Mastering Non-Trading Organization Accounting: Essential Guide

Table of Contents

1. Introduction
2. What are Non-Trading Organizations?
3. Unique Terms in Non-Trading Organization Accounting
4. The Subscription Account
5. The Expense Account
6. The Statement of Affairs
7. Additional Workings for Non-Trading Organizations
8. Handling Trading Ventures in Non-Trading Organizations
9. Practical Example: Solving a Non-Trading Organization Accounting Question
10. Conclusion

Accounting for Non-Trading Organizations: A Comprehensive Guide 📚

Introduction

Welcome to this comprehensive guide on accounting for non-trading organizations. In this article, we will explore the unique aspects and processes involved in handling the finances of non-profit making organizations, also known as non-trading organizations. Whether you're a member or an accountant responsible for managing the financial records of these organizations, this guide will provide you with valuable insights and practical advice on how to navigate the complexities of non-trading organization accounting.

What are Non-Trading Organizations?

Non-trading organizations, also referred to as non-profit making organizations, are entities that are not engaged in buying and selling goods for profits. These organizations are primarily focused on providing services to their members or the wider society. Examples of non-trading organizations include clubs, societies, schools, and hospitals. Unlike profit-making businesses, the main objective of non-trading organizations is not to generate profits but to fulfill their mission or purpose.

Unique Terms in Non-Trading Organization Accounting

Before diving into the intricacies of accounting for non-trading organizations, it is important to familiarize ourselves with some key terms that are specific to this type of accounting. Understanding these terms will enable us to accurately prepare the financial statements and reports required for non-trading organizations.

Accumulated Fund

In non-trading organizations, the accumulated fund represents the total pool of funds used to run the organization. This is analogous to the concept of capital in profit-making businesses.

Receipts and Payment Accounts

While profit-making businesses typically use cash books to record their cash transactions, non-trading organizations utilize receipts and payment accounts. These accounts document the inflows and outflows of cash, with the debit side representing cash receipts and the credit side representing cash payments.

Income and Expenditure Account

In non-trading organizations, the income and expenditure account serves as the equivalent of the profit and loss account in profit-making businesses. It records all the income received and expenses incurred by the organization, ultimately determining whether there is a surplus (excess of income over expenditure) or a deficit (excess of expenditure over income).

Surplus and Deficit

Unlike profit-making businesses, non-trading organizations do not refer to a positive financial outcome as profit. Instead, they use the term "surplus" to denote the excess of income over expenditure. Conversely, a deficit is the excess of expenditure over income for non-trading organizations.

Subscription

Subscription refers to the regular payments made by members of non-trading organizations, such as clubs or associations. These payments, often referred to as dues, serve as a primary source of income for many non-trading organizations. Subscription payments can be made monthly, annually, quarterly, or semi-annually, depending on the organization's policies.

Entrance Fees and Life Membership Fees

Entrance fees are non-refundable fees paid when joining an association or club. These fees represent the cost of admission into the organization. In some cases, non-trading organizations may also offer life membership, where members pay a substantial amount upfront to enjoy the organization's facilities and services for the rest of their lives.

Donations and Honorarium

Donations can serve as both income and expenditure for non-trading organizations. When an outsider or third-party donates to the organization, it is considered income. Conversely, when the organization donates to external entities, it is recorded as an expenditure. Honorariums, on the other hand, represent fees paid to professionals who provide specialized services to the organization.

The Subscription Account

One of the essential accounts to prepare in non-trading organization accounting is the subscription account, which tracks the income generated from member subscriptions. The subscription account follows the standard format of an income account, taking into consideration accruals and prepayments.

The format for the subscription account is as follows:

In the subscription account, the opening balance represents any prepaid subscriptions or outstanding dues from the previous period. When subscriptions are received during the accounting period, they are debited to the cash or receipt and payment account and credited to the subscription account. The total of the debits should be greater than the credits, resulting in a balance to be carried forward. This balance is then transferred to the income and expenditure account as subscription revenue for the year.

The Expense Account

Another crucial account in non-trading organization accounting is the expense account, which tracks the organization's expenditures. The format for the expense account varies depending on the specific expenses incurred by the organization.

The general format for an expense account is as follows:

Similar to the subscription account, the expense account starts with the opening balance, which represents any prepaid expenses or outstanding liabilities from the previous period. As expenses are paid during the accounting period, they are debited to the expense account and credited to the cash or receipt and payment account. The total debits should exceed the credits, resulting in a balance to be carried forward. This balance is then transferred to the income and expenditure account as an expense item.

The Statement of Affairs

The statement of affairs provides a snapshot of the organization's financial position at a specific point in time. It presents the assets, liabilities, and accumulated fund, which serves as the organization's equivalent of capital.

The format for the statement of affairs is as follows:

In the statement of affairs, assets are listed, including non-current assets (e.g., motor vehicles, land) and current assets (e.g., inventories, receivables, cash). Liabilities are also listed, such as loans, payables, subscriptions prepaid, and expenses owed. The total liabilities are then subtracted from the total assets, yielding the accumulated fund (equivalent to capital) for the organization.

Additional Workings for Non-Trading Organizations

Apart from the subscription account, expense account, and the statement of affairs, there may be additional workings required in non-trading organization accounting. Some common examples include:

1. Depreciation: If the organization possesses depreciable assets, it is necessary to account for depreciation expense. Depreciation should be provided for in accordance with standard accounting principles.
2. Receipt and Payment Account: In certain cases, the receipt and payment account provided in the question may be incomplete or require adjustments. In such situations, it may be necessary to prepare a new receipt and payment account to obtain the closing cash balance accurately.
3. Trading Ventures: Non-trading organizations occasionally engage in trading ventures, such as operating a bar or other businesses. In these cases, it is crucial to prepare separate trading accounts (e.g., bar trading account) and incorporate their profits or losses into the income and expenditure account.

Remember, the specific workings required will vary by question and organization. Adaptability and a thorough understanding of accounting principles are essential in handling these additional complexities effectively.

Handling Trading Ventures in Non-Trading Organizations

Although non-trading organizations are mainly focused on non-profit activities, some engage in trading ventures alongside their core activities. This can add complexity to the accounting process but remains an important aspect to address.

When a non-trading organization owns or operates a trading entity (e.g., a bar), it is necessary to prepare separate accounts for the trading venture. These accounts, such as the bar profit and loss account, function similarly to profit and loss accounts in profit-making businesses. Profits from the trading venture are subsequently transferred to the income and expenditure account as additional income, while losses are recorded as expenses.

It is important to note that engagement in trading ventures does not change the nature of a non-trading organization. Instead, it necessitates the preparation of separate accounts to calculate profits or losses specific to the trading activities.

Practical Example: Solving a Non-Trading Organization Accounting Question

To reinforce the concepts discussed, let's work through a practical example that covers various aspects of non-trading organization accounting. In Part 2 of this video, I will provide a step-by-step solution to the question, ensuring that you grasp the practical application of the concepts presented in this guide. To stay updated, be sure to subscribe to this channel and enable notifications. Let's dive into the fascinating world of non-trading organization accounting together!

Conclusion

Managing the finances of non-trading organizations requires a sound understanding of their unique accounting principles and processes. This comprehensive guide has provided you with the essential knowledge and practical insights necessary to navigate the complexities of non-trading organization accounting. From preparing subscription and expense accounts to understanding the statement of affairs, you'll be well-equipped to handle the financial management of non-profit making organizations. Remember to adapt these concepts and procedures based on the specific requirements of each organization and question you encounter. With this knowledge, you are now ready to confidently tackle the accounting challenges of non-trading organizations. Good luck!