Class-12 Accoutancy Notes Unit-1 Part-A Accounting for Not-for-Profit Organisations

Class 10 SEBA General Science Important Questions pdf for Pre-final 2022

True or false.

State whether the following statements are true or false :

1. No capital item is entered in an income and expenditure account.

Ans :- True.

2. Excess income over expenditure is added to capital fund.

Ans :-  True.

3. Income is shown on the debit side of income and expenditure.

Ans :- False.

4. Excess of expenditure over income is shown on the debit side of income and expenditure account.

Ans :- False.

5. Subscription received in advance is not shown in receipt and payment account.

Ans :- False.

6. Revenue items are shown in the Income & Expenditure Account.

Ans :- True.

7. Excess of income over expenditure is called deficit.

Ans :- False.

8. Receipt and payments Account records the expenses and incomes of the current year only.

Ans :- True.

9. Receipt and payments Account is a summary of all capital receipt and payments.

Ans :- False.

10. Any interest received on Prize Fund Investments is credited to Prize Fund Account.

Ans :- True.

Multiple Choice Questions    

1. Non – trading Account

• Only Trading Account.
• Income and Expenditure Account.  
• Trading and Profit and Loss Account.

Ans :- b) Income and Expenditure Account

2. Receipt and Payment Account is a summary of

• Cash receipts and payments.
• Income and expenses.
•  Debit and credit balances of ledger accounts.
•  None of these.

Ans :- a) Cash receipts and payments.

 3. Subscriptions received in advance are shown by a club.

•  As a liability in balance sheet.
•   As an assets in balance sheet.
•   As Income on the credit side of income and expenditure account.

Ans :- a) As a liability in balance sheet.

 

4. Donation received by a sports club for conducting a tournament should be shown in.

• Balance sheet.
•   Income and Expenditure account.
•  None of these.

Ans :- a) balance sheet.

Fill in the blanks :-

a)      Opening statements of affairs is prepared to find out the opening balance of  Capital fund.

b)      Honorarium paid is  Debited  to Income & Expenditure account.

c)      Receipt and payment Account is a  Real  account.

d)     Income and Expenditure account is a Nominal  account.

e)      Income and Expenditure account is prepared on  Accrual  basis of accounting.

1. State the meaning of  Not-for –profit Organization.

Ans: Not –for – profit organization or non – profit seeking organization are such organization which are established not for earning profit but for providing services to its members or society. The primary motives of such organization is to render service but without profit motive.

2. State five features /characteristics of non for profit organisation.

Ans: The five features /characteristics of non for profit organisation are:

Voluntary organization: Such organizations are voluntary organization of persons with humanitarian objectives .They are set up charitable trust or society.

Objectives: Such organizations are formed for providing services to a specified group or public at large such as education, health care, sports etc.

Sources of fund: Main sources of funds for such organization are subscriptions from members, donations, legacies, grants –in-aids, income from investment etc  

Non profit motive: Such organisations carry on its activities without profit motive.

 Mode of Management:  Such organisations are managed by a Managing Committee or an Executive Committee elected by its members.

 Separate Entity: The separate entity concept is equally acceptable to non-profit organizations. Such organizations are treated as a separate entity distinct from its members.

3. Point out the differences between not-for-profit organizations and trading organizations ?

Ans: The differences between not-for-profit organizations and trading organizations are :

Basis	Trading Organisation	Not-for-Profit Organisation
1. Nature of Activity	The primary activity is manufacturing, or buying and selling of goods or providing services.	The primary activity of a non-trading organization is to provide services.
2. Primary Motive	The primary motive of establishing such organizations is to earn profit.	The primary motive is not to earn profit but to carry activities on no-profit no-loss basis.
3. Net result of activity	The net result of operation is termed as ‘Net Profit’ or ‘Net Loss’.	The net result of operation of such organizations is termed as ‘Surplus’ or ‘Deficit’.
4. Use of surplus	The surplus of such organizations are shared by its owners.	The surplus is utilized for the benefit of its members in particular and the society in general.
5. cause of surplus	Its profit arises from selling goods at a price higher than the cost price.	Its surplus arises from saving is its members.
6. Meaning of Surplus	Here surplus means profit which is goes to the owners as reward risk bearing.	Here surplus means cost of unutilized or underutilized services.

4. Name any four organizations which are not-for-profit organizations.

Ans: K.C. Das Commerce College, Guwahati Medical College & hospital, Assam Seva  Smithy, North East Voluntary Association of Rural Development.

5. Write any two objectives of not-for-profit organization.

Ans : Two objectives of not-for-profit organization are:

• To offer their valuable services for the welfare of the society or for their members.
•  Earnings profit is not the objective of not for profit organizations.

6. What is Receipts and Payments Account? Mention five features of Receipts an Payments Account. What are the objectives of Receipts and Payments Account? Mention five limitations of Receipts and Payments Account.

Ans:    It is a merely a summary of cash transactions under proper heads which have taken place during the accounting period .It is like cash book .All the receipts  whether revenue and capital are recorded in the debt side and all the payments whether revenue and capital are recorded in the credit side.

Features of Receipts and Payments Account are as under-

1. It starts with opening balance of cash and bank.
2.  It is the summary of cash and bank transactions.
3.  Actual cash transaction is entered.
4.  It includes capital as well as revenue items.
5.  It follows cash system/basis of accounting.
6.   It shows cash positions and exclusive all non cash items.
7. It does not take any income/expense outstanding at the beginning and at the end.
8. The balance of this account indicates closing balance of cash and bank.

Objectives of Receipts and Payments Account are as follow:

• To show in a summary form the sources and application of funds.
• To show the cash trial.
• To show the cash position.
•    To show the functional activities.                           
•  To facilitate the preparation of Income and Expenditure Account.

Limitations of Receipts and Payments Account are as under:

•  It is prepared on cash basis of accounting and does not contain noncash items of expenses e.g. depreciation.
•   It is not a part of double entry system.
•   Balance Sheet can’t be prepared from this account.
•  It does not show true surplus or deficit of the period as it does not consider outstanding items, depreciation.
•  It includes all receipts and payments take place in a given period and do not make any distinction between capital and revenue income and expenses.

7. What is Income and Expenditure Account? Mention five features of Income and Expenditure Account.

Ans:    Income and expenditure Account is a summary of income and expenses of an accounting year, prepared on accrual basis like a profit and loss account in order to ascertain the operational surplus or deficit made during a year. It is prepared from the Receipts and Payments Account and other information.

Features of Income and Expenditure Account are as under:

•    It prepared on accrual basis of accounting. 
•     It records all cash and non cash expenses and income which are of revenue nature.
• It is debited all expenses and losses and credited with all incomes and gains.
•   The closing balance of Income and Expenditure Account is either surplus or deficit is transferred to capital fund in the Balance Sheet.
• It includes the expenses and the revenue of the current period only and excludes the items relating to past and future periods, if any.

8. Give distinction between ‘Receipts and Payments Account’ and ‘Income and Expenditure Account’.

Ans: The following are the distinctions between ‘Receipts and payments Account’ & ‘Income and Expenditure Account’ :

Basis

Receipts any Payments Account

Income and Expenditure Account

(i)                 Nature	It is summary of cash book.	It is a summary expenditure and income
(ii)               Object	Its object is to find out cash cash and bank balance .	Its object is to find out the surplus or deficit of the period for which it is prepared.
(iii)             Basis of accounting	It is prepared on cash basis accounting.	It is prepared on accrual basis of accounting.
(iv)             Side of recording	Receipts are shown on the debit side and payments on the credit side.	Incomes are shown on the credit side and expenses on the debit side.
(v)               Part of double entry	It is not a  part of double entry.	It is a part of double entry.
(vi)             Adjustments	It does not include any adjustment.	It includes adjustment entries such as outstanding items , depreciation etc.
(vii)           Period	It includes all receipts and payments relating to any period but taken place during the current period.	It includes all revenue incomes and revenue expenditure relating to relevant period on

 

9. What is Fund Based Accounting ?

Ans:Fund based accounting is a system of accounting used primarily by non-profit organization. It is more important for them to keep a record of how their money was spent, rather than how it was earned.

10. State the accounting principle followed in fund based accounting.

Ans: The principles followed in case of ‘Fund Based Accounting’ are stated below:

1.   Any donation received for a ‘specific Purpose’ is created to a separate Fund Account and is shown on the liabilities side of the balance Sheet.
2.   If there is any specific investment against that fund, such investment is shown on the assets side of the Balance Sheet.
3.   Profit/loss on the sale of such an investment is adjusted to that Fund Account.
4.  Any income derived from the investment of such fund is created to that Fund Account. Such income is not credited to Income and Expenditure Account.
5. If any expenditure is incurred for carrying out the purpose of that fund, such amount is debited to that fund account if the expenditure is of revenue in nature.
6.  However, if the expenditure is of capital nature, the account of that particular asset is debited and the cash account is credited.
7.  After the fulfillment of the purpose of that fund, the balance remaining, if any, is transferred to the Capital Fund.
8.  If the fund is received for the purpose of acquiring an asset, the Fund Account is closed by transfer to the Capital Fund after the asset is acquired.
9.  If the balance of a specific fund, after the adjustment of income and expenses related to that fund, is negative i.e. shows debit balance, the balance is transferred to the debit side of Income and Expenditure account as expenses.

11. Give three distinctions between Fund Based Accounting and Non-Fund Based Accounting ?

Ans: following are the distinctions between Fund based Accounting and Non-Fund Based Accounting.

Basis	Fund based accounting	Non fund based Accounting
(i)                 Use of funds	Funds are used for specific purposes expect for general fund.	Funds can be used for any profit earning propose.

(i)                 Accounting Entity	Each fund is treated as a separate fiscal or financial entity.	Business enterprise is the accounting and reporting entity for recording and reporting financial transactions.
(ii)               Accountability	Accountability is towards donors, contributors, regulators, laws, etc.	Accountability is towards shareholders, owners, etc.
(iii)             Application	It is applicable to not-for-profit organization.	It is applicable to commercial profit seeking organization.
(iv)             Financial Statement	Under the system, Receipts and Payments Account, Income and Expenditure Account and a Balance sheet are prepared.	Under the system a Profit and Loss Account and a Balance Sheet are prepared.
(v)               Result of Operation	Under the system, the results of operation represent either Surplus or Deficit.	Under the system, the results of operation represent either Net Profit or Net Loss.

 

12. What are the basis of preparing ‘Receipts and Payments Account ‘ and Income and Expenditure Account?

Ans. ‘Receipts and Payments Account’ is prepared on cash basis and ‘Income and Expenditure Account’ is prepared on accrual basis.

13. State the meaning and accounting treatment of some special items.

Ans: Donations: Charitable institution may receive donation from time to time. If the amount is small and if such collections are frequent, then they may be treated as an income. Donations may also be of two types –General donations and specific donations. Any donations received not for a specific purpose, are treated as general Donations. In case received for any specific purpose then it is termed specific donations.

The general donations of comparatively small amount may be taken to income and expenditure account. General donations of comparatively huge amount, which are of non-recurring nature, may be added to the capital fund. The nature and size of the organization decide about the amount of donation being small or big.

Legacy: It is like donation. It is the amount given to non-trading concern as per the will of decreased person. It is taken to the ‘Receipts and Payments Account’ as capital receipts. These are not income but may appear in Balance Sheet. These types of receipts are of non-recurring nature.

Life Membership Fee: Trading concerns usually collect subscription every month from their ordinary members. There are another category of members called “Life Members” from whom the subscriptions are collected as a lump sum. Such subscriptions are called life membership and are capital receipts. This can also be kept in a separate account and an amount equal to annual subscription can be transferred to subscription account. The balance in such account, on the death of the member must be transferred to capital fund.

Endowment Fund: Funds received for the permanent means of support is known as endowment fund. The objective of the donor is to provide a source of permanent income. It is a gift or special donation of a large amount. It is a capital receipt and is show on the liabilities side of Balance Sheet.

Entrance Fee (Admission fee): These are the fees collected from every member at the time of his/her admission into membership. It is paid only once by the new entrants on becoming a member of a society or a club. Generally, there may be bye –laws as regards the accounting treatment of such amount. In the absence of any bye-laws, it is taken as an item for income. Again treating it as an income, there are arguments favoring it as a capital receipt as the members pay such fees only once. In the absence of any instruction, it may be treated as regular income and is credited to ‘Income and Expenditure Account’.

Sale of Old sports materials and Old newspapers: The amount received on account of sale of old sports materials and old newspaper are recurring incomes to a concern and therefore treated them as revenue incomes .The purchase of bells, nets, etc. are revenue expenditure.

Purchase of Equipment: The price paid for acquiring any equipment is a capital Expenditure.

Honorarium: It is a payment of remuneration to a person who is not an employee of the organization. Any special performance is done by an outsider at the organization and any amount paid to that person is called honorarium and is debited to ‘Income and Expenditure Account’ as it is revenue expenditure.

Subscription: It is a primary source of income of a non-profit organization. It is usually collected every month from all the ordinary members. Subscription is the amount paid by the members to keep their membership alive. The subscription amounts are treated as revenue receipts. Subscription received is credited to ‘Income and Expenditure Account’ on accrual basis i.e., total amount receivable from all the members as subscriptions should be considered as income for the year.

Special fund : If there is any specific fund, such as prize distribution fund, the expenses or incomes relating to the fund may be adjusted to the fund itself (on the liability side of the balance sheet). Such expenses or incomes may not be taken to ‘Income and Expenditure Account’.

Sale of Old assets: If any asset is sold, the amount is debited to ‘Receipts and Payments Account’. It is not taken to ‘Income and Expenditure Account’. The profit or loss made on sale of old asset is recorded in ‘Income and Expenditure Account’.

14. Mention the steps to be followed for the preparation of ‘Income and Expenditure Account’.

Ans: Following steps are to be followed for the preparation of Income and Expenditure Account.

1. Opening and closing cash and bank balances are not to be taken to Income and Expenditure Account.
2. All items of capital receipts and capital payments are not to be taken to Income and Expenditure Account.
3. All prior period items i.e. items of income and expenses of the previous periods are to be excluded.
4. All future periods items i.e. items of income and expenses pertaining to the future period to be excluded.
5.   All current period items i.e. items of incomes and expenses pertaining to the current period is to be included in the Income and Expenditure Account.
6.  Income earned during the current period but not yet received should be taken into account.
7.   Expenses incurred during the current period but not yet paid should be provided for.
8. Considering the items not appearing in the Receipts and Payments Account. Items such as bad debts, depreciation, profit/loss on sale of fixed assets, etc.
9.  The Income and Expenditure Account prepared will be balanced. Surplus will be added to ‘Capital Fund’ in the Balance Sheet and deficit will be deducted from the ‘Capital Fund’ in the Balance Sheet.