Ch 1 FINANCIAL STSTEMEMTS OF NOT FOR PROFIT ORGANISATIONS

CHAPTER 1 

FINANCIAL STSTEMEMTS OF NOT FOR PROFIT ORGANISATIONS

 

ONE WORD TO ONE SENTENCE QUESTIONS

Q.1. What is non-profit organisation?

Ans. A non-profit organization, also known as a not-for-profit organization, is a type of organization that exists to serve a social or public benefit purpose, rather than to generate profit for owners or shareholders. Non-profit organizations may include charities, foundations, advocacy groups, and religious organizations. They rely on donations, grants, and government funding to support their operations and achieve their missions.

 

Q.2. Give any two features of non-profit organisation?

Ans.1. Non-profit organizations exist to serve a social or public benefit purpose, rather than to generate profit for owners or shareholders.

2. Non-profit organizations rely on donations, grants, and government funding to support their operations and achieve their missions.

 

Q.3. What is Subscription?

Ans. Subscription refers to the act of signing up for a service or product that is provided on a regular basis, typically for a fee, for a defined period of time. This can include a range of services such as online streaming, software, or monthly deliveries of products. Subscribers typically pay a recurring fee in exchange for continued access to the service or product.

 

Q.4. What is Donation?

Ans. A donation is a voluntary act of giving money, goods, or services to a charitable or humanitarian cause without expecting anything in return. Donations are often made to support a specific cause, organization, or individual in need. Donations can be made by individuals, corporations, or other organizations, and can take various forms such as cash, in-kind donations, or volunteer time.

Q.5. Name any two not for profit organisation.

                                Or

Write the name of any two Not-for profit Organisations?

Ans. Red Cross: The Red Cross is a global humanitarian organization that provides assistance to those in need, including disaster relief, blood donation, health and safety training, and support to military families.

World Wildlife Fund (WWF): WWF is an international non-governmental organization that works towards the conservation of nature and the protection of endangered species. It focuses on protecting biodiversity, reducing the impact of climate change, and promoting sustainable living practices.

 

Q.6. What is main recurring source of income of a ‘’Not for profit Organisations’’?

Ans. The main recurring source of income for a not-for-profit organization is usually donations from individuals, corporations, and/or government grants. Some non-profits may also generate income from fundraising events or membership fees, but donations and grants tend to be the most reliable and consistent sources of income.

 

Q.7. Name the financial statements maintained by non-profit organisations’’?

Ans. The financial statements maintained by non-profit organizations include:

Statement of financial position (or balance sheet): This provides a snapshot of the organization's assets, liabilities, and net assets at a specific point in time.

Statement of activities (or income statement): This shows the organization's revenues and expenses over a specific period of time, and may include details about specific programs or activities.

Statement of cash flows: This shows the organization's sources and uses of cash over a specific period of time, and provides information about the organization's cash position and liquidity.

Notes to the financial statements: These provide additional information and context about the organization's financial performance, accounting policies, and other relevant details.

 

Q.8. What is main objective of not for profit organisation?

Ans. The main objective of a not-for-profit organization is to serve a social or public benefit purpose, rather than to generate profit for owners or shareholders. This can include a wide range of goals such as promoting a charitable cause, advancing education, supporting research, or providing services to those in need. Non-profit organizations are typically mission-driven, with a focus on achieving their social or public benefit objectives rather than maximizing profits or returns for investors.

 

Q.9. Not-for-Organisations have some distinguishing features from that of profit organisations state any one of them?

Ans. One distinguishing feature of not-for-profit organizations is that they are generally exempt from paying taxes on their income, as long as they meet certain criteria and their activities are considered to be in the public interest. This is because non-profit organizations are not focused on generating profits or returns for shareholders, but rather on fulfilling their social or public benefit missions. Additionally, non-profits are typically subject to greater transparency and accountability requirements than for-profit organizations, due to their tax-exempt status and their reliance on donations and other forms of support from the public.

 

Q.10. What is Grant?

Ans. A grant is a sum of money or other resources that is provided by a government, foundation, or other organization to support a specific project or activity. Grants are typically awarded on a competitive basis, and may be provided to non-profit organizations, businesses, or individuals who meet certain eligibility criteria. Unlike loans, grants do not need to be repaid, although there may be reporting requirements or other conditions attached to the funding. Grants can be used to support a wide range of activities, including research, education, social services, and arts and culture.

 

Q.11. What is maintenance Grant?

Ans. A maintenance grant is a type of financial aid that is provided to support a student's living expenses while they are attending school or university. Maintenance grants may be awarded based on financial need or merit, and are typically provided by the government or other organizations that support education. Unlike loans, maintenance grants do not need to be repaid, although there may be conditions attached to the funding, such as maintaining a certain GPA or completing a degree program within a certain timeframe. Maintenance grants can help to make higher education more accessible and affordable for students who might not otherwise be able to afford living expenses while attending school.

 

Q.12. Name the account which shows the classified summary of transactions of a cash book in a not-for profit organisations?

Ans. The account that shows the classified summary of transactions of a cash book in a not-for-profit organization is typically called the "statement of cash receipts and disbursements" or "cash flow statement". This statement provides a summary of the organization's sources and uses of cash over a specific period of time, and may be broken down into categories such as operating activities, investing activities, and financing activities. The statement of cash receipts and disbursements is an important tool for assessing an organization's liquidity and cash flow position, and can help to identify potential financial risks or opportunities.

 

Q.13. What is Receipts and Payments Account?

Ans. A Receipts and Payments Account is a summary of all cash receipts and payments made by a not-for-profit organization during a specific period of time, such as a fiscal year. It provides a summary of the organization's cash transactions and balances, including income received from donations or grants, expenses paid for operating costs or program expenses, and any changes in cash reserves or investments. The Receipts and Payments Account is similar to a cash flow statement, but does not include non-cash transactions or account for depreciation. It is often used by smaller non-profit organizations or those that do not have complex financial operations, as a simple way to track cash flow and monitor financial performance.

 

Q.14. Which account is prepared by non-profit organisation to know about cash and bank balance during a particular?

Ans. The Cash Book is the account that is prepared by a non-profit organization to track and record all cash and bank transactions during a particular period of time, such as a fiscal year. The cash book provides a detailed record of all cash and bank receipts and payments, and is used to reconcile the organization's bank statements, monitor cash balances, and identify any discrepancies or irregularities. The cash book is an important tool for managing a non-profit organization's cash flow and ensuring that funds are being used in accordance with the organization's mission and objectives.

 

Q.15. Name any two items that appears on the debit side of receipt and payment account of not for profit organisation?

Ans. Two items that typically appear on the debit side of a Receipts and Payments Account for a not-for-profit organization are:

1. Donations received

2. Membership fees or dues received

These are both examples of cash receipts that increase the organization's cash balances and are recorded as debits in the Receipts and Payments Account. Other items that may appear on the debit side of the account could include proceeds from fundraising events, grants received, or income from investments or other sources

 

Q.16. Give any two features of receipts and payments account?

Ans. Two features of a Receipts and Payments Account for a not-for-profit organization are:

It is a summary of all cash transactions: The Receipts and Payments Account provides a summary of all cash receipts and payments made by the organization during a specific period of time, typically a fiscal year. This includes all sources of cash, such as donations, grants, and investment income, as well as all uses of cash, such as operating expenses and program expenditures.

It does not include non-cash transactions: The Receipts and Payments Account is a cash-based accounting record and does not include non-cash transactions, such as depreciation or accruals. It is focused solely on the organization's cash flow and provides a snapshot of the organization's cash position at a specific point in time.

 

Q.17. What are the non-cash items not recorded in receipts and payments account?

Ans. Non-cash items that are typically not recorded in a Receipts and Payments Account for a not-for-profit organization include:

Depreciation: The decline in value of a non-cash asset over time is not recorded in the Receipts and Payments Account, as it does not involve the movement of cash.

Accruals: Expenses that are incurred but not yet paid, or revenue that is earned but not yet received, are not recorded in the Receipts and Payments Account, as they do not involve the movement of cash.

Investments: Non-cash assets such as stocks, bonds, or real estate investments are not typically recorded in the Receipts and Payments Account, as they do not involve the movement of cash.

In-kind donations: Donations of goods or services, rather than cash, are not recorded in the Receipts and Payments Account, as they do not involve the movement of cash.

 

Q.18. Whether Receipts and payments accounts are maintained on cash system or mercantile system of accounting?

Ans. Receipts and Payments Accounts are typically maintained on a cash basis of accounting, rather than a mercantile (or accrual) basis. This means that transactions are recorded when cash is received or paid out, rather than when revenue is earned or expenses are incurred. The cash basis is a simpler and more straightforward method of accounting, and is often used by smaller not-for-profit organizations that do not have complex financial operations or significant non-cash transactions. However, some larger not-for-profit organizations may also use a modified cash basis, which combines elements of cash and accrual accounting to better reflect the organization's financial position and performance.

 

Q.19. Name the account prepared by not for profit organisation for ascertain surplus or deficit?

Ans. The Income and Expenditure Account is the account prepared by a not-for-profit organization to ascertain whether it has a surplus or deficit for a particular period of time, such as a fiscal year. The Income and Expenditure Account summarizes all the organization's income and expenses during that period, and calculates the difference between the two to determine whether the organization's income was greater than or less than its expenses. This account is similar to the Profit and Loss Account used by for-profit businesses, but the surplus or deficit shown on the Income and Expenditure Account is not distributed to owners or shareholders as profit. Instead, it is used to fund the organization's ongoing activities and programs or to build reserves for future use.

 

Q.20. Give any one difference between revenue receipts &capital receipts?

Ans.  One main difference between revenue receipts and capital receipts is the purpose for which they are received.

Revenue receipts are received in the normal course of business operations, and are used to fund the day-to-day expenses of the organization. They are typically recurring in nature and include items such as sales revenue, service fees, and donations.

Capital receipts, on the other hand, are received for the purpose of financing long-term capital investments or assets, such as buildings, equipment, or land. They are usually one-time in nature and include items such as the proceeds from the sale of an asset, loans taken for the purpose of acquiring a capital asset, or donations specifically earmarked for capital projects.

 

Q.21. What is Income and Expenditure account?

Ans. The Income and Expenditure Account is a financial statement prepared by a not-for-profit organization to show its income and expenses over a particular period of time, such as a fiscal year. It is similar to the Profit and Loss Account used by for-profit businesses, but the surplus or deficit shown on the Income and Expenditure Account is not distributed to owners or shareholders as profit. Instead, it is used to fund the organization's ongoing activities and programs or to build reserves for future use. The Income and Expenditure Account includes all revenue and expenses incurred by the organization during the period, and the difference between the two gives the organization's surplus or deficit for that period.

 

Q.22. What is the purpose of preparing Income and Expenditure Account?

Ans. The purpose of preparing an Income and Expenditure Account is to show the financial performance of a not-for-profit organization over a particular period of time, such as a fiscal year. The account summarizes all of the organization's income and expenses during that period, including revenue received from donations, grants, and other sources, as well as expenses incurred for salaries, program costs, and administrative expenses.

The Income and Expenditure Account provides important information on the financial health of the organization, including whether it has generated a surplus or deficit during the period. It is used to assess the effectiveness of the organization's programs and activities, and to make decisions about how to allocate resources in the future. The account is also used to report on the organization's financial performance to stakeholders, such as donors, funders, and the public.

 

Q.23. Give any two features of Income and Expenditure Account?

Ans. Here are two features of Income and Expenditure Account:

It is prepared on the accrual basis: The Income and Expenditure Account is prepared on the accrual basis of accounting, which means that revenue and expenses are recognized when they are earned or incurred, regardless of whether payment has been received or made.

It includes only non-capital items: The Income and Expenditure Account includes only non-capital items, such as revenue from donations, membership fees, and grants, as well as expenses for salaries, program costs, and administrative expenses. It does not include items related to the acquisition or disposal of capital assets, such as the purchase or sale of land, buildings, or equipment.

 

Q.24. What account is prepared to know cash and bank balance by not for profit organisation?

Ans. A Receipts and Payments Account is prepared by a not-for-profit organization to know its cash and bank balance during a particular period. It records all cash and bank transactions during the period, including receipts from donations, grants, and other sources, as well as payments for salaries, program costs, and administrative expenses. The Receipts and Payments Account is used to reconcile the organization's cash and bank balances, and to identify any discrepancies or errors in the accounts. It provides a summary of all cash and bank transactions during the period, and is used to prepare the Income and Expenditure Account and the Balance Sheet.

Q.25. What does credit balance in Income & Expenditure Account and Receipt & payment Account on the basis of nature  of items recorded therein?
Ans. The credit balance in the Income and Expenditure Account represents the surplus of income over expenditure for a particular period, indicating that the organization has generated more revenue than it has spent on its programs and activities. This surplus can be carried forward to the next fiscal year or used to fund new programs and activities.

On the other hand, the credit balance in the Receipts and Payments Account represents the organization's cash and bank balances at the end of the accounting period, after all transactions have been recorded. This balance is carried forward to the next accounting period as the opening balance. The balance in the Receipts and Payments Account does not reflect the organization's financial performance or whether it has generated a surplus or deficit during the period, as it only records cash and bank transactions, not revenue or expenses on an accrual basis.

 

Q.26. What shows the difference between two sides of Income and Expenditure Account?

Ans. The difference between the two sides of an Income and Expenditure Account shows whether an organization has a surplus or deficit, which indicates whether it is earning more than it is spending or vice versa.

 

Q.27. Distinguish between Income & Expenditure Account and receipt & payment account on the basis of nature of items recorded therein?

Ans. Income and Expenditure Account records income and expenses of a particular period, including both cash and credit transactions, whereas the Receipt and Payment Account records only cash and bank transactions of an organization during a particular period.

 

Q.28. Why balance sheet of a non-profit organisation is prepared?

Ans. The balance sheet of a non-profit organization is prepared to provide a snapshot of the organization's financial position at a specific point in time, showing the assets, liabilities, and net assets or fund balances of the organization. This helps stakeholders understand the financial health and stability of the organization and make informed decisions.

 

Q.29. Give any two distinction between receipts and payments account and Income and expenditure account?

Ans. Receipts and Payments account records only cash and bank transactions, whereas Income and Expenditure account records both cash and credit transactions.

Receipts and Payments account shows the actual cash inflows and outflows of an organization during a specific period, whereas Income and Expenditure account shows the income earned and expenses incurred by the organization during that period, regardless of actual cash movements.

 

Q.30. Name any two items that appears on the credit side of receipt and payment account of not for profit Organisation?

Ans. 1. Donations received

2. Membership fees received

 

Q.31. Name any two items that appears on the debit side of Income and Expenditure account of not for profit organisation?

Ans. 1. Salaries and wages paid

2. Rent and utilities expenses

 

Q.32. Name any one item that appears on the debit side of receipt and payment account?

Ans. Purchase of assets (e.g. land, buildings, equipment, etc.)

 

Q.33. Name any one item that appears on the credit side of receipt and payment account?

Ans. Income from donations, grants, or fundraising activities.

 

Q.34. Name any one item that appears on the debit side income and expenditure account?

Ans. Program expenses (expenses related to the non-profit organization's core activities or projects).

 

Q.35. How is sale of an old asset treated in not-for profit organisations?

Ans. In not-for-profit organizations, the sale of an old asset is treated as a capital receipt and is recorded on the credit side of the Receipts and Payments account. It does not affect the Income and Expenditure account as it is not considered as income earned during the financial period. However, any profit or loss arising from the sale of the old asset is recorded in the Capital Fund Account, which is a part of the organization's balance sheet.

 

Q.36. Income and Expenditure account is based on which system of accounting?

Ans. Income and Expenditure account is based on the accrual system of accounting, which records all income earned and expenses incurred during a particular period, regardless of actual cash movements.

 

Q.37. How is sale of old newspaper & waste material treated in case of not-for-profit-organisations?

Ans. In the case of not-for-profit organizations, the sale of old newspaper and waste material is treated as revenue and is recorded on the credit side of the Receipts and Payments account. It is also recorded on the credit side of the Income and Expenditure account as other income earned during the financial period. The revenue earned from the sale of old newspaper and waste material can be used to fund the organization's activities or projects.

 

Q.38. What is the nature of receipts and payments account?

Ans. Receipts and Payments account is a summary of all cash and bank transactions made by a not-for-profit organization during a particular period. It is a real account that records actual cash inflows and outflows, and it shows the cash and bank balances at the beginning and end of the period. It provides information about the organization's cash and bank transactions and helps to reconcile the cash and bank balances.

 

Q.39. What is the nature of Income and expenditure account?

Ans. Income and Expenditure account is a nominal account that records the income earned and expenses incurred by a not-for-profit organization during a particular period. It includes both cash and credit transactions, and it is based on the accrual system of accounting. The purpose of the Income and Expenditure account is to determine the surplus or deficit of the organization for a specific period, which helps to assess the financial performance of the organization.

 

Q.40. Name the account prepared by non-profit organisations, based on the summary of cash and bank transactions during a particular accounting year?

Ans. The account prepared by non-profit organizations based on the summary of cash and bank transactions during a particular accounting year is called the Receipts and Payments Account.

 

Q.41. Whether capital receipts and payments are recorded in Income and expenditure account or not?

Ans. Capital receipts and payments are not recorded in the Income and Expenditure account of a not-for-profit organization. These transactions are recorded in the Capital Fund account, which is a part of the balance sheet of the organization. The Capital Fund account shows the changes in the organization's capital, including the opening balance, capital receipts, capital payments, and the closing balance of the capital fund.

 

Q.42. Name any one item that appears on the credit side Income and expenditure account?

Ans. Donations received.

 

Q.43. How we treat subscriptions in receipts and payments account?

Ans. In the Receipts and Payments account of a not-for-profit organization, subscriptions received are treated as revenue and are recorded on the credit side of the account. Subscriptions received in advance are recorded as a liability on the balance sheet of the organization until the period to which they relate. Similarly, subscriptions paid in advance are recorded as an asset on the balance sheet until the period to which they relate.

 

Q.44. What is the treatment of life membership fees received by non-profit organisation?

Ans. Life membership fees received by a non-profit organization are treated as capital receipts and are not recorded in the Income and Expenditure account. These fees are recorded on the credit side of the Receipts and Payments account as a liability until the life membership is utilized, and then it is transferred to the Capital Fund account. The Capital Fund account is a part of the organization's balance sheet and shows the organization's capital, including the opening and closing balance, and the changes in capital during the period.

 

Q.45. What is admission fees in not for profit organisation?

Ans. Admission fees in a not-for-profit organization are the fees charged from the new members when they join the organization. These fees are usually a one-time payment and are considered as capital receipts. Admission fees are not recorded in the Income and Expenditure account of the organization; instead, they are recorded on the credit side of the Receipts and Payments account and subsequently transferred to the Capital Fund account, which is a part of the organization's balance sheet.

 

Q.46. How entrance fee treated?

Ans. Entrance fees in a not-for-profit organization are similar to admission fees and are treated as capital receipts. These fees are not recorded in the Income and Expenditure account of the organization. Instead, they are recorded on the credit side of the Receipts and Payments account and subsequently transferred to the Capital Fund account, which is a part of the organization's balance sheet.

 

Q.47. where specific donations are shown?

Ans. Specific donations received by a not-for-profit organization are shown on the credit side of the Income and Expenditure account, under the head of 'Donations', and also on the liability side of the balance sheet, under the head of 'Donor's Fund'. The Donor's Fund is a separate fund created by the organization to account for the specific donations received for a particular purpose. These funds are utilized for the specific purpose for which they are received and cannot be used for any other purpose.

 

Q.48. Subscription due but not yet received are shown on which side of the balance sheet?

Ans. Subscription due but not yet received are shown on the assets side of the balance sheet of a not-for-profit organization. It is treated as a current asset as it represents the amount of subscription that is expected to be received in the future. This is recorded under the head 'Sundry Debtors' or 'Receivables' in the assets section of the balance sheet.

 

Q.49. What is Legacy?

Ans. A Legacy is a gift or bequest of property or money that is left to someone in a will. In the context of a not-for-profit organization, a Legacy refers to a donation or bequest that is received by the organization from an individual or a donor's estate. It is a form of planned giving where the donor leaves a gift to the organization in their will or as a part of their estate planning. The Legacy is usually received by the organization after the death of the donor and is shown as a part of the organization's balance sheet, under the head 'Legacy Fund'. The Legacy Fund is used by the organization for specific purposes as directed by the donor in their will or as per the organization's policies.

 

Q.50. What is endowment fund?

Ans. An Endowment Fund is a fund that is set up by a not-for-profit organization to receive donations or bequests, which are then invested to generate income for the organization's long-term financial sustainability. The principal amount of the Endowment Fund is kept intact and only the income earned on the invested amount is used for the organization's operational or programmatic expenses. The purpose of setting up an Endowment Fund is to ensure the organization's long-term financial stability and to provide a reliable source of income for future years. It is shown as a part of the organization's balance sheet, under the head 'Endowment Fund'.

 

Q.51. Explain the meaning of capital fund?

Ans. Capital Fund is a term used in the context of not-for-profit organizations and refers to the amount of money that has been accumulated by the organization through various sources such as donations, grants, investments, and other capital receipts. It is the fund that represents the long-term financial position of the organization and is used to finance its capital expenditure and investment needs. The Capital Fund is shown as a part of the organization's balance sheet, under the head 'Capital Fund' or 'General Fund'. The Capital Fund is different from the Income and Expenditure Account, which records the organization's revenue and expenses for a particular period.

 

Q.52. If there is a match fund of Rs. 22,000 and match expenses Rs 7,000, how these will be treated in case of Not-for-profit organisations?

Ans. In the case of not-for-profit organizations, a matching fund of Rs. 22,000 and matching expenses of Rs. 7,000 would be treated as follows:

The matching fund of Rs. 22,000 would be treated as a Capital Receipt and would be shown on the credit side of the Receipts and Payments Account.

The matching expenses of Rs. 7,000 would be treated as Revenue Expenditure and would be shown on the debit side of the Income and Expenditure Account.

This treatment is based on the principle of matching of income and expenses. The matching fund is treated as a capital receipt because it represents a long-term source of funding for the organization, while the matching expenses are treated as revenue expenditure because they are incurred in the normal course of the organization's activities and are expected to be fully consumed within the current accounting period.

VERY SHORT ANSWER TYPE QUESTIONS

 

Q.1. What do you mean by not for profit organisations?

Ans. Not-for-profit organizations, also known as non-profit organizations, are entities that are formed for the purpose of serving a specific social or public cause, rather than to generate profits for their owners or shareholders. These organizations typically operate in the fields of education, healthcare, social welfare, arts and culture, environmental conservation, and other similar areas.

Not-for-profit organizations may be registered as trusts, societies, or as Section 8 companies under the Companies Act, 2013 in India. They are typically funded through donations, grants, subscriptions, and other sources of funding, and any surplus generated by the organization is reinvested back into its operations or used to further its charitable objectives.

Not-for-profit organizations are subject to specific legal and regulatory frameworks, which require them to maintain a high degree of transparency and accountability in their operations. They are also required to maintain proper books of accounts and prepare financial statements in accordance with applicable accounting standards.

 

Q.2. What do you mean by Receipts and Payments Account?

Ans. Receipts and Payments Account is a summary of cash and bank transactions of a not-for-profit organization for a particular accounting period, typically a year. It records all the cash and bank receipts and payments made by the organization during the period and provides a clear picture of the organization's cash and bank balances at the end of the period.

The receipts and payments account is usually prepared in a format that resembles a cash book, with separate columns for cash and bank transactions. The receipts side of the account shows the amounts received by the organization during the period, including subscriptions, donations, grants, fees, and other sources of income. The payments side of the account shows the amounts paid by the organization during the period, including salaries, rent, office expenses, program expenses, and other expenditures.

The receipts and payments account is not prepared under any particular system of accounting, and it does not distinguish between capital and revenue items. It provides a summary of the organization's cash and bank transactions, which is useful for monitoring and managing the organization's liquidity and cash flow. The receipts and payments account is typically used as a basis for preparing the income and expenditure account and balance sheet of the organization.

 

Q.3. Give any four feature of Receipts and payments account?

Ans. The four features of Receipts and Payments Account are as follows:

 

Summary of cash and bank transactions: The Receipts and Payments Account is a summary of all the cash and bank transactions made by a not-for-profit organization during a specific accounting period, usually a year. It records all the cash and bank receipts and payments made by the organization, which helps to provide a clear picture of the organization's cash and bank balances at the end of the period.

Prepared on cash basis: The Receipts and Payments Account is prepared on a cash basis of accounting, which means that it records only cash and bank transactions that have been actually received or paid during the accounting period. It does not take into account any outstanding or deferred payments or receipts.

No distinction between capital and revenue items: The Receipts and Payments Account does not distinguish between capital and revenue items, as it records all the cash and bank transactions made by the organization, irrespective of their nature. Therefore, it includes both capital and revenue receipts and payments.

Used as a basis for other financial statements: The Receipts and Payments Account is used as a basis for preparing other financial statements such as the Income and Expenditure Account and Balance Sheet. It provides valuable information about the organization's cash and bank transactions, which is used to prepare these financial statements.

 

Q.4. What do you mean by Income and Expenditure Account?

Ans. Income and Expenditure Account is a nominal account that shows the revenue earned and expenses incurred by a non-profit organization during a specific accounting period. It is prepared to determine the surplus or deficit of the organization for the period, which helps in assessing its financial performance. Unlike a profit-making organization, a non-profit organization does not aim to make a profit. Therefore, the Income and Expenditure Account serves as an alternative to the Profit and Loss Account in a for-profit entity.

 

Q.4. What do you mean by Income account?

Ans. An Income Account is a nominal account that records all the revenues earned by a business during a particular accounting period. It includes all the inflows of economic resources, such as sales revenue, interest income, rent received, and other forms of revenue. The primary purpose of an Income Account is to measure the profitability of a business, which is calculated by deducting the total expenses incurred from the total revenues earned. The resulting figure represents the net income or net profit of the business for the accounting period.

 

Q.5. What is difference between receipts and Income account?

Ans. The main difference between Receipts and Income Accounts is their nature and purpose.

Receipts Account is a summary of all cash and bank transactions that take place during a particular accounting period. It records all the cash inflows and outflows, such as the receipt of cash from sales, payments made for expenses, receipts of donations, and payments made for capital expenditures. The primary purpose of the Receipts Account is to show the opening and closing balances of cash and bank balances.

On the other hand, an Income Account is a nominal account that records all the revenues earned by a business during a particular accounting period. It includes all the inflows of economic resources, such as sales revenue, interest income, rent received, and other forms of revenue. The primary purpose of an Income Account is to measure the profitability of a business, which is calculated by deducting the total expenses incurred from the total revenues earned.

In summary, while the Receipts Account is a record of all cash and bank transactions during an accounting period, the Income Account is a record of all the revenues earned during that period.

 

Q.6. What is difference between expenditure and payment?
Ans. Expenditure refers to the cost or amount spent on goods or services purchased by an organization during a specific period, whereas payment refers to the actual disbursement or outflow of cash or funds made to settle the outstanding liabilities or expenses incurred by the organization. In other words, expenditure is the total cost incurred by the organization for the goods and services consumed or utilized, whereas payment is the actual cash outflow or payment made to settle the outstanding liabilities or expenses. Expenditure is recorded in the books of accounts when the goods or services are received or utilized, whereas payment is recorded when the actual cash payment is made.

 

Q.7. What is life membership fee?

Ans. Life membership fee is a type of fee charged by non-profit organizations to individuals who want to become permanent members of the organization. This fee is usually a one-time payment that grants the individual lifetime membership to the organization, with all the associated benefits and privileges. Life membership fees are typically higher than annual membership fees, but they provide the member with permanent access to the organization's activities, services, and facilities without any additional payments or renewals.

 

Q.8.  How life membership fees is treated in the books of a non-trading institution?

Ans. In the books of a non-trading institution, life membership fees are treated as a capital receipt, as they represent a one-time payment for a long-term benefit. The life membership fees are not considered as income, as they do not represent any revenue earned from the organization's regular operations. Instead, they are treated as a part of the organization's capital funds, which are used for long-term investments and other capital expenditures. The life membership fees received are credited to the capital fund account in the balance sheet and are not included in the Income and Expenditure Account, as they do not represent any income earned during the accounting period.

 

Q.9. What is Honorarium?

Ans. Honorarium refers to a payment made to a person as a token of appreciation or gratitude for services rendered. It is usually a one-time payment, and is often made to guest speakers, performers, or individuals who provide professional or expert advice on a voluntary basis. The amount of an honorarium is usually fixed beforehand and is not based on the actual time or effort spent in performing the service. In the books of a non-profit organization, honorarium is treated as an expense and is debited to the income and expenditure account.

 

Q.10. What is legacy amount?

Ans. Honorarium refers to a payment made to a person as a token of appreciation or gratitude for services rendered. It is usually a one-time payment, and is often made to guest speakers, performers, or individuals who provide professional or expert advice on a voluntary basis. The amount of an honorarium is usually fixed beforehand and is not based on the actual time or effort spent in performing the service. In the books of a non-profit organization, honorarium is treated as an expense and is debited to the income and expenditure account.

 

Q.11. What is legacy amount?

Ans. A legacy amount refers to the amount of money or property left to a person or an organization through a will or testamentary document. In the context of non-profit organizations, a legacy amount may be a bequest from a donor who has passed away, and it may be used by the organization to fund various programs or activities in the future. Legacy amounts can play a significant role in the financial sustainability of non-profit organizations.

 

Q.12. What is General donation and specific donation?

Ans. In the context of non-profit organizations, a general donation refers to a donation made without any specific conditions or restrictions placed upon it by the donor. This means that the organization can use the donation in any way it sees fit to further its charitable mission or objectives.

On the other hand, a specific donation is a donation made by a donor with a specific purpose in mind. The donor may specify that the donation be used for a particular project or program, or that it be used to support a particular group or cause. In this case, the non-profit organization is obligated to use the donation in the manner specified by the donor.

 

Q.13. what is fund based accounting?

Ans. Fund-based accounting is a method of accounting that is used by non-profit organizations and government agencies to manage their financial resources. It involves the tracking of funds that are designated for specific purposes, such as grants or donations, and the monitoring of expenditures against those funds. This method allows organizations to ensure that funds are being used for their intended purposes and to provide transparency and accountability to stakeholders. Fund-based accounting typically involves the use of separate funds or accounts for each specific purpose, with financial statements prepared for each fund separately.

Q.14. How would you treat a Tournament fund?

Ans. A tournament fund is created to account for the income and expenses related to a specific tournament or event hosted by a non-profit organization. The following steps can be taken to treat a tournament fund:

Create a separate ledger account for the tournament fund and transfer the initial amount allocated to the fund.

Record all income received and expenses incurred specifically for the tournament in the tournament fund ledger account.

Any excess funds remaining in the tournament fund after the event should be transferred to the general fund.

If the tournament results in a deficit, the amount should be transferred from the general fund to the tournament fund to cover the shortfall.

The balance of the tournament fund should be shown on the balance sheet as a restricted fund.

Overall, the purpose of creating a tournament fund is to ensure that all income and expenses related to the event are clearly identified and accounted for separately from other funds.

 

Q.15. Give any three difference between receipts and payments account and income and expenditure account?

Ans. The three differences between receipts and payments account and income and expenditure account are:

Basis of recording: Receipts and payments account is a summary of all cash and bank transactions, whether they relate to the current or the previous year, and is based on the cash basis of accounting. On the other hand, income and expenditure account is prepared on an accrual basis of accounting, which means that it records all incomes and expenses incurred during the accounting period, irrespective of whether they have been received or paid in cash or not.

Nature of accounts: Receipts and payments account is a real account, as it records actual cash and bank transactions. In contrast, income and expenditure account is a nominal account, as it records all revenue and expense items, which are not actual transactions but represent accruals or deferrals of incomes and expenses.

Purpose: Receipts and payments account is prepared to ascertain the cash and bank balances of the non-profit organization, whereas income and expenditure account is prepared to determine the surplus or deficit of the organization during the accounting period. The main purpose of income and expenditure account is to present a summary of revenue and expenses, which are not related to the acquisition or disposal of assets or liabilities.

 

Q.16. How would you treat entrance fee in case of non-profit organisation?

Ans. Entrance fee is treated as a capital receipt in the books of a non-profit organization. It is credited to the Capital Fund or Entrance Fee Fund account. The entrance fee is not considered as income and is not shown in the Income and Expenditure Account.

 

Q.17. Write any two difference between Income and Expenditure account and profit and loss account?

Ans. The two differences between Income and Expenditure account and profit and loss account are:

Nature of the organization: Income and Expenditure account is prepared by non-profit organizations to record their revenue and expenses for a particular accounting period. In contrast, the profit and loss account is prepared by profit-making organizations to determine their net profit or loss.

Treatment of capital items: Income and Expenditure account does not consider capital items like fixed assets, long-term loans, etc., as its purpose is to record the revenue and expenses incurred during the accounting period. However, the profit and loss account considers both revenue and capital items like depreciation, interest on long-term loans, etc., to determine the net profit or loss of the organization.

 

Q.20. Give any three difference between income and expenditure account and profit & loss account?

Ans. Objective:

The primary objective of the income and expenditure account is to record all the revenue and expenses of a non-profit organization over a specified period, whereas the profit and loss account records the revenue, expenses, gains, and losses of a profit-making entity during a given period.

Nature of Transactions:

Income and expenditure account records only the revenue and expenses related to the non-profit activities of an organization, whereas the profit and loss account records all transactions related to the core business activities of a profit-making entity.

Presentation of Final Result:

Income and expenditure account shows the surplus or deficit of income and expenses over a given period of time, whereas the profit and loss account shows the net profit or loss of the business after taking into account all the revenues, expenses, gains, and losses of the entity. In other words, while income and expenditure account shows the financial position of a non-profit organization, the profit and loss account shows the financial performance of a profit-making entity.

 

Q.21. What are the rules regarding expenses and incomes relating to a specific fund?

Ans. Expenses and incomes relating to a specific fund are governed by specific rules depending on the nature of the fund. Here are some general rules that apply to such expenses and incomes:

Restriction on usage: In general, expenses and incomes related to a specific fund can only be used for the purpose of that fund. For example, if an organization has a scholarship fund, the expenses related to the scholarship program can only be paid from that fund. Similarly, the income earned from the scholarship fund can only be used to support the scholarship program.

Separate accounting: Expenses and incomes related to a specific fund should be accounted for separately from other funds of the organization. This helps to ensure that the financial statements accurately reflect the financial position of the organization with respect to each fund.

Donor restrictions: In some cases, a donor may place restrictions on the use of the funds they donate. For example, they may specify that the funds can only be used for a specific purpose, such as research or education. In such cases, the organization must adhere to the donor's restrictions when using the funds.

Legal compliance: Organizations may be required to comply with legal requirements related to the use of funds. For example, there may be regulations related to the use of government grants or funds received from charitable organizations.

It is important for organizations to understand and follow the rules related to expenses and incomes related to a specific fund to ensure compliance with regulations and maintain the trust of donors and stakeholders.

 

Q.22. Give any three differences between receipt and payment account and cash account?

Ans. Objective:

The primary objective of the receipt and payment account is to record all cash and bank transactions of a non-profit organization during a specified period, whereas the cash account records all cash transactions of a profit-making entity over a given period.

Nature of Transactions:

Receipt and payment account records all receipts and payments, whether in cash or through banks, whereas the cash account records only cash transactions of the entity.

Presentation of Final Result:

Receipt and payment account shows the total amount of cash and bank receipts and payments over a given period, whereas the cash account shows the balance of cash in hand or at the bank at the end of a given period. In other words, while the receipt and payment account shows the cash inflows and outflows during the period, the cash account shows the cash position of the business at a specific point in time.

 

SHORT ANSWER TYPE QUESTIONS

 Q.1. Discuss main features of receipts and payment account?

Ans. Receipts and payment account is a statement that records all cash and bank transactions of a non-profit organization over a specified period. Here are some of the main features of a receipts and payment account:

Record of all receipts and payments: The receipts and payment account records all cash and bank receipts and payments made by a non-profit organization during a specified period, regardless of whether they are related to revenue or capital items.

Cash and bank transactions: The account records both cash and bank transactions of the organization. Cash transactions include cash received or paid by the organization, whereas bank transactions include payments made by cheques or electronic transfers.

Summary of transactions: The account provides a summary of all cash and bank transactions during a specified period. The summary includes the opening and closing cash balances, total receipts, and total payments made during the period.

Separate columns for cash and bank: The account has separate columns for recording cash and bank transactions. The cash column records all cash receipts and payments, whereas the bank column records all bank receipts and payments.

Cash balance at the end of the period: The receipts and payment account shows the cash balance at the end of the period. This balance is calculated by subtracting the total payments from the total receipts and adding the opening cash balance.

Non-profit organization focus: The receipts and payment account is designed specifically for non-profit organizations. It is used to record transactions related to revenue and capital items of a non-profit entity.

Overall, the receipts and payment account provides an overview of the cash and bank transactions made by a non-profit organization over a specified period. It helps the organization to monitor its cash position, plan future expenditures, and maintain accurate financial records.

 

Q.2. Give the differences between ‘’ Receipts and payments Account’’ and cash book?

Ans. The "Receipts and Payments Account" and the "Cash Book" are both financial records used in accounting to track and summarize cash transactions. However, there are a few key differences between these two:

Scope of Transactions:

Receipts and Payments Account: This account summarizes all cash and non-cash transactions of a non-profit organization or a club during a specific period. It includes both revenue and capital items.

Cash Book: The cash book records only cash transactions, including both cash receipts and cash payments.

Presentation:

Receipts and Payments Account: It is usually presented in the form of an account, similar to other ledger accounts. It starts with the opening balance of cash and ends with the closing balance of cash.

Cash Book: It is presented in a book format, with separate columns for cash receipts and cash payments. The cash book may also include additional columns for bank transactions, discounts, and other relevant information.

Recording Method:

Receipts and Payments Account: Transactions are recorded on the basis of the date of occurrence. Both cash and non-cash transactions are included in the account.

Cash Book: Transactions are recorded on the basis of the actual receipt or payment of cash. It records the details of each cash transaction as it happens.

Purpose:

Receipts and Payments Account: It is used to summarize all cash and non-cash transactions and calculate the cash surplus or deficit during a particular period.

Cash Book: It serves as a subsidiary book that provides a detailed record of all cash transactions. It helps in maintaining a proper record of cash inflows and outflows.

Periodicity:

Receipts and Payments Account: It is usually prepared at the end of an accounting period, such as annually or monthly.

Cash Book: It is maintained on a regular and ongoing basis, usually updated daily or whenever a cash transaction occurs.

In summary, the Receipts and Payments Account provides an overview of all cash and non-cash transactions for a specific period, while the Cash Book focuses exclusively on cash transactions. The Receipts and Payments Account is prepared periodically, while the Cash Book is maintained continuously.

 

Q.3. Write down the differences between ‘’Income and Expenditure account’ ’and ‘’Profit and loss Account?

Ans. The "Income and Expenditure Account" and the "Profit and Loss Account" are both financial statements used in accounting to measure the financial performance of an organization. However, there are several key differences between these two:

Nature of Organization:

Income and Expenditure Account: It is primarily used by non-profit organizations, such as clubs, societies, and charitable institutions, to record their revenue and expenses.

Profit and Loss Account: It is used by profit-oriented businesses to calculate their net profit or net loss during a specific accounting period.

Revenue and Expense Recognition:

Income and Expenditure Account: It includes both revenue and expenses, regardless of whether they are related to the current accounting period or not. Revenue is recognized when received or earned, and expenses are recognized when paid or incurred.

Profit and Loss Account: It includes revenue and expenses that are directly related to the current accounting period. Revenue is recognized when earned, and expenses are recognized when incurred, following the accrual basis of accounting.

Purpose:

Income and Expenditure Account: Its purpose is to determine the surplus or deficit of a non-profit organization over a specific period. The surplus represents excess revenue over expenses, while a deficit occurs when expenses exceed revenue.

Profit and Loss Account: Its purpose is to calculate the net profit or net loss of a business entity. Net profit is achieved when revenue exceeds expenses, whereas net loss occurs when expenses exceed revenue.

Presentation:

Income and Expenditure Account: It is presented in the form of an account, similar to other ledger accounts. It begins with the opening balance of surplus/deficit, incorporates revenue and expenses for the period, and concludes with the closing balance of surplus/deficit.

Profit and Loss Account: It is presented in a statement format, with revenue listed first, followed by various expense categories. The account calculates the net profit or net loss by deducting total expenses from total revenue.

Legal Requirement:

Income and Expenditure Account: It is not a legal requirement and is typically used for internal reporting purposes in non-profit organizations.

Profit and Loss Account: It is a legal requirement for businesses, and companies are obligated to prepare and present a profit and loss account as part of their financial statements.

In summary, the Income and Expenditure Account is used by non-profit organizations to determine their surplus or deficit, while the Profit and Loss Account is used by profit-oriented businesses to calculate their net profit or net loss. The Income and Expenditure Account includes all revenue and expenses, regardless of the accounting period, whereas the Profit and Loss Account focuses on revenue and expenses related specifically to the current accounting period.

 

Q.4. What are the limitations of receipts and payments account?

Ans. The Receipts and Payments Account, despite its usefulness in summarizing cash and non-cash transactions, has several limitations:

Non-Inclusion of Non-Cash Transactions: The Receipts and Payments Account only captures cash transactions, excluding non-cash transactions such as credit sales, credit purchases, and depreciation of assets. As a result, it may not provide a comprehensive view of all financial activities of an organization.

Lack of Accrual Basis: The account does not consider the accrual basis of accounting, which recognizes revenue when earned and expenses when incurred, irrespective of cash flows. It may lead to a distorted view of the financial performance and position of the organization.

Limited Detail: The Receipts and Payments Account provides a summarized view of cash transactions, often lacking specific details and breakdowns of individual transactions. It may not provide sufficient information for analysis or decision-making purposes.

Inadequate Periodicity: The account is usually prepared at the end of an accounting period, such as annually or monthly. This infrequent reporting may result in a delayed understanding of cash flows and financial activities, limiting real-time monitoring and control.

Failure to Distinguish between Revenue and Capital Items: The Receipts and Payments Account does not differentiate between revenue and capital items. Both types of transactions are combined, which can make it difficult to assess the financial performance and make informed decisions regarding revenue generation and capital investment.

Ignoring Accruals and Prepayments: The account does not consider accruals (revenues or expenses yet to be received or paid) and prepayments (advance payments for future expenses). This exclusion may distort the actual financial position and cash flow status of the organization.

Inadequate Disclosure: The Receipts and Payments Account may lack disclosure of essential financial information, such as contingent liabilities, long-term commitments, or off-balance sheet items. It may not provide a complete picture of the organization's financial obligations and risks.

Given these limitations, it is crucial to complement the Receipts and Payments Account with other financial statements, such as the Income Statement, Balance Sheet, and Cash Flow Statement, to gain a comprehensive understanding of an organization's financial performance and position.

 

Q.5. Distinguish between ‘’Receipts and payments Account and ‘’ Income and Expenditure Account?

Ans. The "Receipts and Payments Account" and the "Income and Expenditure Account" are two distinct financial statements used in accounting. Here are the key differences between them:

Purpose and Nature:

Receipts and Payments Account: This account is used primarily by non-profit organizations, clubs, and societies to record and summarize their cash and non-cash transactions. It aims to determine the cash balance and cash flow position.

Income and Expenditure Account: This account is used by non-profit organizations to measure their revenue and expenses during a specific period. It focuses on determining the surplus or deficit of the organization.

Scope of Transactions:

Receipts and Payments Account: It includes all cash and non-cash transactions, such as cash receipts, cash payments, credit sales, credit purchases, donations received, and expenses paid. It covers both revenue and capital items.

Income and Expenditure Account: It includes only revenue and expenses, whether they are cash-based or accrual-based. It does not include non-cash items like the purchase or sale of assets.

Basis of Recording:

Receipts and Payments Account: Transactions are recorded on the basis of the date of occurrence, whether it is a cash transaction or a non-cash transaction.

Income and Expenditure Account: Transactions are recorded on an accrual basis, recognizing revenue when earned and expenses when incurred, regardless of the actual cash inflow or outflow.

Presentation:

Receipts and Payments Account: It is presented in the form of an account, similar to other ledger accounts, with opening and closing cash balances. It provides a summary of cash and non-cash transactions during a specific period.

Income and Expenditure Account: It is presented as a statement, showing the revenue and expense items for a specific period. It starts with the opening surplus/deficit, includes revenue and expense items, and ends with the closing surplus/deficit.

Periodicity:

Receipts and Payments Account: It is usually prepared at the end of an accounting period, such as annually or monthly, to summarize the financial transactions during that period.

Income and Expenditure Account: It is prepared for a specific accounting period, typically annually, to measure the revenue and expenses incurred during that period.

Treatment of Surplus/Deficit:

Receipts and Payments Account: It does not directly calculate surplus or deficit. The surplus or deficit is calculated by comparing the opening and closing cash balances.

Income and Expenditure Account: It calculates the surplus or deficit by deducting total expenses from total revenue. A surplus rep resents excess revenue over expenses, while a deficit occurs when expenses exceed revenue.

In summary, the Receipts and Payments Account focuses on summarizing all cash and non-cash transactions to determine the cash flow position, while the Income and Expenditure Account measures revenue and expenses to determine the surplus or deficit of a non-profit organization. The Receipts and Payments Account covers a broader range of transactions, including both revenue and capital items, whereas the Income and Expenditure Account focuses specifically on revenue and expenses.

 

Q.6. What is legacy and donation?

Ans. Legacy and donation are two terms related to charitable giving and estate planning. Here's an explanation of each:

Legacy:

A legacy refers to a gift or bequest made in a will or trust by an individual, known as the testator, to be given to a person or organization after their death. It is a way for individuals to leave a lasting impact or support causes that are important to them. Legacies can take various forms, including money, property, investments, valuable possessions, or a percentage of the estate. The person or organization receiving the legacy is referred to as the beneficiary or legatee. Legacies are often given to family members, friends, or charitable organizations.

Donation:

A donation, also known as a charitable contribution or gift, is the act of voluntarily giving money, goods, services, or other resources to a charitable organization or cause without expecting anything in return. Donations are made to support and further the work of nonprofit organizations, charities, foundations, or other entities engaged in philanthropic activities. Donations can be in the form of cash, checks, online transfers, property, securities, or even in-kind contributions such as goods or services. Donations are often made to support specific causes, projects, programs, or campaigns and can be made by individuals, corporations, or other entities.

Both legacies and donations are means by which individuals can contribute to charitable causes and make a positive impact on society. Legacies are typically planned and specified in a person's will or trust, whereas donations can be made during a person's lifetime or through bequests in a will. Both forms of giving are vital for supporting charitable organizations and addressing societal needs.