Final Accounts and Accounting Principles for Nonprofit Organizations
Final Accounts of Nonprofit Organizations
Final accounts of a nonprofit organization
Nonprofit organizations are entities established not for earning profit but for promoting art, culture, sports, education, welfare, etc. Examples include medical associations, charitable trusts, welfare societies, laboratories, sports clubs, hospitals, and educational institutions. These are also called non-trading concerns or not-for-profit organizations.
Final accounts of a nonprofit organization
The final accounts of a nonprofit organization include the following:
- Receipts and Payments Account
- Income and Expenditure Account
- Balance Sheet
Receipts and Payments Account
The Receipts and Payments Account is a summary of cash transactions for a particular period. It contains receipts and payments whether they are of capital nature or revenue nature and whether they relate to the previous year, current year, or subsequent year.
Features
- It is a real account.
- It is prepared from the cash book.
- It starts with opening cash and bank balances.
- It ends with closing cash and bank balances.
- It contains receipts and payments of both capital and revenue nature.
- It does not contain outstanding expenses, accrued income, or other non-cash items.
Difference between Receipts & Payments and Cash Book
| Receipts & Payments | Cash Book |
|---|---|
| It is a memorandum account. | It is a principal book. |
| Transactions are recorded after a certain period. | Transactions are recorded throughout the year. |
| Transactions are not recorded date-wise. | It is a detailed form of cash transactions. |
| It is a summary of the cash book. | It is a part of the books of cash accounts. |
| It is a part of the final accounts. | It is prepared by both trading and non-trading concerns. |
| It is prepared only by non-trading concerns. |
Income and Expenditure Account
The Income and Expenditure Account is a nominal account prepared to find out the surplus (profit) or deficit (loss) of a nonprofit organization for a particular period. In this account only revenue expenses and revenue receipts of the period are recorded. All revenue expenses relating to the current year (whether paid or not) are shown on the debit side. All revenue incomes relating to the current year (whether received or not) are shown on the credit side. The difference between the two sides represents profit or loss: if the total credit side is more than the debit side the difference is a surplus; if the total debit side is greater than the total credit side the difference is a deficit.
Features
- It is a nominal account.
- It is prepared from the Receipts and Payments Account and additional information.
- It contains only revenue receipts and revenue payments; capital items are ignored.
- It ignores expenses and income of the previous year and the succeeding year.
- It also includes non-cash items such as bad debts and depreciation.
- It does not contain opening or closing balances of cash or bank.
- The closing balance represents either surplus or deficit.
Difference between Income & Expenditure and Profit & Loss Account
| Basis | Income & Expenditure A/C | Profit & Loss A/C |
|---|---|---|
| Meaning | Account prepared to find surplus or deficit of a nonprofit organization. | Account prepared to find net profit or net loss of a business concern. |
| Prepared by | Nonprofit organizations (clubs, hospitals, schools, charities). | Profit-seeking business organizations. |
| Objective | To know whether income exceeds expenditure or vice versa. | To know profit or loss for the accounting period. |
| Nature of items | Includes only revenue items. | Includes only revenue items. |
| Capital items | Not included. | Not included. |
| Accounting basis | Prepared on an accrual basis. | Prepared on an accrual basis. |
| Opening balance | No opening balance. | No opening balance. |
| Closing balance | Surplus is added to Capital Fund; deficit is deducted. | Net profit added to capital; net loss deducted. |
| Related account | Prepared from Receipts & Payments Account. | Prepared from Trial Balance. |
| Outcome | Surplus or deficit. | Net profit or net loss. |
| Legal requirement | Not compulsory under law. | Compulsory for business organizations (statutory requirements apply). |
Key points
- Income & Expenditure Account = Nonprofit organizations
- Profit & Loss Account = Business organizations
- Both are nominal accounts.
- Both follow accrual accounting.
- Result affects capital fund / capital account.
Simple Example
Income & Expenditure Account
- Subscription income ₹1,00,000
- Expenses ₹90,000
- Surplus = ₹10,000
Profit & Loss Account
- Sales ₹5,00,000
- Expenses ₹4,50,000
- Net Profit = ₹50,000
Introduction to Financial Accounting
Accounting is the process of recording, classifying, analyzing, and reporting business transactions in monetary terms. When accounting deals mainly with financial transactions, it is called Financial Accounting. It provides information to external users such as shareholders, creditors, employees, government, and investors.
Other branches of accounting include
- Cost Accounting – concerned with cost ascertainment and cost control.
- Management Accounting – provides information for planning, decision-making, and control.
Need for Accounting
Accounting is called the language of business because it communicates financial information to interested parties. It is useful not only for businesses but also for individuals, households, and government.
Need for accounting includes:
- To know sources and uses of funds.
- To ascertain profit or loss.
- To know financial position.
- To control expenses.
- To plan future activities.
For a business, accounting helps to know:
- What it owns (assets).
- What it owes (liabilities).
- Profit or loss.
- Ability to meet future obligations.
Development of Accounting
Accounting is as old as money. In India, Chanakya’s Arthashastra emphasized accounting and auditing. The modern accounting system originated with Luca Pacioli of Italy. With the Industrial Revolution, businesses grew larger and more complex. Personal supervision reduced and scientific management increased. As a result, accounting evolved to provide:
- Better control.
- Reliable information.
- A basis for decision-making.
Today, accounting records the economic history of an organization and supplies information for future planning.
Meaning of Financial Accounting
Financial Accounting is the art and science of recording, classifying, summarizing, and interpreting financial transactions to determine profit or loss and financial position. According to the American Institute of Certified Public Accountants (AICPA), financial accounting involves recording and summarizing transactions in monetary terms and interpreting the results.
Objectives of Financial Accounting
The main objectives are:
- To ascertain profit or loss.
- To show the financial position.
- To exercise control over resources.
- To provide financial information to users.
Functions of Financial Accounting
- Recording – Recording transactions in journals and subsidiary books.
- Classifying – Grouping similar transactions in ledger accounts.
- Summarising – Preparing Trial Balance, Income Statement, and Balance Sheet.
- Interpretation – Analyzing financial data for decision-making.
Parties Interested in Accounting Information
- Proprietors – To know profitability and financial position.
- Managers – For planning and control.
- Creditors – To assess repayment capacity.
- Investors – To decide on investments.
- Government – For taxation and regulation.
- Employees – For bonus and job security.
- Citizens – As taxpayers and users of public utilities.
Book-keeping and Accounting
Book-keeping is concerned with recording transactions systematically. It is clerical in nature. Accounting involves designing systems, summarizing data, and interpreting results. Accountants supervise book-keepers and require higher analytical skills. Thus, book-keeping is a part of accounting, but accounting is broader in scope.
Limitations of Financial Accounting
- It is historical in nature.
- Provides information for the business as a whole only.
- Not useful for price fixation.
- Cost control is not possible.
- Cannot evaluate managerial efficiency properly.
- Records only actual costs.
- Not useful for strategic decisions.
- Technical subject.
- Records only quantitative information.
- Lack of uniformity in accounting principles.
- Possibility of manipulation of accounts.
Because of these limitations, cost accounting and management accounting have developed.
Conclusion
Financial accounting plays a vital role in providing reliable financial information to external users. However, due to its limitations, it is supported by cost and management accounting for effective decision-making and control.
Consignment Account
Consignment account
Meaning of consignment
In short, consignment means to send. A consignment is a contract between consignor and consignee to sell goods from one person to another.
Definition of consignment
“A transfer of possession of goods by the consignor to the consignee for the purpose of storage and sale.”
Parties to consignment
The two parties included are:
- Consignor
- Consignee
The consignor is the person who sends goods to an agent on a consignment basis. The consignee is the person who receives goods; the goods remain the property of the consignor until sold. Example: A from Pondicherry sent 1,000 mobiles to B in Madras. The transaction between A and B is a consignment transaction.
Features of consignment transaction
- Consignment of goods is not a sale; it is a transfer of possession of goods.
- The consignor bears the risk; the consignor is responsible for loss or destruction of goods unless otherwise agreed.
- The relationship between consignor and consignee is that of principal and agent.
Difference between Consignment and Sales
| Basis | Consignment | Sales |
|---|---|---|
| Parties | Consignor & Consignee | Seller & Buyer |
| Relationship | Principal & Agent relationship | Seller & Buyer relationship |
| Ownership | Remains with consignor (principal) | Ownership transferred to the buyer |
| Risk of the goods | Not transferred to consignee | Transferred to buyer |
| Profit & Loss | Enjoyed only by consignor | Enjoyed by the seller |
Documents used in consignment business
Documents used: proforma invoice; account sales.
Proforma invoice means a preliminary invoice sent by seller to buyer before delivery of goods and services.
Account sales means a statement noting all sales information about the goods and services; if sales are on credit, the buyer is allowed to pay for the purchase at a later date.
Accounting records
Following are the special accounts included in the consignor’s books:
- Consignment Account
- Goods Sent on Consignment Account
- Consignee’s Personal Account
- Consignment Stock Account
- Consignment Stock Reserve Account
Consignment Account
The Consignment Account is prepared to show information about goods sent to the consignee.
Journal entries in the books of consignor (under cost price method)
- For sending goods to consignee
Consignment A/c Dr.
To Goods Sent on Consignment A/c - For payment of expenses by the consignor
Consignment A/c Dr.
To Bank / Cash - For receiving advance from consignee
Cash / Bank / Bills Receivable A/c Dr.
To Consignee’s A/c - For expenses incurred by the consignee
Consignment A/c Dr.
To Consignee’s A/c (Expenses paid by consignee) - For sale made by consignee
Consignee’s A/c Dr.
To Consignment A/c (Gross sale) - For the commission of the consignee
Consignment A/c Dr.
To Consignee’s A/c - For receiving the balance due from the consignee
Cash / Bank / Bills Receivable A/c Dr.
To Consignee’s A/c - For profit on consignment
Consignment A/c Dr. [Amount of profit]
To Profit & Loss A/c - For loss on consignment
Profit & Loss A/c Dr.
To Consignment A/c - At the end of the accounting year the Goods Sent on Consignment A/c is closed by transferring to Trading A/c
Goods Sent on Consignment A/c Dr.
To Trading A/c
Journal entries in the books of consignee
- For goods received on consignment
No entry is made because the consignee holds these goods on behalf of the consignor.
- For advance given on behalf of the consignor
Consignor’s A/c Dr.
To Cash / Bank / Bills Receivable - For payment of expenses
Consignor’s A/c Dr.
To Cash / Bank - For sales of goods
Cash / Bank A/c Dr.
To Consignor’s A/c - For commission
Consignor’s A/c Dr.
To Commission A/c - For sending the balance due to consignor
Consignor’s A/c Dr.
To Cash / Bank
Accounting Principles
- Accounting Entity Concept – This concept distinguishes between the business and the proprietor. The business is treated as an entity independent of the proprietor and transactions are recorded accordingly.
- Going Concern – According to this concept it is assumed that a business will continue for a long time; there is no intention to liquidate the business in the immediate future. Fixed assets are recorded at original cost and depreciated systematically.
- Money Measurement – Transactions that can be expressed in terms of money are recorded in the books of the business. Events that cannot be expressed in monetary terms are not recorded.
- Accounting Period – Income measurement and study of financial position are made for a definite time interval, usually a year. The period for which accounts are prepared is called the accounting period.
- Matching Principle – Revenues of an accounting period are matched with the expenses of that period to ascertain profit or loss.
- Dual Aspect – Every transaction has two aspects: giving and receiving, or debit and credit.
- Consistency – Accounting practices should remain consistent from one year to another.
- Conservatism (Prudence) – Anticipated profits are not recognized; only probable losses are considered when recording transactions. This policy favors caution.