Maintenance of proper books of accounts is necessary to safeguard the money of its members and general public from any kind of misuse or misappropriations. It is important to know the total receipts, total payments, and also to know financial status of an institution. Hence, the account opened and maintained for and by the organizations discussed above is known as Non-trading account.
Normally, registration of members, minute book, cash receipt journal, cash payment journal, etc. are main record which is maintained by these organizations/ institutions in their non-trading accounts. At the end of an accounting period, these institutions prepares its final accounts, which include the following −
- Receipt and Payment Account
- Income and Expenditure Account
- Balance-Sheet
Let’s discuss each of these in detail.
Receipt and Payment Account
It is a real account. Basic rule of double entries is followed to prepare this account. It is prepared from a cash book at the end of the accounting period. Every transaction regarding the cash transactions is recorded in the Cash Book in a chronological order. We may say that the Receipt and Payment account is a summary of cash payment and cash receipts during the current year.
For example, if rent and salary paid on monthly basis all over the accounting period, and donation or subscription received during the current year recorded in a cash book date wise, but at the end of the accounting period, the Receipt and Payment account will contain total amount of rent paid, salary paid, subscription received and donation received. All cash receipt will be recorded on the debit side and all cash payment will be recorded on the credit side.
Income and Expenditure Account
Income and expenditure account is a nominal account and as an equivalent to Profit and Loss account.
The essential features of an income and expenditure account are as follows −
- Expenses and losses are recorded in the debit side of it and all incomes and gains are recorded on the credit side.
- Capital income and expenditure are excluded and revenue income and expenses are included in it.
- It is based on a mercantile system of accounting, therefore, the income and expenses related to preceding years or subsequent years are excluded while preparing the income and expenditure account.
- The credit balance of an income and expenditure account shows surplus. Further, excess of income over the expenditure and the debit balance of it show deficit i.e. excess of the expenditure over income.
- Only nominal accounts are considered in preparation of this account.
Balance Sheet
The date on which a balance sheet is prepared, particulars of all the assets and liabilities are recorded in the same manner as we do in any other profit making firms. Its capital fund is made up of surplus income over expenditure and other incomes capitalized in the given period of time. Sometimes, two balance sheets need to be prepared viz…
- At the beginning of the accounting year to know the opening capital fund and
- At the end of the financial year to know the financial position of the organization.
Conversion of Receipt and Payment Account into Income and Expenditure Account
Following are the steps required to convert receipt and payment account into income & expenditure account −
- Opening balance and closing balance of a receipt and payment account representing opening cash in hand, opening cash at bank, closing cash in hand, and closing cash at bank need to be ignored.
- Items of capital receipts and capital payment will be excluded while preparing an income and expenditure account.
- Revenue items of an income and expenditure will be considered only at the time of preparation of an income & expenditure account from the receipt and payment account.
- All adjustment regarding the outstanding expenses, prepaid expenses, provision for bad debts, provision for depreciation, income received in advance, and income receivable will be done.
- An income and expenditure relating to preceding year or subsequent year will be ignored, and the items only related to the current year will be considered.
Method to Calculation
With the help of ledger accounts, we may calculate the value of income or expenses.
The following two examples describe the method of calculation −
Example (1) − to calculate the amount of expenses of the current year, we need to prepare a ledger account of a particular expense and then the balancing figure of it will represent the amount of expense for the current year.
From the following particulars, please find out the amount of rent need to be shown in income & expenditure account −
| Particulars | Amount (in Rs.) |
| Outstanding Rent at the beginning of the year (as on 01-04-2013) | 6,000 |
| Amount as shown in the receipt and payment account | 26,000 |
| Outstanding Rent at the end of the year (31-03-14) | 4,000 |
Solution −
Rent Account
| Date | Particulars | Amount | Date | Particulars | Amount |
| 01-04-13 | By Balance b/d | 6,000 | |||
| To Cash Paid (As per receipt and payment account) | 26,000 | 31-03-14 | By Income and expenditure a/c (Balancing Figure)* | 24,000 | |
| 31-03-14 | To Balance C/d | 4,000 | |||
| Total | 30,000 | Total | 30,000 |
It is very clear from the above example that the balancing figure represents rent for the current year i.e. to be transferred and shown in the debit side of the income & expenditure account. Following the same method, we can calculate the amount of any other expenses.
Items Peculiar to Non-Trading Concern
There are certain peculiar items in the case of non-trading concerns, which require a special treatment −
Donations
Non-trading concerns may receive donations time to time. The treatment of donation depends upon nature of donation.
There are two types of donation as explained below −
- Specific Donation − Some donation may be received for any specific purpose, for example, for the construction of a room or building and then donation is termed as specific donation. The amount of such donation cannot be used for any other purpose. It should be shown on liabilities side of the Balance-sheet and used only for the same purpose it is meant for.
- General Donation − When a donation is received for a common purpose is termed as General Donation. If the amount of donation is small, it will be treated as recurring income and will be recorded in the credit side of income & expenditure account.
Donation of the big amount should be fairly treated as capital receipts and will be shown in the liabilities side of the Balance sheet. However, donation is of a small amount or a big amount may depend upon the size of a concern and amount.
Legacy
Sometimes, as per the will of a person, an amount received is called as legacy. It is as good as donation. It is of a non-recurring nature, therefore should be treated as a capital receipt, and hence will be appeared in the liabilities side of a Balance sheet. However, it may also be treated as an income and may be taken to income & expenditure account.
Entrance Fees
A club or society usually charge admission fees or entrance fees for the membership. In case of club etc., admission fees or entrance fees usually charged as capital receipts, but in case of a hospital or educational institution, it is treated as a recurring income.
Life Membership Fees
The life membership fees may be taken from the members of institution only once in their lifetimes. On the basis of lifetime membership, members may enjoy certain benefits. Amount received as the Life Membership might be transferred to the “Life Membership Fees Account” of the institution and can be dealt in the accounts by any of the following methods −
- May be taken as liabilities side of a Balance sheet as Life Membership Fees.”
- Normal subscriptions of the members may be transferred from the Life Membership Fees account to the subscription account as an income and the balance may be carried forward to the following years.
- On the basis of average life of a member, the amount may be transferred to the income and expenditure account annually and rest will be carried forward towards the following years.
Sale of Scrap or Old Newspapers
Without any dispute, it will be treated as recurring income and will appear in the credit side of an income and expenditure account.
Subscription
Subscription is the major source of an income for the non-trading concerns. Subscriptions are received from the members of a club or institution. A receipt and payment account records all the actual subscription received during the current year and an income & expenditure account shows the subscriptions, which relates to the current accounting period. Therefore, some adjustments require to calculate the subscription of the current year.
Example (1) − to calculate the amount of Subscription for the current year, the ledger account of a subscription account needs to be drawn and the balancing figure of this will represent the amount of subscription of the current year.
With the following particulars, please find out the amount of subscription to be shown in an income & expenditure account −
| Particulars | Amount (in Rs.) |
| Outstanding subscription at the beginning of the year (as on 01-04-2013) | 6,000 |
| Amount as shown in the receipt and payment account | 26,000 |
| Outstanding subscription at the end of the year (31-03-14) | 4,000 |
| Subscription received in advance for the next year | 2,000 |
Solution −
Subscription Account
| Date | Particulars | Amount | Date | Particulars | Amount |
| 01-04-13 | To balance b/d | 6,000 | 31-03-14 | By Cash | 28,000 |
| 31-03-14 | To Advance Subscription (to be shown as Liabilities in Balance Sheet) | 2,000 | |||
| 31-03-14 | To Income & Expenditure Account (Balancing Figure)* | 24,000 | 31-03-14 | By balance c/d | 4,000 |
| Total | 32,000 | Total | 32,000 |
It is very clear from the above example that the balancing figure represents subscription for the current year, which needs to be transferred to the income & expenditure account as an income.
Special Funds
Some special funds are created by the respective institutions for specific purpose. For example, a prize fund may be created to give the best player of the year award. Any income relating to those funds should be added to the funds and deficit, if any may be charged from the income & expenditure account.
Example (2) − to calculate the amount of an income related to the current year, we need to prepare a ledger account of the particular income. Further, the balancing figure of this account will represent the amount of an income for the current year.
From the following particulars, please find out the amount of Subscription that needs to be shown in the Income & Expenditure account −
| Particulars | Amount (in Rs.) |
| Outstanding Subscription at the beginning of the year (as on 01-04-2013) | 6,000 |
| Amount as shown in the receipt and the payment account | 26,000 |
| Outstanding subscription at the end of the year (31-03-14) | 4,000 |
Solution −
Subscription Account
| Date | Particulars | Amount | Date | Particulars | Amount |
| 01-04-13 | To balance b/d | 6,000 | |||
| By Income and expenditure a/c (Balancing Figure)* | 24,000 | 31-03-14 | By Cash (As per receipt and payment account) | 26,000 | |
| 31-03-14 | By balance c/d | 4,000 | |||
| Total | 30,000 | Total | 30,000 |
It is very clear from the above example that balancing figure represents Subscription for the current year i.e. to be transferred and shown in the credit side of the income & expenditure account.