenditures and spells out fiscal and
accounting entities for controlling and reporting purposes.
5. Accounting entity is the budget head of expenditure and income.
6. General/Unrestricted Fund is the revenue income pooled in a fund from various sources
such as membership fees, gifts, contributions, grants, interest and dividend which can
be used for any activity.
7. Current Restricted Fund is grant, gift, contribution, donation, received to carry on
specific activities as specified in the agreement by the donor.
8. Endowment Fund is the contributions that require the entity to invest and maintain
principal in perpetuity and only interest income to be used.
9. Plant/Assets Fund is created out of specific grants or general funds for acquisition of
assets such as land, building, machinery, furniture etc.
10. Debt Fund is meant for raising loan/debt/borrowings of long term nature.
11. Difference between profit–seeking and Not-for-profit seeking entities.
Profit-seeking entities undertake activities such as manufacturing, trading, banking
and insurance to bring financial gain to the owners.
Not-for-profit-seeking entities exist to provide services to the members or to the society
at large. Such entities might sometimes carry on trading activities but the profits
arising there from are used to further the service objectives.
12. Appreciation of the need for separate accounting treatment for non-profit organizations.
Since Not-for-profit-seeking entities are guided primarily by a service motive, the
decisions made by their managers are different from those made by their counterparts
in profit-seeking entities. Differences in the nature of decisions implies that the
financial information on which they are based, must also be different in content and
presentation.
13. Explanation of the nature of the principal financial statements prepared by Not-for-
profit organizations.
Not-for-profit organizations that maintain accounts based on the double-entry system
of accounting, generally prepare three principal statements to fulfill their information
needs. These include Receipts and Payments Account, and Income and Expenditure
Account and a Balance Sheet.
The Receipts and Payments Accounts is a summarized cashbook, which records all
cash receipts and cash payments without distinguishing between capital and revenue
1

items, and between items relating to the current year and those relating to previous
or future years.
The Income and Expenditure Account is an income statement which is prepared to
ascertain the excess of revenue income over revenue expenditure or vice versa, for a
particular accounting year, as a result of the entity’s overall activities. Although it is
considered to be a substitute for the Profit and Loss Account of a profit-seeking entity,
there are certain conceptual differences between the two statements, which have been
discussed at length in the chapter.
The Balance Sheet is prepared at the end of the entity’s accounting year to depict the
financial position on that date. It includes the Capital fund or Accumulated Fund,
special purpose funds, and current liabilities on the left had or liabilities side, and
fixed assets and current assets on the right hand or assets side.
14. Difference between the Receipts and Payments Account and the Income and
Expenditure Account
Many differences exist between the Receipts and Payments Account and the Income
and Expenditure Account, which are evident from the nature and purpose of two
statements.
While the former records both capital and revenue receipts and payments relating to
any accounting year, the latter records only revenue items relating to the current
accounting year. Non-cash expenses such as depreciation on fixed assets and
outstanding incomes and expenses are shown in the latter but omitted in the former.
The Receipts and Payments Account has an opening balance while the Income and
Expenditure Account does not. The closing balance of the former account represents
cash and bank balances on the closing date while in the latter account it indicates
surplus or deficit from the activities of the enterprise.
15. Conversion of a Receipts and Payments Account into an Income and Expenditure
Account.
This essentially involves five steps namely (i) adjusting the revenue receipts on the
debit side to include outstanding incomes and incomes relating to the current
year received earlier and to exclude amounts received in arrears or in advance; (ii)
adjusting revenue payments on the credit side; (iii) identifying and showing non-
cash expenses and losses on the debit side of the Income and Expenditure Account
(iv) computing and showing profits/losses from trading and/or social activities on
the credit/debit side of the Income and Expenditure Account; and (v) ascertaining
the surplus or deficit as the closing balance of the Income and Expenditure
Account.
16. Government Accounts for Not-for-Profit entities are maintained as per the accounting
rules in force from time-to-time by Government of India. All accounts are maintained
in Consolidated Fund of India which has Revenue and Capital sub-sections both for
receipts and expenditures. Part II of the Account relates to Contingency Fund and
Part III Public Account for Loans, Advances, borrowings and Public Debt. All
accounting heads are classified into Major, Sub-major, Minor, Sub-minor,
Detailed Head and Objects. All accounts are codified by following a four-digit coding
system.

ACCOUNTANCY
378
EXERCISES
Objective type Questions
1. Fill in the blanks:
a. Fund Accounting is used by ___________________organizations.
b. Restricted Fund can be used for _____________________purpose only.
c. Endowment Fund is ______________________ fund.
d. General fund can be transferred to ___________________fund.
e. Appropriation is a budgetary head with a ________________ balance.
f. When expenditures are paid out of Current Restricted Fund, cash/bank
is credited and _____________ is debited.
g. When cash is transferred, General Fund is debited, and ______is credited.
h. When endowment fund is used for specific purpose, the expense is
charged to _________ account.
i. A Receipts and Payments Account makes no distinction between
____________ and ____________ receipts and payments account.
j. The closing balance of the Receipts and Payments Account represents
____________.
k. Expenditure is shown on the __________ side of the Income and Expenditure
Account.
l. Amount received in respect of _________ or ___________ subscriptions should
be eliminated while preparing the Income and Expenditure Account.
m._____________ represents the excess of assets over liabilities.
2. Multiple choice questions:
(a) Not-for-Profit Organization is
(i) Profit seeking in nature.
(ii) Not profit seeking but can earn surplus.
(iii) Earning money.
(iv) None of the above.
(b) Fixed Assets Fund is
(i) Endowment Fund.
(ii) Current Restricted Fund.
(iii) Current Unrestricted Fund.
(iv) Meant for accounting of assets and depreciation.

(c) Loan fund is for
(i) Paying the loan.
(ii) Raising the loan.
(iii) Payment of interest.
(iv) Loan transactions
3. Select one from the possible alternatives to make the following statements correct:
(i) Subscription received in advance during the accounting year is
(a) an income
(b) an expense;
(c) An asset;
(d) A liability.
(ii) Income and Expenditure Account shows a balance of:
(a) Cash in hand;
(b) Capital account;
(c) Net profit;
(d) Excess of revenue over expenditure or vice versa.
(iii) Donations received for special purposes should be:
(a) Credited to a separate fund account and shown in the Balance Sheet
(b) Treated as revenue;
(c) Treated as revenue unless the amount is large;
(d) Not recorded at all.
(iv) Subscription in arrears for the current year are shown:
(a) On the credit side of the income and expenditure account and the assets
side of a Balance Sheet;
(b) Debit side of the Profit and Loss Account and the liabilities side of a Balance
Sheet;
(c) Only on the assets side of a Balance Sheet.
(v) The Receipts and Payments Account generally shows:
(a) A credit balance;
(b) Cash/Bank balance;
(c) Capital fund or accumulated fund;
(d) Surplus or deficit.

ACCOUNTANCY
380
4. State whether the following statements are true or false, giving reasons.
(a) A public library is a not-for-profit seeking accounting entity;
(b) A not-for-profit organization never undertakes trading activities;
(c) Outstanding expenses need not be adjusted, its accounts are kept on accrual basis;
(d) Entrance fee to a club is shown as a payment;
(e) Only capital expenses are shown in the Receipts and Payments Account.
(f) Donations received for construction of an auditorium by a club is to be
credited to a separated building fund account.
5. Choose the correct answer from the alternatives given below:
(a) Second hand furniture worth Rs. 5,000 was purchased. It was repaired for Rs. 500
and installed by to whom Rs. 100 was paid as wages. The
furniture should be capitalized for:
(i) Rs. 5,000
(ii) Rs. 5,500
(iii Rs. 5,600
(b) Subscription received in cash during the year amounted to Rs. 4,000; the amount
received in advance for the next year is Rs. 300; the amount outstanding for the current
year is Rs. 200 and the amount received last year for the current year was Rs. 400. The
amount to the credited to the Income and Expenditure Account is:
(i) Rs. 4,000
(ii) Rs. 4,300
(iii) Rs. 4,200
(iv) Rs. 4,600
(c) At the beginning of the accounting year, a club has Rs. 18,000 assets; Rs. 5,000 liabilities;
Rs. 1,800 debit balance of the Income and Expenditure Account. The opening Capital
Fund is:
(i) Rs. 18,000
(ii) Rs. 11,200
(iii) Rs. 14,800
(iv) Rs. 24,800
(d) The opening balance of the Prize Fund of a sports club was Rs. 5,400. Further donations
towards this fund received during the accounting year amounted to Rs. 4,800. During
the year, Rs. 3,500 was spent on prizes and Rs. 400 was received as interest on
investment of the Prize Fund. The closing balance of the Prize Fund is:
(i) Rs. 1,900
(ii) Rs. 10,200

(iii) Rs. 10,600
(iv) Rs. 7,100
(e) Salaries payable for the current year amount to Rs. 7,500 at the end of the year,
outstanding salaries amount to Rs. 300. Salaries paid in advance last year pertaining
to the current year amounted Rs. 500. Prepaid salaries for the next year amount to Rs.
250. Total amount paid for salaries during the year is:
(i) Rs. 7,550
(ii) Rs. 7,500
(iii) Rs. 6,950
(iv) Rs. 6,550
Short Answer Questions
6. What is Fund Accounting?
7. What is Consolidated Fund of India?
8. Explain Endowment Fund.
9. What are encumbrances?
10. Define Public Fund Account.
11. Explain inter-fund transfer.
Long Answer Questions
12. What is an accounting entity? How are such entities classified?
13. The Receipts and Payments Account is a summarized cashbook explains
14. the statement.
15. The Income and Expenditure Account is another name for the Profit and
16. Loss Account. Do you agree with this statement? Given reasons.
17. Discuss the structure and codification of Accounts of Government of
18. India?
19. Enumerate the points of difference between Receipts and Payments
20. Account and an Income and Expenditure Account.
21. (a) What steps would you take to convert a Receipts and Payments
Account into an Income and Expenditure Account?
(b) List the steps to be followed to transform an Income and Expenditure
Account into a Receipts and Payments Account.

ACCOUNTANCY
382
18. Explain the accounting treatment of the following items:
(a) Life membership subscription
(b) Entrance fees
(c) Purchase of sports goods by a sports club
(d) Donations received for the construction of a building by a public library
(e) Annual subscriptions received in arrears.
19. Explain briefly the following
(a) Not-profit seeking entity.
(b) Accumulated or capital fund
(c) Membership subscriptions.
20. What is Fund Accounting? What are the objectives of Fund Accounting?
21. Explain different type of funds used in Fund Accounting.
22. Explain the rationale of Fund Accounting and state the Accounting treatment of
different type of funds.
Problems
23. Record the following transactions in the books of Jindal Public School.
Particulars
Rs.
Grant received from Government 30,00,000
Fee collected from students 10,00,000
Building Fund raised 30,00,000
Salaries and allowances paid from General Fund 30,00,000
Student Welfare Activities 10,000
Gold Medals and Prizes Fund 5,00,000
Interest received on Gold Medal Fund 25,000
Expenditure on Medals and Prizes 20,000
You are required to prepare the appropriate fund accounts and show them in the
Balance Sheet.
24. From the under mentioned particulars relating to Life-Line Clinic, prepare the
subscriptions account for the year ending 31st
march 2002.
(a) There are 200 members and the subscription payable is Rs 50 each p.a.
(b) Subscription received during the year 20002 is as follows:
For 2001 Rs. 300
For 2002 Rs. 9,300
For 2003 Rs. 400
(c) Subscriptions outstanding at the end of
2001 Rs. 400
2002 Rs. 500

Salaries and wages 1,350
Printing and stationary 320
Purchase of sports 1,610
equipment
Purchase of refreshments 1,350
Rent of grounds 1,200
Other expenses 200
Balance c/f 1,170
7,300
Receipt and Payment Account for the year ending 31.3.2002
Dr. Cr.
Rs. Rs.
Balance b/f 340
Entrance fees 1,000
Subscriptions 5,450
Sale of Refreshments 1,410
7,3000
(d) Subscription received in advance for 2002 in 2001 was Rs. 300
25. The following particulars of Hygiene Club have been provided and you are required
to prepare:
(a) Salaries and Wages Account
(b) Locker Rent Account
Salaries and Wages payable during the year 2002 amounted to Rs. 9,000. Salaries
outstanding on 1.1.2002 were Rs. 300 and that on 31.12.2002 was Rs. 550. Rs. 600 was
paid in 2002 as advance wages for 2003.
Locker Rent received during the year amounted to Rs. 3,200. Rent outstanding on
1.1.2002 was Rs. 160 and that on 31.3.2002 was Rs. 230.
26. The Receipts and Payments Account of Aurobindo Sport Club is given below:
The following additional information has been provided.
(a) The stock of stationary on 1.1.2002 was Rs. 25 and at the end of the year it was Rs. 45.
(b) Outstanding subscription on 31.12.2002 was Rs. 230
Outstanding subscription on 1.1.2002 was Rs. 250
Subscription paid in advance in 2001 for 2002 was Rs. 180
(c) The depreciation charge on sports equipment for the year was Rs. 200. You are required
to prepare an Income and Expenditure Account for the year ending 31.12.2002.
27. From the following Receipt and Payment Account and additional information relating
to Khalid Social Club, prepare the Income and Expenditure Account for the year ending
31.3.2002 and a Balance Sheet as on the date.
(a) On 1.4.2001 the club owned sports equipment worth Rs. 1,200.
subscription in arrears on that date was Rs. 350.
(b) Sports equipment is depreciated @ 10% p.a. on the reducing balance
basis.
(c) On 31.3.2002 locker rent in arrears was Rs. 50, outstanding rent was
Rs. 120 and Rs. 250 was due for subscriptions.

ACCOUNTANCY
384
28. From the following Income and Expenditure Account and Balance Sheet of Clayton
Tennis Club, Prepare a Receipts and Payments Account for the year ending 31.12.2002.
Khalid Social Club
Receipt and Payment Account for the year ending 31.3.2002
Dr. Cr.
Rs. Rs.
Balance b/f 1,650 Wages 450
Entrance fees 1,300 Printting, postage and stationery 240
Subscriptions for: Charity show expenses 1,000
2000-2001 300 Investment in 10% Government 4,000
2001-2002 2,500 secyrutues (1.7.2002)
2002-2003 200 3,000 Electricity 370
Locker Rent 150 Periodicals & Newpapeers 240
Interest on investment 200 Sports Expenses 660
Charity show receipts 1,400 Rent 600
Sale of old newspapers 160 Blance c/f 300
and periodicals
7,860 7,860
Clayton Tennis Club
Income and Expenditure Account for the year ending 31.12.2002
Expenditure Amount Income Amount
Rs. Rs.
Remuneration to coach 12,000 Subscription 1,00,000
Salaries & Wages 24,000 Surplus from cafeteria
Rent 18,000 Receipts 20,000
Secretary’s honorarium 15,000 Expenses 16,000 4,000
Depreciation on sport equipment 6,000 Bank interest 2,000
Miscellaneous expenses Repairs 9,000 Club hall rent 14,000
Surplus 11,000
25,000
1,20,000 1,20,000
Clayton Tennis Club
Balance Sheet as at ———-
2001 Liabilities 2002 2001 Assets 2002
Capital fund 44,000 27,000 Sports 21,000
Add: Surplus 25,000 Equipment
Entrance fees 10,000 6,000 Outstanding 10,000
44,000 79,000 subscription
3,000 Subscription in advance 2,000 Accrued rent 4,000
2,000 Outstanding liabilities for 3,000 10,000 Fixed deposit 40,000
Salaries 3,000 3,500 Cash at bank 5,750
Repairs 5,000 Cash in hand 7.500
2,500 Rent 1,250
51,500 88,250 51,500 88,250

29. The following information relates to Himalayan Maintaining Club
Income and Expenditure Account for the year ending 31.3.2002
Expenditure Amount Income Amount
Rs. Rs.
Salaries & wages 12,000 Admission fees 15,000
Remuneration to trainers 15,600 Subscriptions 30,000
General office expenses 16,400 Rent receivable 4,800
Printing and stationary 3,200 Hire charges of equipment 3,300
Deprecation on: Surplus from annual dinner:
Building 1,500 Sale of tickets 7,200
Furniture 500 Less expenses 5,900 1,300
Equipment 4,000 6,000
Surplus 1,200
54,400 54,400
Receipt and Payment Account for the year ended 31.3.2002
Rs. Rs.
Balance b/f 6,000 Salaries and wages (including 11,600
Admission fees for: Rs. 600 for 2001-2002)
2001-2002 4,000
2002-2003 12,600 16,600 Remuneration to trainers 15,000
Purchase of equipment 16,000
Subscription for: Printing and stationary 3,200
2001-2002 3,600 General officer expenses 15,700
2002-2003 27,400 (including prepaid insurance
2003-2003 1,800 32,800 Rs. 200 and electric bill for
Rent 4,400 2000-2001 Rs. 300)
Hire charges of equipment 3,000 Annual dinner 5,900
Sale of annual dinner tickets 7,200 Balance c/f 2,600
70,000 70,000
30. From the following Trial Balance for the year ended 31.3.2002, and other relevant
information of Apeejay School, prepare Income and Expenditure Account and the
Balance Sheet.
Debit Amount Credit Amount
Rs. Rs.
School furniture 16,000 Creditor for supplies 4,000
Science laboratory 40,000 School fees 1,50,000
School library 50,000 Entrance fees 3,000
School building 2,00,000 Hall rent 5,000
Securities 1,00,000 Miscellaneous Receipts 1,500

ACCOUNTANCY
386
31. The governing board of Soclean Foundation decides to raise funds to build an
endowment. The governing board of Soclean solicits gifts/contributions. The terms of
gifts specify that gifts will be invested and the return from the investment will be used
for tree plantation in the city. The foundations furnishes to you the following
information:
ParticularsRs.
Tree-guards received 2,00,000
Contributions 3,00,000
Opening balance of Endowment Fund 4,00,000
Investment in Government Securities 4,00,000
Interest received during the year 40,000
Tree saplings purchased 10,000
Wages and salaries 15,000
Watering charges 2,000
Gifts made to other Voluntary Organisations 1,000
Value of investment at the end of the year 7,00,000
From the information given above prepare a Statement of Changes in Endowment
Fund of Soclean Foundation as it would be shown in the financial statements for the
year ended on 31st
March, 2002.
ANSWERS
1. Objective Type Questions
(a) not-for-profit
(b) Specific
(c) Journal
Staff salaries 1,60,000 Grant received 30,000
Office stationary 10,000 General Fund 3,60,000
General school expenses 6,000 Donation Received for 40,000
Annual function expenses 2,000 compute
Cash in hand 500 Sale of old school furniture 7,000
Cash at bank 16,000
6,00,500 6,00,500
Additional Information:
Fees still receivable Rs. 6,000
Salaries still payable Rs.14,000
On 1 Oct 2001 not yet recorded
Furniture sold carries a book value of Rs.10,000
Depreciation charged:
School furniture 10% p.a.
Science laboratory 20% p.a.
School library 10% p.a.

(d) Any other
(e) Debit
(f) Restricted Fund
(g) Endowment Fund
(h) Cash
(i) Endowment Fund
(j) Cash/Bank Balance
(k) Debit
(l) Outstanding/Prepaid
(m) Capital Fund/Equity Fund/Corpus Fund
2.
(a) (ii)
(b) (iv)
(c) (iv)
3.
(i) a
(ii) d
(iii) a
(iv) a
(v) b
4.
(a) True, because it exists to serve the needs of the reading public.
(b) False, a not-profit organization may undertake trading activities to further its
service objectives
(c) False, outstanding expenses relate to the current accounting year and must be
added to the cash expenses.
(d) False, entrance or admission fees represent amounts which members of not-for-
profit organizations are required to pay at the time of their admission. It is thus
an item of receipt from the viewpoint of the organizations.
(e) False, both capital and revenue expenditures are shown in the Receipts and
Payments Account if they are received in cash.
(f) True, as the donation is received for a special purpose and may be utilized for the
construction of the auditorium only, it should be created to Building Fund Account
and not to the Income and Expenditure Account.
5.
(a) (iii)
(b) (ii)
(c) (iii)
(d) (iv)
(e) (ii)

ACCOUNTANCY
388
25. Subscriptions credited to the Income and Expenditure Account Rs. 10,000. closing
balance of subscription account Rs. 400 (Credit) and Rs. 500 (Debit)
26. (a) Salaries and Wages paid during the year- Rs. 9,410
(b) Locker rent credited to the Income and Expenditure Account Rs. 3,270
27. Excess of income and expenditure Rs. 2,310 Total of Balance Sheet Rs. 5,830 (opening
capital fund Rs. 3,200; subscription for 2001-2002 Rs. 2,750; subscription outstanding
on 31.3.2002 Rs. 300)
28. Total of the Receipts and Payments Account Rs. 1,45,500 (subscription received in
2002 Rs. 95,000; rent received Rs. 19,250, fixed deposits during the year Rs. 30,000.
29. Closing cash in hand and at bank Rs. 11,510, total of Balance Sheet Rs. 85,260 (opening
capital fund Rs. 80,800)
30. Total of opening Balance Sheet Rs. 68,600. Total of closing Balance Sheet Rs. 74,100
(opening capital fund Rs. 68,300)
31. Balance sheet 4,33,900, Deficit 4,100

Accounting For Financial Statements Of Not-For-Profit Organizations LEARNING OBJECTIVES

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