Accounting for Non-Trading Organizations: Key Principles and Practices

Table of Contents:

1. Introduction
2. What are Non-Trading Organizations?
3. Differences Between Profit-Making and Non-Profit-Making Organizations
4. Terms Associated with Non-Trading Organizations
   • Accumulated Fund
   • Receipts and Payment Accounts
   • Income and Expenditure Account
   • Surplus and Deficit
   • Entrance Fees and Subscriptions
   • Life Membership Fees
   • Donations
   • Honorarium
5. Practical Aspect: Preparing the Subscription Account
6. Practical Aspect: Preparing the Expense Account
7. Practical Aspect: Preparing the Statement of Affairs
8. Conclusion
9. Frequently Asked Questions (FAQs)

Article:

Introduction

Welcome to another session of FOA Accountancy Tutorials! In today's tutorial, we will be delving into the topic of accounting for non-trading organizations, also known as accounting for non-profit making organizations. Non-trading organizations, such as clubs, societies, schools, and hospitals, are establishments that provide services rather than engage in buying and selling goods for profits. As such, their accounting practices differ from those of profit-making organizations. In this article, we will explore the unique terminology, principles, and practical aspects associated with accounting for non-trading organizations.

What are Non-Trading Organizations?

Non-trading organizations are entities that do not engage in the buying and selling of goods for profit. They primarily consist of clubs, societies, schools, hospitals, and other organizations that provide services to their members or society at large. Unlike businesses, whose main purpose is to generate profits, non-trading organizations focus on delivering services and fulfilling their mission objectives. Consequently, their accounting processes must adapt to reflect their non-profit status and distinguish them from profit-making organizations.

Differences Between Profit-Making and Non-Profit-Making Organizations

There are several key differences between profit-making and non-profit-making organizations. These distinctions lie in the terminology and accounting practices used by each type of entity. Here are some common terms and their contrasting meanings:

1. Accumulated Fund: In profit-making organizations, the funds used to run the business are referred to as capital. On the other hand, non-profit-making organizations use the term accumulated fund to describe the total pool of funds used to operate the establishment.

2. Receipts and Payment Accounts: While profit-making organizations maintain cash books to track their financial transactions, non-profit-making organizations often use receipts and payment accounts. These accounts record cash inflows and outflows, with the debit side representing cash receipts and the credit side representing cash payments.

3. Income and Expenditure Account: In profit-making organizations, the statement used to ascertain profits is called the income statement or profit and loss account. However, for non-profit-making organizations, the equivalent statement is known as the income and expenditure account. It records all incomes and subtracts all expenses to determine whether there is a surplus or deficit.

4. Surplus and Deficit: Instead of profits and losses, non-profit-making organizations use the terms surplus and deficit to describe their financial outcomes. If the organization has an excess of income over expenditure, it is considered a surplus. Conversely, if expenditures exceed income, it is called a deficit.

5. Entrance Fees and Subscriptions: Non-profit-making organizations often collect membership fees, which are known as dues. In a professional setting, these dues are referred to as subscriptions. Entrance fees, on the other hand, are one-time payments made by individuals when they join the organization.

6. Life Membership Fees: Some organizations offer the option for members to pay a substantial amount upfront and enjoy the club's facilities for the rest of their lives. These payments are known as life membership fees.

7. Donations: Donations can be both an income and an expense for non-profit-making organizations. When an outsider donates to the organization, it is considered income. Conversely, when the organization donates to external entities, it is treated as an expenditure.

8. Honorarium: Non-profit-making organizations often invite professionals to deliver specialized services or talks. In such cases, the organization pays the professional a fee for their services. This fee is called an honorarium and is treated as an expense.

Terms Associated with Non-Trading Organizations

Before delving into the practical aspect of accounting for non-trading organizations, it is essential to understand several key terms associated with this type of accounting. These terms will help us navigate the nuances of preparing financial statements for non-profit-making entities. Here are some important terms to remember:

1. Accumulated Fund: The total pool of funds used to run a non-profit-making organization.

2. Receipts and Payment Accounts: Accounts used by non-profit-making organizations to record cash transactions, with the debit side representing cash receipts and the credit side representing cash payments.

3. Income and Expenditure Account: The final account of a non-profit-making organization, recording all incomes and expenses to determine the surplus or deficit for the year.

4. Surplus and Deficit: The excess of income over expenditure (surplus) or the excess of expenditure over income (deficit) for a non-profit-making organization.

5. Entrance Fees and Subscriptions: Entrance fees are one-time payments made by individuals upon joining an organization, while subscriptions are regular payments made by members to the organization.

6. Life Membership Fees: A substantial upfront payment that grants an individual lifetime access to the organization's facilities.

7. Donations: Contributions made by outsiders to the organization may be treated as income, while donations made by the organization to external entities are considered expenditures.

8. Honorarium: Fees paid to professionals who provide specialized services or talks to the organization.

Practical Aspect: Preparing the Subscription Account

One crucial aspect of accounting for non-trading organizations is preparing the subscription account. The subscription account is an income account that helps ascertain the earnings for the year to be included in the income and expenditure account. To prepare the subscription account, follow these steps:

1. Start with the opening balance for prepayment. If there is any prepaid subscription, record it on the credit side of the account. Conversely, if there is an outstanding subscription, place it on the debit side.
2. Record any balances brought forward as opening balances. For prepaid subscriptions, the balance is on the credit side, while for outstanding subscriptions, it is on the debit side.
3. Make entries from the receipt and payment account on the debit side of the subscription account. This entry represents the subscriptions received for the year.
4. Calculate the total subscription received and balance off the account. The balance on the credit side should exceed the balance on the debit side.
5. The difference between the two sides represents the income to be included in the income and expenditure account as subscription revenue for the year.

By following these steps, non-trading organizations can accurately determine their subscription earnings and allocate them appropriately in their financial statements.

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