A Different Approach Tuition Limited (ADApT)

April 13th 2011: - Non-profit organizations

Preamble
Hi, guys ^_^ we’re almost at the end of the course and as you may expect we’ve been encountering some of the more
challenging topics recently. I have a feeling that this topic is not liked by many students but the truth is: it is an easy topic.

It’s just different.

You already know how to do everything in it. I’ll prove it to you.

Do you know how to do: A Cash Book? Yup. ^_^

A Trading account? Mmhmm! (*nods head)
A Profit and Loss account? Duh! (lol!)
A Balance Sheet? <_< … like… long time, Sir!
A T-a/c for a revenue with accruals Umm… I’m a lil rusty, but yeh (*I think…)
and prepayments?
Adjust for accruals and
prepayments in the Profit and Loss Yeh, yeh. Small thing.
a/c and the Balance Sheet?

See? You already know how to do everything in this topic. All you have to do is learn some new terminology, see a few
examples, and you’re good to go ^_^.

Do not become YOUR OWN worst enemy with a negative attitude toward this topic.

So without further ado, let’s get to it!

Chris

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 A Different Approach Tuition Limited (ADApT)
Introduction
The table below provides a summary of the major accounting items that you will need to know to be able to answer any
question on this topic and also shows the parallel item that you have already learned.

New name (non-profit version) Old name (for-profit version)

The Receipts and Payments a/c A Cash Book
The “Bar” Trading a/c (name can change) A Trading account
The Income and Expenditure a/c A Profit and Loss account
The Statement of Affairs A Balance Sheet
The Subscriptions a/c A T-a/c for a revenue with accruals and prepayments

The Receipts and Payments a/c

This is a cash book with the cash and bank columns combined into ONE column. Remember how you used to do a bank
account or a cash account before you learned how to do a cash book (a normal T-a/c without all the additional columns)?

Example: Place the info below in the Receipts and Payments a/c and balance it off.
2011 - Jan
1st Balance b/d $3,500
2nd Members' Subscriptions received by cash and cheque totaling $15,000 (this will be explained later on)
3rd Purchases of refreshments for the bar $5000 (cash) (this is explained in the very next section)
4th Donations received via cash and cheque $10,000
5th Telephone Expense paid via cheque $2,000
7th Paid rent via cheque $5,000
8th Paid wages of bar staff in cheque $3,000

Receipts and Payments a/c

2011 $ 2011 $
Jan 1st Balance b/d 3,500 Jan 3rd Purchases for bar 5,000
Jan 2nd Subscriptions 15,000 Jan 5th Telephone Expense 2,000
Jan 4th Donations 10,000 Jan 7th Rent 5,000
Jan 8th Wages of Bar Staff 3,000
Jan 10th Balance c/d 13,500
28,500 28,500

Don’t worry about what the new items are just yet (subscriptions, bar purchases, donations). These will be explained in
due course. What you need to pay attention to is the fact that this account contains BOTH cash and bank transactions.

*Please note that this account can have an overdraft

You already know how to do this. DO NOT LET THE “NEW” STUFF CONFUSE YOU.

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 A Different Approach Tuition Limited (ADApT)
The Bar Trading account
Ok, listen up! This is simply a trading account for the organization’s bar or cafeteria (and you know what a bar/cafeteria
is! It’s a place where you buy drinks/food. It’s not some magical, complicated key to the universe that will forever change
the way you look at PoA. Do not allow yourself to become distressed by the addition of the word “bar” in front of
“trading a/c”. PLEASE!!!)

The format is identical to the trading account that you already know. As a matter of fact it will probably be simpler
because there are not usually returns or carriage in. IF THERE ARE, YOU KNOW WHAT TO DO.

Reason for a Bar Trading account

Put simply, the reason for the bar trading account is: to calculate the profit made from the bar. It is done SEPARATELY
from the organization’s Income and Expenditure account (the parallel to the Profit and Loss a/c) because the bar does not
represent the organization’s major line of activity/revenue generation. It is simply a small part of the business’s activities.

You are accustomed to seeing the trading account as part of the Income Statement (The Trading and Profit and Loss a/c)
for profit-making trading organizations (companies that buy/sell goods to as their major line of operations).

This type of organization is a NON-PROFIT organization and does not engage in trading as its major line of operations.
Usually these organizations have members who pay a subscription or membership fees (more on this later) and this is the
major source of the organization’s revenue. Non-profits usually do charity work, and they have barbeques, raffles and
dances (socials, galas, balls, fetes, etc.) in order to raise funds for their cause (cancer research, taking care of the
underprivileged, etc.)

More on this later. Right now let’s take a look at the Bar Trading account.

Example: - Prepare a Bar Trading account for the month ended Jan 1st, 2011 from the following information:

$
Bar Takings (Sales) 5,000
Opening Bar Stock 400
Bar Purchases 3,500
Closing Bar Stock 700

Bar Trading a/c

For the month ended
January 31st, 2011
$ $
Bar Takings 5,000
Less Cost of Goods Sold
Opening Bar Stock (400)
add Purchases (3,500)
(3,900)
less Closing Bar Stock 700
Cost of Goods Sold (3,200)
Gross bar profit 1,800
In the above table it can be seen that the Bar Trading account is essentially the SAME as a regular trading account. The
only thing NOT SHOWN here is that sometimes it has a Profit and Loss piece attached to it for other bar expenses like
Salary of Bar Staff, Bar Cleaning Expenses, etc. USE YOUR BRAIN and DON’T PANIC!
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 A Different Approach Tuition Limited (ADApT)
The Income and Expenditure Account
As indicated before this is the non-profit equivalent to a “Profit and Loss” section. It has a section for “Income” and a
section for “Expenditure”. And guess what happens? The expenditure is added up and subtracted from the income <_<
Not much of a surprise, eh? Take a look at the example below to see what it looks like.

Example: From the following information you are required to construct an Income and Expenditure account for Random
Name Club for the year ended December 31st, 2010

$
Subscriptions earned 50,000
Bar Profit 7,000
Donations received 30,000
Profit on Fundraisers 25,000

Depreciation 5,000
Rental expense 12,000
General Expenses 27,000

Random Name Club

Income and Expenditure a/c
for the year ended December 31st 2010
$ $
Income
Subscriptions earned 50,000
Bar Profit 7,000
Donations received 30,000
Profit on Fundraisers 25,000
TOTAL INCOME 112,000

Expenditure
Depreciation (5,000)
Rental expense (12,000)
General Expenses (27,000)
TOTAL EXPENDITURE (44,000)
Surplus of Income over Expenditure 68,000

• These are not all of the possible items that can be included in this account. By now you should be able to tell which
items are income and which are expenditure.
• Subscriptions WILL BE EXPLAINED LATER ON. Just familiarize yourself with it for now.
• Look out for accrued and prepaid portions of expenses!
• The net income here is referred to as the Surplus of Income over Expenditure.
• If there was a loss it would be referred to as the Excess of Expenditure over Income.
• The more questions you try, the more familiar you will become with the different “tricks” and items.
• Use your common sense to guide you. If you are not sure of something, leave it out and do what you can.

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 A Different Approach Tuition Limited (ADApT)
The Statement of Affairs
This is the name given to the Balance Sheet of a non-profit organization (Note: Sometimes they ask for a balance sheet…
just give them what they want). In terms of the format IT IS ESSENTIALLY THE SAME as the balance sheet that you
already know and love.

The only major difference (AND PAY ATTENTION HERE) is that the CAPITAL of a non-profit organization is called the:

ACCUMULATED FUND

Example: using the information below prepare a Statement of Affairs for Random Name Club as at December 31st, 2010.

$
Furniture and Fittings 100,000
Motor Vehicle 25,000
Bar Stock 700
Subscriptions owing 1,400
Prepaid Expenses 500
Bank/Cash 2,500
Accrued Expenses 400
Subscriptions Prepaid 1,500
Depreciation:
Furniture and Fittings 20,000
Motor Vehicle 5,000

Accumulated Fund at Start 35,200

Surplus of Income over Expenditure 68,000

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 A Different Approach Tuition Limited (ADApT)
Random Name Club
Statement of Affairs
as at December 31st 2010

Fixed Assets Cost Depr'n NBV

$ $ $
Furniture and Fittings 100,000 (20,000) 80,000
Motor Vehicle 25,000 (5,000) 20,000
125,000 (25,000) 100,000
Current Assets
Bar Stock 700
Subscriptions owing 1,400
Prepaid Expenses 500
Bank/Cash 2,500
5,100
Current Liabilities
Accrued Expenses (400)
Subscriptions Prepaid (1,500)
(1,900)
Working Capital 3,200
Net Assets 103,200

Accumulated Fund
Balance at start 35,200
add Surplus of Income 68,000
Balance at end 103,200

As can be seen above the Statement of Affairs is essentially the same as a Balance Sheet with the two minor adjustments
being:
• The Capital is called the “Accumulated Fund”, and
• The net profit is referred to as the “Surplus of Income over Expenditure”

So far you should be noticing the similarities between these “new” items and the items that you already know.

Now let’s get to the last new item and then we’ll head straight to the past papers.

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 A Different Approach Tuition Limited (ADApT)
Subscriptions
You know how you pay a subscription for a magazine or perhaps a website online – money that you pay so that the
magazine is delivered to you/you can have access to the website?

In the context of non-profit organizations a subscription is essentially a membership fee. It is paid by members (people
who are part of the organization) to enjoy the benefits of being part of the non-profit organization (access to facilities –
gym, recreational center, discounts on events/products/services, etc.)

Subscriptions are the major form of revenue/income for a non-profit organization and usually you will have to do a T-a/c
to calculate the amount that must be transferred to the Income and Expenditure account. And this is where the fun
begins, because there will be both accrued and prepaid portions of subscriptions. Enough talk, PHIL, fling de example!!!

Example: from the information below draw up the subscriptions account and evaluate the amount of subscriptions that
will be transferred to the Income and Expenditure account.

$
Subscriptions accrued at start 500 (Accrued subscriptions are a current asset – this is the opening DR balance)
Subscriptions prepaid at start 700 (Prepaid subscriptions are a current liability – opening CR balance)
Subscriptions received 5,400 (The is the Receipts and Payments figure (Cash/Bank))
Subscriptions accrued at end 300 (Accrued subs @ end – current asset (carried down from CR side))
Subscriptions prepaid at end 400 (Prepaid subs @ end – current liability (carried down from DR side))

REMEMBER: Subscriptions is a REVENUE

Subscriptions a/c
$ $
Subs accrued b/d 500 Subs prepaid b/d 700
Income and Expenditure 5,500 Receipts and Payments 5,400
Subs prepaid c/d 400 Subs accrued c/d 300
6,400 6,400

As can be seen in the above account the Income and Expenditure figure is calculated by plugging in all the other figures
in the appropriate places (on the appropriate sides) and “working backwards” to find the missing figure.

So there you have it: a crash course in Non-profit organizations. Of course there are a few other things that are not shown
here but they will be seen when you attempt the past paper questions.

So … on to it!

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