Accounting for Financial Statements of Not-for-Profit Organizations

Transcription

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

2 338 Accounting is always done with respect to an entity. An accounting entity may be an individual such as a sole proprietor, a doctor, a lawyer or a chartered accountant. An accounting entity may also be a group of persons such as a Hindu Undivided Family, a Partnership Firm, a Joint Stock Company, a Cooperative Society, a Club, a Hospital, School, etc. On the basis of the objectives to be achieved accounting entities can be divided into two categories. These are: (i) Entities for profit, and (ii) Not-for-profit entities (See Exhibit 8.1). Entities for profit: The objective of such entities is to conduct business and earn profit. These entities include manufacturers, wholesalers, retailers, service providers such as transporters, bankers, insurance agencies, and professionals such as doctor s lawyer, engineers, architects, professional advisors, etc. Not-for-profit entities: The objective of such entities is to provide services to the people without any intentions to seek profit. The main objective of these entities may be social, educational, religious, cultural or charitable. These entities may be in the form of sports club, social or literary club, religious institutions, libraries, hospitals, educational institutions, professional bodies, societies and charitable institutions like orphanage homes, and old age homes. Some not-for-profit entities such as sports and recreation clubs exist with the primary objective of providing services to its members. These may consist one or more sub entity, which may undertake trading in order to add the income from memberships, subscriptions, donations and grants. For example, a cricket club, a ACCOUNTANCY not-for-profit organization may run a restaurant as a sub entity of cricket club to earn profit and the same fund may be used for the furtherance of the objectives of the club. So far you have studied about accounting of the transactions of Business Organizations, which are profit-making and follow accrual system of accounting. This chapter seeks to explain the concepts and procedures of accounting followed by not-for-profit organizations. Not-forprofit organizations follow usually the Cash system of accounting and partly the Accrual system of accounting and hence, the system is hybrid in nature or Modified Accrual Accounting. This chapter is divided into two parts. Part I deals with Accounting for Governmental Organi-zations and Part II deals with Non-Governmental Not-for-Profit Organizations. 8.1 Concept of Not-for-Profit Organizations The primary reason of the existence of notfor-profit organizations is the existence of many social and political groups within our present-day society, which provide service and carry on activities in the interest of society. Thus, the interest of society is considered to be of prime importance because it is desirable to make available certain services which economically and physically challenged people cannot afford, but are required to be provided for the empowerment of the deprived people or for promotion of certain activities, which cannot be pursued individually. The not-for-profit organizations grow in any society with the

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

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

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

6 342 Liabilities + Appropriations + Revenues + Interfund Obligations + Fund Balance Terminology of Fund Accounting Some of the new terms used in the above equation as also the other terms used in fund accounting are explained hereunder: Expenditure: It is an amount paid for transfer of an asset, for acquiring services or assets or for settling a loss. Encumbrances: Obligations/liabilities committed during the accounting year by agreement of purchase or contract. A portion of general funds may be set aside to meet the obligations on account of purchase orders. Interfund Claims/Transfers: This implies earmarking of resources for specific purpose or use. Usually, this is done by transfers from general revenues or from other funds. For the purpose of fulldisclosure, it is necessary that Interfund transfers/claims be shown clearly to avoid the mis-reading of financial statement. If not properly presented along with explanations, such transfers may give the impression of willful manipulation of reported income. Since, transfers are merely internal allocations, they must not be shown as income of the receiving fund and expense of transferring fund. Appropriation: Appropriations are internal authorizations to spend money on a given expenditure head. It is defined as one that sets out the amount earmarked or authorized to be spent for a particular activity or function. Expenses incurred out of Appropriate Funds should be charged as expenses in the year incurred, ACCOUNTANCY and the related appropriations should be reversed if there is excess. Disclosure should be made by way of a note. Revenues: Revenues are the current incomes received by way of cash inflows through gifts, fees, grants, interest, dividend, rent etc. 8.4 Objectives of Accounting for Not-for-Profit Entities: Following are the objectives of accounting for Not-for-profit entities: To compare the actual financial results of operations with organization s approved and legally adopted budget. To assess financial performance of the entity during the current accounting year. To determine the compliance with rules, regulations and laws under which Not-for-profit accounting system is operating. To evaluate the organization s efficiency in spending money on meeting the assigned tasks and responsibilities. 8.5 Types of Funds Following are the most commonly used group of funds: Current Unrestricted or General Funds: This fund is created to carry out the general activities and is also called Operating Fund, Unrestricted Fund or General Fund. This fund does not contain any restrictions on the use of assets contributed to it. This fund is used for the attainment of objectives for

7 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 343 which the organization was established. All unrestricted grants, gifts, contributions and incomes are recorded in this fund. If the organization does not receive any restricted fund, this fund would show all activities of the organization. Common example of Unrestricted funds are annual membership fee, non-specified gifts and grants, contributions. Accounting Entries for General Fund (a) Receipt of Fund: Bank/Cash a/c Dr. Contributions a/c (b) Use of Funds: Contributions a/c Dr. Fund Balance a/c Current Restricted fund: This fund accounts for contributions received by the Not-for-profit organization for carrying out those activities for which such contributions are made. This fund is also called Donor-restricted Fund or Fund for Specified Purposes. For example, a school may receive 1 Lakh for a programme of Public Education for Drug Abuse. In this case, this is a restricted fund, which is to be used for promoting Drug abuse programme. Such amounts are recorded in the specific funds. In the given example, the amount will be recorded in Drug Abuse Fund Account. Often the Current Restricted Funds are relatively small in amount and are used either in the current year or in the following year. Usually, all Good Luck Community Service Centre Current Unrestricted Fund Statement of Income, Expenses and Charge in Fund Balances for the year ended 31 March 2002 Particulars Amount Amount Income: 5,40,000 Contribution and Gifts 4,00,000 Service Fees 1,00,000 Investment Income from endowment fund 25,000 Other Incomes 15,000 Expenses: 3,50,000 Salaries 2,00,000 Rent 75,000 Utilities 50,000 Other 25,000 Excess of income: 1,90,000 Over expenses 10,000 Fund balance, beginning of the year 2,00,000 Less: Transfer to fixed asset fund 1,50,000 Fund balance at the end of the year 50,000

8 344 Current Restricted Funds are clubbed under one head. Another example would be, the Research Grants Fund which is the sum-total of the grants received by different teachers in different departments of a college to carry out specific individual research projects. It is to be noted that details of each research project with respect to the amount sanctioned, amount received, amount spent and balance will be shown for each scheme of research project. Accounting Entries If a Not-for-Profit Organization: (a) For Receipt of Funds: Cash Operating a/c Dr. Restricted Fund a/c ACCOUNTANCY (b) Use of Fund: Restricted Fund a/c Dr. Contributions for Research a/c Endowment Fund: Endowment Funds are the assets donated to Notfor-profit organizations with the legal condition that the principal amount will be maintained in perpetuity and only the income earned from these assets can be used for the various activities of the organization. Usually, income arising from the investment of Endowment Fund, is unrestricted for use hence, should be reported in the Current Unrestricted Funds. In some cases, endowment donations are received with restriction on the use of income from the fund investment. In such cases, the income is added to the Endowment Fund and related expenditure is subtracted from the fund Good Luck Community Service Centre Current Restricted Fund Statement of Income, Expenses and Charge in Fund Balances for the year ended 31 March 2002 Particulars Amount Amount Income: 3,00,000 Contributions 2,00,000 Gifts 75,000 Other Incomes 25,000 Expenses: 2,58,000 Sports prizes 1,75,000 Welfare Programme 45,000 Other expenses 38,000 Excess of income: Over expenses 42,000 Fund balance, beginning of the year 18,000 Fund balance at the end of the year 60,000

9 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 345 Abstract Balance Sheet as at 31 March 2001 Liabilities Amount Assets Amount Current Restricted Fund 60,000 Current Restricted Fund 60,000 Investment with HDFC Bank 30,000 Bank of Baroda 20,000 Cash 10,000 60,000 income. Any excess of income over expense is added to the fund and is invested to generate further income for the original purpose. For example, a University may receive 1 Lakh for awarding gold medal to the meritorious student. In this case, the endowment for Gold Medal is a restriction and hence, the expenditure on the Gold Medal will be less than or equal to the interest income arising from the investment In case of surplus, the same will be invested and added to the fund. Another possibility is that a donation/ grant may be received by the organization. Such donation is invested and income is paid to the beneficiary as per the directives of the donor. For example, an organization may donate Rs10 lakh for promoting study of literature. In this case the Rs10 lakh will be invested and income arising out of that will be distributed by way of Scholarship to people pursuing study of Literature. The donations so received will be shown as Scholarship Fund. Accounting entries: (a) Receipt of Endowment: Cash/bank a/c Dr. Endowment Fund a/c (b) Making of Investment: Investment a/c Dr. Cash/Bank a/c (c) Receipt of Interest/Dividend: Cash/bank a/c Interest/Dividend a/c (d) Transferring interest to Endowment and matching expenses Interest/dividend a/c Expenditure Endowment (e) Purchase of Medals etc. Expenditure a/c Cash/Bank (f) Transfer to Unrestricted Fund Endowment Fund a/c Unrestricted Fund Dr. Dr. Dr. Dr. Fixed Asset Fund: The gifts and contributions received by Not-forprofit organisations for the acquisition/creation of assets are recorded in Fixed Assets Fund / Building & Equipment Fund / Plant Fund. Often amount spent are funded by both donor restricted and unrestricted gifts. This fund will also include unspent Building Fund contributions. Creating a separate fund and thereby indicating that this amount is not available for day-today operations of the Not-for-Profit Organizations. Sometimes, the

10 346 ACCOUNTANCY Abstract Balance Sheet as on 31 March, ( In lakhs) Liabilities Amount Assets Amount Sir SayajiRao Diamond Sir SayajiRao Diamond Jubilee Fund 20 Jubilee Fund 20 Investment with As per last Account 15 HDFC Bank 10 Exp. As per last Account 3 Bank of Baroda 5 Add: Donations 2 Addition to Building 5 amount of unrestricted gifts/general fund may be transferred to another fund. Such transfer of amount is known as Interfund transfer. Depreciation is shown in the Plant Fund or in the unrestricted fund. In the latter case, an amount equal to the depreciation charge is transferred from the unrestricted funds to Plant Fund. The following explains this process: Unrestricted Fund Particulars Provision for Depreciation Transfer to Plant Fund XXXXXX XXXXXX Plant Fund Particulars Transfer from Unrestricted Fund Accumulated Depreciation XXXXXX XXXXXX Good Luck Community Service Centre Fixed Asset Fund Statement of Change in Fund Balances for the year ended 31 March 2002 Particulars Amount Fund balance in the beginning of the year 8,00,000 Add: Transfer from ensuer fund 1,50,000 Fund balance at the end of the year 9,50,000

11 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 347 Good Luck Community Service Centre Abstract Balance Sheet as on 31 st March, ( In lakhs) Liabilities Assets Fixed Assets Fund 9.5 Fixed Assets 9.5 Difference between Fund Accounting and Non-fund Accounting 1. Basis of Bookkeeping 2. Use of Money Cash Basis. Fund Accounting Except general funds, all other funds are used for specific purpose and separate funds are created for recording. Accrual Basis. Non-Fund Accounting All resources are used for any of the objectives or basis and all resources are classified as owner s equity and loans. 3. Equity Accounting 4. Entity of Accounting 5. Accountability Fund Accounting There is no individual or group of persons who have economic interest and hence there is no equity. Each fund is a fiscal and financial accounting entity. Accountability is towards law, regulations, legislature, Parliament, contributors and donors of funds. Non-Fund Accounting Equity accounting is of primary focus as these are ownership equities. Business enterprise is the accounting entity for recording and reporting business transactions. Accountability is towards all stakeholders viz., owners, creditors, workers, Government, regulators, consumers and all other general public. 6. Financial Statements 7. Surplus v/s. income 8. Budget Budget, income and expenditure account, statement of changes in funds alongwith their utilization, summary of debts. Usually expenditures are more or equal to receipts, hence deficit is the common feature. Sometimes individual funds may have excess of current income over expenses because of restrictions. Approval of budget is fundamental for financial transactions. Hence, authorizations and appropriations are sacrosanct. Moreover, all account heads emanate from budget. Profit & Loss Account, Balance sheet, cash-flow statement and statement of changes in financial position of business entity. The result of matching of revenues and expenses may either be profit or loss. Commercial principles of codification of accounting are followed and budget system is optional.

12 348 ACCOUNTANCY 9. Adjustment 10. Depreciation Under cash system, outstanding and prepaid expenses, accrued income are not recorded. However, for restricted purposes under modified accrual system, such adjustments are recorded. Depreciation is not recorded as cost of carrying on operations. Depre-ciation is treated as allocation of funds based on replacement cost of the asset in use as is followed in Indian Railways. 8.4 Governmental Accounting System It is to be noted that the discusstion that follows hereunder is to give a synoptic view of Government Accounting System of the Government of India. For further details, one can refer to Government Accounting Rules framed and enforced from time-totime. The fundamental objective of Governmental Accounting System is to forecast with greatest possible accuracy what is expected to be received and paid during the year and whether the receipts along with previous years balance of fund is sufficient to cover the expenses. For this, every year a Budget is laid before the Parliament/State Legislature showing the Capital and Revenue receipts and capital and revenue disbursements. Further, division is made between plan and nonplan expenditure. The budget has to be voted and passed by the Parliament/ Legislature and a separate Appropriation Bill is to be passed to indicate authorizations for different receipts and disbursements. On the basis of the budget and accounts the Government determines (a) whether it will be justified in curtailing the expenditure or expanding the activities, and (b) whether it can or should raise revenues accordingly. In brief, Exhibit : 8.2 All adjustments are made by invoking the Generally Accepted Accounting Principles (GAAP). Depreciation is recorded as Business expense and proper asset accounting is done. following are the purposes of Government Accounting System: 1. Historical record of financial operations of the Government alongwith the legally adopted budget. 2. Report expenditure incurred on various activities. 3. Provide information about how Government financed its activities and met its cash requirements. 4. Provide aggregate information useful in evaluating the Governments performatnce in terms of services, cost efficiency and accomplishments. 5. Provide help in the financial management of the country/state/ union territory through periodical reporting Method of Governmental Accounting The mass of Government transactions are cash based, hence cash system of accounting is followed. However, for certain transactions for which Government acts as banker, remitter, borrower or lender, accrual System of Accounting is followed. There are three pillars viz., elements (expense, revenue, receipt, disbursements, liabilities, cash balance), measurement and recongnition.

13 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 349 These are explained below: 1. Element is and item of transaction relating to expense, income, receipt, disbursement, liability, or asset. 2. Measurement is the process of determining the monetary amounts at which elements are to be recorded. 3. Recognition is the processs of incorporating in a financial statement an item that is within the definition of an element and satisfies the criteria for recognition. Cash Basis of Accounting: Recognises transaction at exchange of cash. Financial result is expressed in terms of cash received and cash paid. Elements covered are: (a) Receipts (b) Expenditure (c) Cash balance Accrual Basis of Accounting: Accrual system of Accounting follows Generally Accepted Accounting Principles and is recommended for use in case of trusts, capital projects, special assessment, and Inter-Governmental transfer of funds. The modified Accrual basis of accounting is used for general funds, special reverues and Debt Service Funds. The modified accrual basis of accounting is defined as that method of accounting in which expenditures and revenues are recorded at the exchange of cash except for material and approved revenues. Revenue sources which give rise to legally enforceable claims (such as property taxes, which can be duly ascertained and Inter- Governmental transfers are recorded on accrual basis. Following are the elements covered: Revenues Expenses Assets including physical assets Liabilities Net assets Cash flows Receipts: Receipts are cash inflows arising from reciprocal and non-reciprocal transactions, borrowings, interest, or custodial contributions/receipts. Non-Reciprocal Transactions: Taxation Issue of currency Grants Donations Contributions Reciprocal Transactions: Sale of goods and services Sale of Assets. Financial Inflows: Interest receipts Borrowings Capital contributions Custodial receipts Payments: Reciprocal Transactions: Purchase of goods and services Acquisition of asssets Capital investment and loans Non-reciprocal Transactions: Governmental transfers Grants Contributions Donations

14 350 Financial Outflows: Interest payment Repayment of debt Custodial payments Assets: An asset is a resource controlled by the entity as a result of past event and from which future economic benefits are expected to flow. Assets may be financial (bonds, securities, shares, debentures etc.), physical (gold, silver, land & building, bridges, furniture, fixtures, equipment and plant, currency) and intangible (patents, copyrights, licences etc.). Liabilities: A present obligation arising from past events settlement of which is expected to result in the outflow of resources embodying economic benefits. Examples of liabilities are accounts payable, accrued interest payable, accrued wages and salaries, pension and other accrued terminal benefits, guarantees and indemnities likely to be invoked, currency ACCOUNTANCY issued, debt, obligation under accident compensation. Commitment: It is a Government responsibitlity for a future liability based on contractual agreement. Obligation is not certain but when it occurs, it is to be recognized as a liability because it ceases to be a commitment Classification of Government Accounts Government accounts are kept in three parts, viz., Part I Consolidated Fund of India, Part II Contingency Fund of India and Part III Public Account of India (See Exhibit 8.3) Consolidated Fund of India It is the account of all revenues received, all loans raised and all money received by the Government in repayment of loans. This account has two divisions. The first Government Account Consolidated Fund of India Contingency Fund of India Public Account of India Receipts Tax Revenue. Non-Tax Revenue. Grants in aid & Contributions. Revenue Section Expenditures General Services. Social Services. Economic Services. Grants in aid & Contributions. Receipts Capital Section Expenditures General Services. Social Services. Economic Services. Grants in aid & Contributions. Small Savings. Deposits & Advances. Reserve Fund. Suspense & Miscellanceous. Remittances. Cash Balance Exhibit 8.3: Structure of Government Account

15 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 351 division consists of revenue account, detailing about revenue receipts and expenditure heads. The second division comprises capital receipts and capital expenditure. The third section relates to Public Debt and Loans and Advances which include loans raised and their repayment by Government such as Internal debt, external debt of Central Government, Loans and Advances made by Government and their recoveries. Contingency Fund: It is Part II of Government Accounts. The Contingency Fund is in the nature of an imprest created through the law by the Parliament and placed at the disposal of the Government to enable advances to be made for meeting unforeseen expenditure, pending authorization by the Parliament. Public Account of India: This is the third part of Government Accounts. All other moneys received by or on behalf of the Government of India shall be credited to the Public account of India. The transactions leading to debt (other than in Part I), deposits, advances, remittances and suspense are recorded in this account. Sectors and Sub-sectors of Accounts: Under each division and section of the Consolidated Fund of India, the transactions are grouped into Sectors such as General Services, Social and Community Services. This classifi-cation highlights the Function or the Service carried on by the Government. The Sectors may be divided into Sub-sectors. Each Sector in a section is distinguished by an alphabet. Major, Minor and Detailed Heads: Major head of account falling in the Consolidated Fund of India corresponds to the functions of Government such as services like agriculture, defense provided by the Government. A Minor head identifies a programme undertaken and a sub-minor head indicates the scheme or activity undertaken. A detailed head is termed as an object classification. It is meant for itemized control over expenditure such as salaries, office expenses, grant-in aid, loans, and investments. Codification of Accounts: A four-digit Arabic-numerical code is assigned to Major Heads followed by two-digit code for the relevant Major Sub-head followed by a three-digit code for Minor Heads (See Exhibit 8.4). This is illustrated by the following example: Procedure for Receipts, Payments and Inter-Government Transfers: All receipts (taxes, borrowings, interest receipts and Major Head Code in the section for Receipt Heads Expenditure Expenditure Loans and Function Revenue Heads Heads Capital Advances Account Revenue Account Account 1. Medical and Public Health Shipping

16 352 ACCOUNTANCY Characteristics of the Function Part Division Section Sector Sub-sector Sub-sub-sector Classification and Codification of Accounts Function Itself Major Head Function 4 Digit Code Sub-Major Head Sub-Function 2 Digit Code Minor Head Programme 3 Digit Code Sub-Minor Head Scheme 2 Digit Code Detailed Head Sub-Scheme 2 Digit Code Object Head Item Class 2 Digit Code Exhibit 8.4: Coding System others), payments (expenses for civil, defense, and general services for each head) and inter-governmental transfers are carried out through the use of vouchers, formats whereof are prescribed in Government of India Accounting Rules, The procedure for receipts, payments and inter-governmental transfers is presented in a synoptic form in Exhibit 8.5. Reserve Bank of India

17 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 353 Exhibit 8.5: Procedure for Receipts, Payments and Transfers.

18 354 ACCOUNTANCY Recording of Transactions 1. Recording Estimated Revenue Estimated revenue is, being an Asset account is debited and Fund Balance is credited. General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Estimated Revenue 9,00,000 Fund Balance 9,00,000 Estimated Revenues Ledger Tax Revenue 5,00,000 Licenses and Permits 2,00,000 Service charges 1,20,000 Fines and others 80, Recording Appropriations General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Fund Balance 8,00,000 Estimated other uses 30,000 Appropriations 7,70,000 Appropriations Ledger General Government 4,00,000 Public Safety 2,00,000 Public Parks 60,000 Health and Welfare 1,10,000 Estimated other uses 30,000 As revenues are received, cash account is debited and revenue account is credited. Assuming that (out of 5,00,000 tax revenue) 4,50,000 is collected (and distributed as follows) General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Cash 4,50,000 Revenue 4,50,000 Revenue Ledger General Government 3,00,000 Public Safety 30,000 Public Parks 40,000 Health and Welfare 80,000

19 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS Recording Expenditure When the authorized liabilities have been incurred, an appropriation is considered expended. Expected liabilities are called encumbrances/obligations. In order to record an encumbrance, usually in case of purchase or other commitments, the Encumbrances Controlling Account is debited and Reserve for Encumbrances is credited. For example, encumbrances for the year 2002 are of 1,00,000. The transaction is recorded as follows: General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Encumbrances ,00,000 Reserve for Encumbrances ,00,000 Revenue Ledger General Government 50,000 Public Safety 25,000 Public Parks 20,000 Health and Welfare 5,000 General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Encumbrances ,00,000 Reserve for Encumbrances ,00,000 Revenue Ledger General Government 50,000 Public Safety 25,000 Public Parks 20,000 Health and Welfare 5,000 When expenditures are actually paid, expenditures (and its subsidiary account) is debited and liability account is created for the amount paid to the creditor. For example, 90,000 of 1,00,000 of the encumbrances is paid as follows: General Ledger () Subsidiary Ledger () Debit Credit Debit Credit Reserve for Encumbrances ,000 Encumbrances ,000 Encumbrances Ledger General Government 45,000 Public Safety 20,000 Public Parks 20,000 Health and Welfare 5,000 Expenditure ,000 Vouchers Payable 90,000 Expenditure Ledger General Government 45,000 Public Safety 20,000 Public Parks 20,000 Health and Welfare 5,000

20 356 ACCOUNTANCY In this way, all transactions are recorded in the General Fund (Consolidated Fund of India) and entries are made in the Budgeting Process. A pictorial representation of the flow of receipts and payment procedure is shown in exhibit 8.5. Illustration 1 A college has received endowments for furtherance of research. Following are the details of the various endowments: Balances as on 1 April, 2000 IPCL Research fund in Management 20,00,000 IPCL Research fund in Microbiology 10,00,000 GSFC Fellowship 20,00,000 Interest Balance as on 1 April, 2000 IPCL Research fund in Management 40,00,000 IPCL Research fund in Microbiology 5,00,000 GSFC Fellowship 3,00,000 Interest received during the year ending 31 March, IPCL Research fund in Management 6,00,000 IPCL Research fund in Microbiology 1,50,000 GSFC Fellowship 3,00,000 Expenditure during the year IPCL Research fund in Management 5,00,000 IPCL Research fund in Microbiology 3,50,000 GSFC Fellowship 2,00,000 Contribution received for GSFC Fellowship Fund. 2,00,000 Investment at the end of the year IPCL Research fund in Management 50,00,000 IPCL Research fund in Microbiology (In Government Bonds) 14,00,000 GSFC Fellowship (LIC Annuities) 36,00,000 Balances of funds are maintained in the Bank Account with the State Bank of India. From the above information, you are required to prepare Statement of Change in Endowment Fund. Show the relevant items in the Statement of Affairs.

21 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 357 Solution Statement of Change in Endowment Fund Particulars Amount Amount A. IPCL Research fund in Management Opening Balance of Interest 40,00,000 Add: Interest Received 6,00,000 46,00,000 Less: Expenditure during the year 5,00,000 Closing Balance of Interest 41,00,000 Opening Balance of Fund 20,00,000 Closing Balance of Fund 61,00,000 B. IPCL Research Fund in Microbiology Opening Balance of Interest 5,00,000 Add: Interest Received 1,50,000 6,50,000 Less: Expenditure during the year 3,50,000 Closing Balance of Interest 3,00,000 Opening Balance of Fund 10,00,000 Fund received during the year 2,00,000 Closing Balance of Fund 15,00,000 C. GSFC Fellowship Fund Opening Balance of Interest 3,00,000 Add: Interest Received during the year 3,00,000 6,00,000 Less: Expenditure during the year 2,00,000 Closing Balance of Interest 4,00,000 Add: Opening Balance of Fund 30,00,000 Add: Contributions Received 2,00,000 Closing Balance of Fund 36,00,000 Total Endowment Fund 1,12,00,000 Statement of Affairs as at 31 March 2001 Liabilities Amount Assets Amount Endowment Fund: Endowment Fund: A. IPCL Research fund in Management 61,00,000 A. IPCL Research fund in Management Govt. Bonds 50,00,000 Bank Balance* 11,00,000 61,00,000 B. IPCL Research fund B. IPCL Research fund in in Microbiology 15,00,000 Microbiology Govt. Bonds 14,00,000 Bank Balance* 1,00,000 15,00,000 C. GSFC Fellowship C. GSFC Fellowship Fund Fund 36,00,000 LIC Annuities 36,00,000 TOTAL 1,12,00,000 TOTAL 1,12,00,000 * Balance of Bank account for respective fund

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

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

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

25 STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS 361 (d) Payments for purchase of refreshments, dinners; (e) Payments for organizing sport meets and tournaments; (f) Interest paid on loans and on bank overdraft and (g) Payments for other items of similar nature. iv) Capital Payments: These are payments for those items whose benefits are available to the organization during the current accounting year as well as future accounting year also. Capital payments are not made at regular intervals. Following are included in the capital payments- (a) Payments for construction and extension of building, purchase of furniture and office equipment; (b) Payments for purchase of books for the library; (c) Payments made for purchase of sports goods and equipment by a sports clock; (d) Cost investments purchased; (e) Amounts invested in banks as fixed deposits; (f) Amounts advanced to outsiders as loans and; (g) Any other payment of similar nature Uses of Receipt and Payment Account On the basis of accounting system adopted by an organization the Receipt and Payment account can be used in two alternative ways. i. Those organizations, which follow cash basis of accounting, this account plays a vital role. On the one hand, it serves the purpose of cashbook, while on the other hand it provides support in the preparation of financial statements, income statement, and statement of affairs to be presented to the members at the year-end as a result of the enterprise s activities. In such a case, the surplus will be the difference of receipts and payments. When payments will be more than receipts then it will be a situation of deficit. ii. In organizations using accrual basis of accounting the Receipt and Payment account works as a summarized cashbook and is a supplement to the Income and Expenditure account and the Balance Sheet. These are the basic statements presented to the members to show surplus or deficit and the financial position respectively. Illustration 2 Membership subscription received by Modern Cricket Club during the year 2001 amounted to Rs 15,600, which includes Rs 900 received in arrears for the year 2000 and Rs 2,100 received in advance for It is found that Rs 2,500 has not been received as subscription for the current year (2001) and that Rs 1,000 was received in advance in 2000 as subscription for Calculate the income from subscription for the year In the above illustration the total subscription of the current year have been worked out by doing additions and

26 362 ACCOUNTANCY Solution: Rs Amount collected for subscription in cash. 15,600 Add subscriptions received in 2000 for ,000 Add subscriptions received in 2001 not yet received 2,500 18,100 Less subscriptions received in arrears for Subscriptions received in advanced for ,200 2,100 Income from subscriptions to be transferred to Income and Expenditure Account subtractions of the items of information to the subscriptions received in cash during the current year. The total amount of subscriptions due for the current year con also be prepared by preparing subscriptions account as has been illustrated in the illustrations given below: Illustration subscriptions were received by Sita Tracking Club during the year 2001, which includes Rs 1,500 received in arrears for the year 2000 and Rs2,500 received in advance for the year It is found that Rs3000 has not been received as subscriptions for the current year and that Rs 1,800 was received in advance in the 2000 for the year Find out the income from subscriptions for the year 2001 by preparing a subscription account. Solution: Dr. Subscription Account Cr. Date Particulars Amount Date Particulars Amount 1 Balance b/f Cashoutstanding 1,500 subscription subscription received 51,500 received for 2000 Advance Advance subscription 1,800 subscription received in 2000 (Income and balance c/f Expenditure 2,500 outstanding Account) subscription of 3,000 Subscription for current year) current year 52,300 56,300 56,300