C ONTENTS Foreword iii Chapter 1 Accounting for Not-for-Profit Organisation 1 1.1 Meaning and Characteristics of Not-for-Profit 1 Organisation 1.2 Accounting Records of Not-for-Profit Organisations 2 1.3 Receipt and Payment Account 4 1.4 Income and Expenditure Account 12 1.5 Balance Sheet 17 1.6 Some Peculiar Items 21 1.7 Income and Expenditure Account based on Trial Balance 38 1.8 Incidental Trading Activity 40 Chapter 2 Accounting for Partnership : Basic Concepts 64 2.1 Nature of Partnership 64 2.2 Partnership Deed 66 2.3 Special Aspects of Partnership Accounts 68 2.4 Maintenance of Capital Accounts of Partners 68 2.5 Distribution of Profit among Partners 73 2.6 Guarantee of Profit to a Partner 88 2.7 Past Adjustments 93 2.8 Final Accounts 95 Chapter 3 Reconstitution of a Partnership Firm – Admission 115 of a Partner 3.1 Modes of Reconstitution of a Partnership Firm 115 3.2 Admission of a New Partner 116 3.3 New Profit Sharing Ratio 117 3.4 Sacrificing Ratio 119 3.5 Goodwill 122 3.6 Adjustment for Accumulated Profits and Losses 144 3.7 Revaluation of Assets and Reassessment of Liabilities 145 3.8 Adjustment of Capitals 151 3.9 Change in Profit Sharing Ratio among the 161 Existing Partners viii Chapter 4 Reconstitution of a Partnership Firm – 176 Retirement/Death of a Partner 4.1 Ascertaining the Amount Due to 176 Retiring/Deceased Partner 4.2 New Profit Sharing Ratio 177 4.3 Gaining Ratio 178 4.4 Treatment of Goodwill 182 4.5 Adjustment for Revaluation of Assets and Liabilities 192 4.6 Adjustment of Accumulated Profits and Losses 194 4.7 Disposal of Amount Due to Retiring Partner 195 4.8 Adjustment of Partner’s Capital 204 4.9 Death of a Partner 210 Chapter 5 Dissolution of Partnership Firm 226 5.1 Dissolution of Partnership 226 5.2 Dissolution of a Firm 227 5.3 Settlement of Accounts 229 5.4 Accounting Treatment 230 1 Accounting for Not-for-Profit Organisation LEARNING OBJECTIVES There are certain organisations which are set up After studying this chapter, for providing service to its members and the you will be able to; public in general. Such organisations include clubs, •Explain the meaning and charitable institutions, schools, religious characteristics of accounting not-for-profit organisations; organisations, trade unions, welfare societies and (cid:129)Identiy the need for, and societies for the promotion of art and culture. These nature of accounting records organisations have service as the main objective and relating to not-for-profit not the profit as is the case of organisations in organisations; (cid:129)List the principal financial business. Normally, these organisations do not statements prepared by not- undertake any business activity, and are managed for-profit organisations and by trustees who are fully accountable to their explain their nature; (cid:129)Prepare the Receipt and members and the society for the utilization of the Payment Account from a funds raised for meeting the objectives of the given date; organisation. Hence, they also have to maintain (cid:129)Explain the procedure of proper accounts and prepare the financial statement preparing the Income and Expenditure Account from a which take the form of Receipt and Payment given Receipt and Payment Account; Income and Expenditure Account; and Account and some Balance Sheet. at the end of for every accounting additional information; (cid:129)Distinguish between the period (normally a financial year). Receipt and Payment This is also a legal requirement and helps them Account and the to keep track of their income and expenditure, the Income and Expenditure Account; nature of which is different from those of the business (cid:129)Prepare Income and organisations. In this chapter we shall learn about Expenditure Account and the accounting aspects relating to not-for-profit Balance Sheet from a given Receipt and Payment organisation. Account and the relevant additional information; 1.1 Meaning and Characteristics of Not-for-Profit (cid:129)Explain treatment of certain Organisation peculiar items of receipts and payments such as Not-for-Profit Organisations refer to the subscriptions from members, special funds, legacies, sale organisations that are for used for the welfare of the of old fixed assets, etc. society and are set up as charitable institutions 2 Accountancy – Not-for-Profit Organisation and Partnership Accounts which function without any profit motive. Their main aim is to provide service to a specific group or the public at large. Normally, they do not manufacture, purchase or sell goods and may not have credit transactions. Hence they need not maintain many books of account (as the trading concerns do) and Trading and Profit and Loss Account. The funds raised by such organisations are credited to capital fund or general fund. The major sources of their income usually are subscriptions from their members donations, grants-in-aid, income from investments, etc. The main objective of keeping records in such organisations is to meet the statutory requirement and help them in exercising control over utilisation of their funds. They also have to prepare the financial statements at the end of each accounting period (usually a financial year) and ascertain their income and expenditure and the financial position, and submit them to the statutory authority called Registrar of Societies. The main characteristics of such organisations are: 1. Such organisations are formed for providing service to a specific group or public at large such as education, health care, recreation, sports and so on without any consideration of caste, creed and colour. Its sole aim is to provide service either free of cost or at nominal cost, and not to earn profit. 2. These are organised as charitable trusts/societies and subscribers to such organisation are called members. 3. Their affairs are usually managed by a managing/executive committee elected by its members. 4. The main sources of income of such organisations are: (i) subscriptions from members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income from investments, etc. 5. The funds raised by such organisations through various sources are credited to capital fund or general fund. 6. The surplus generated in the form of excess of income over expenditure is not distributed amongst the members. It is simply added in the capital fund. 7. The Not-for-Profit Organisations earn their reputation on the basis of their contributions to the welfare of the society rather than on the customers’ or owners’ satisfaction. 8. The accounting information provided by such organisations is meant for the present and potential contributors meet the statutory requirement. 1.2 Accounting Records of Not-for-Profit Organisations As stated earlier, normally such organisations are not engaged in any trading or business activities. The main sources of their income are subscriptions from members, donations, financial assistance from government and income from investments. Most of their transactions are in cash or through the bank. These Accounting for Not-for-Profit Organisation 3 institutions are required by law to keep proper accounting records and keep proper control over the utilization of their funds. This is why they usually keep a cash book in which all receipts and payments are duly recorded. They also maintain a ledger containing the accounts of all incomes, expenses, assets and liabilities which facilitates the preparation of financial statements at the end of the accounting period. In addition, they are required to maintain a stock register to keep complete record of all fixed assets and the consumables. They do not maintain any capital account. Instead they maintain capital fund which is also called general fund that goes on accumulating due to surpluses generated, life membership fee, donation, legacies, etc. received from year to year. In fact, a proper system of accounting is desirable to avoid or minimise the chances of misappropriations or embezzlement of the funds contributed by the members and other donors. Final Accounts or Financial Statements: The Not-for-Profit Organisations are also required to prepare financial statements at the end of the each accounting period. Although these organisations are non-profit making entities and they are not required to make Trading and Profit & Loss Account but it is necessary to know whether the income during the year was sufficient to meet the expenses or not. Not only that they have to provide the necessary financial information to members, donors, and contributors and also to the Registrar of Societies. For this purpose, they have to prepare their final accounts at the end of the accounting period and the general principles of accounting are fully applicable in their preparation on as stated earlier, the final accounts of a ‘not-for-profit organisation’ consist of the following: (i) Receipt and Payment Account (ii) Income and Expenditure Account, and (iii) Balance Sheet. The Receipt and Payment Account is the summary of cash and bank transactions which helps the preparation of Income and Expenditure Account and the Balance Sheet. Besides, it is a legal requirement as the Receipts and Payments Account has also to be submitted to the Registrar of Societies along with the Income and Expenditure Account, and the Balance Sheet. Income and Expenditure Account is akin to Profit and Loss Account. The Not-for-Profit Organisations usually prepare the Income and Expenditure Account and a Balance Sheet with the help of Receipt and Payment Account. However, this does not simply that they do not make a trial balance. In order to check the accuracy of the ledger accounts, they also prepare a trial balance which facilitate the preparation of accurate Receipt and Payment Account as well as the Income and Expenditure Account and the Balance Sheet. In fact, if an organisation has followed the double entry system they must prepare a trial balance for checking the accuracy of the ledger accounts and it will also. 4 Accountancy – Not-for-Profit Organisation and Partnership Accounts 1.3 Receipt and Payment Account It is prepared at the end of the accounting year on the basis of cash receipts and cash payments recorded in the cash book. It simply is a summary of cash and bank transactions under various heads. For example, subscriptions received from the members on different dates which appear on the debit side of the cash book, shall be shown on the receipts side of the Receipt and Payment Account as one item with its total amount. Similarly, salary, rent, electricity charges paid from time to time as recorded on the credit side of the cash book but the total salary paid, total rent paid, total electricity charges paid during the year appear on the payment side of the Receipt and Payment Account. Thus, Receipt and Payment Account gives summarised picture of various receipts and payments, irrespective of whether they pertain to the current period, previous period or succeeding period or whether they are of capital or revenue nature. It may be noted that this account does not show any non-item like depreciation. The opening balance in Receipt and Payment Account represents cash in hand/ cash at bank which is shown on its receipts side and the closing balance of this account represents cash in hand and bank balance as at the end of the year, which appear on the credit side of the Receipt and Payment Account. However, if it is bank overdraft at the end it shall be shown on its debit side as the last item. Let us look at the cash book given in example how the total amount of each item of receipt and payment has been worked out. Example 1 Cash Book (Columnar) Dr. Cr. Date Details L.F. Bank Office Date Details L.F. Bank Office Amount Amount Amount Amount (Rs.) (Rs.) (Rs.) (Rs.) 2006 2006 April 1 Balance b/d 35,000 20,000 April 15 Insurance premium 15,000 April 10 Subscriptions 1,20,000 May 12 Printing and 10,750 stationery April 10 Entrance fees 13,000 May 20 Postage and 430 May 20 Life membership 12,000 courier fees fees June 16 Telephone 810 June 12 Locker rent 42,000 expenses July 23 Life membership 8,000 July 10 Wages and salaries 22,000 fees July 15 Rates and Taxes 17,000 Aug. 20 Donation for 60,000 July 30 Govt. securities 1,00,000 building Aug. 13 Printing and 15,000 Sept. 13 Subscriptions 30,000 statienary (2005-2006) Aug. 15 Postage and 480 Sept. 13 Subscription 45,000 courier service Sept. 10 Lighting 12,250 Accounting for Not-for-Profit Organisation 5 Sept. 14 Entrance fees 10,000 Sept 13 Telephone expenses 830 Nov. 9 Subscription 35,000 Oct. 1 Wages and salaries 10,000 12,000 Oct. 18 Printing and 13,000 Nov. 9 Subscription 10,000 stationary (2007-2008) Oct. 31 Govt. securities 1,00,000 2007 Dec. 31 Wages and Salaries 22,000 Feb. 07 Subscription 25,000 2007 Jan. 21 Courier charges 240 Mar. 28 Interest on 18,000 Feb. 2 Telephone 960 government expenses securities Mar. 10 Postage and 850 Courier fees Mar. 27 Lighting 14,000 Mar. 27 Wages and Salaries 22,000 Mar. 31 Balance c/d 70,000 23,400 4,21,000 62,000 4,21,000 62,000 Part A Item wise Aggregation of various Receipts Subscriptions (2006–2007) Date Amount (Rs.) April 10, 2006 1,20,000 Sept. 13, 2006 45,000 Nov. 9, 2006 35,000 Feb. 7, 2007 25,000 Total 2,25,000 Subscriptions (2005–06) Date Amount (Rs.) Sept. 13, 2006 30,000 Total 30,000 Subscription Date Amount (Rs) Nov. 9, 2006 10,000 Total 10,000 Entrance Fees Date Amount (Rs) April 10, 2006 13,000 Sept.14, 2006 10,000 Total 23,000 6 Accountancy – Not-for-Profit Organisation and Partnership Accounts Locker Rent Date Amount (Rs) April 12, 2006 42,000 Total 42,000 Life Membership fee Date Amount (Rs) May 12, 2006 12,000 July 23, 2006 8,000 Total 20,000 Donation for Buildings Date Amount (Rs) Aug. 20, 2006 60,000 Total 60,000 Interest on Government securities Date Amount (Rs) March 28, 2007 18,000 Total 18,000 Part B Item wise Aggregation of various Payments Insurance Premium Date Amount (Rs) April 15, 2006 15,000 Total 15,000 Printing and Stationery Date Amount (Rs.) May 12, 2006 10,750 Aug. 13, 2006 15,000 Oct. 18, 2006 13,000 Total 38,750 Lighting Date Amount (Rs.) Sept. 10, 2006 12,250 March 27, 2007 14,000 Total 26,250 Accounting for Not-for-Profit Organisation 7 Telephone Expenses Date Amount (Rs.) June 16, 2006 810 Sept. 13, 2006 830 Feb. 12, 2007 960 Total 2,600 Rates and Taxes Date Amount (Rs.) July 15, 2006 17,000 Total 17,000 Government Securities Date Amount (Rs.) July 30, 2006 1,00,000 Oct. 31, 2006 1,00,000 Total 2,00,000 Wages and Salaries Date Amount (Rs.) July 10, 2006 22,000 Oct. 1, 2006 22,000 Dec. 31, 2006 22,000 March 30, 2007 22,000 Total 88,000 Postage and Courier Service Date Amount (Rs.) May 20, 2006 430 Aug. 15, 2006 480 Jan. 22, 2007 240 March 10, 2007 850 Total 2,000 The above data can also be shown in the form of the respective accounts in the ledger. A detailed illustrative list of items of receipts and payments is given as follows: