Introduction to Financial Accounting and Reporting of Not-for-Profit Organizations:
The financial accounting and reporting of clubs and societies differ majorly from the financial accounting and reporting of for-profit organizations. The main objective of for-profit organizations, as the name suggests is, to make a profit, whereas, clubs and societies are non-profit organizations whose main goal is to provide their own members with services and facilities.
Non-profit organizations earn their income through subscriptions paid by the members of the club, usually annually, to avail the services provided by these clubs. Examples of such organizations are sports clubs or youth clubs, amateur dramatic groups, scout groups, welfare societies, etc.
The final accounts prepared by clubs and societies are the trading account, the receipts, and payments account, the income and expenditure account, and the balance sheet, as it is defined below.
- The trading account: of the club is prepared in the same way as it is done by a for-profit organization. However, it is only necessary when the club carries out trading activities such as the operation of a cafe or a shop inside the club, in order to calculate the profit or loss earned on it.
- The receipts and payments account: is similar to a cash book which debits all the payments received and credits all the payments made by the club.
- The income and expenditure account: records all the incomes earned by the club and all the expenditures incurred. It is prepared in the same way it is prepared by a for-profit organization.
- The balance sheet: is prepared exactly in the same as it is prepared by businesses, but with the exception of a capital section, since there is no owner’s equity or drawings, which is why the capital is replaced by the accumulated funds of the club.
What Is An Income and Expenditure Account?
The income and expenditure account of a club and society is regarded as being similar to the profit and loss statement prepared by businesses, which records all types of incomes earned by the club and all expenditures incurred in running the club for the accounting period.
The main purpose of this account is to determine whether the organization is making a surplus or a deficit. If the incomes are more than the expenditures, it is referred to as excess of income over expenditure, or a surplus and if the incomes are less than the expenditures, it is referred to as excess of expenditure over income, or a deficit.
Financial Accounting and Reporting of Income and Expenditure Account:
In the receipts and payments account, only the cash coming in and going out of the organization is recorded, regardless of whether the payments are related to the financial year or not. However, the income and expenditure account only records the income received and expenditure incurred for the actual accounting period, and there are adjustments made for accruals and prepayments.
Moreover, only revenue receipts and revenue expenditures are included in this account and no entries are made for capital receipts and capital expenditures. This account also incorporates non-monetary items such as depreciation on assets, however, assets and liabilities at the start and end of the year are not included.
The surplus or deficit calculated is the equivalent of net profit or the net loss in the profit and loss account prepared by a for-profit organization. These are shown in the balance sheet of a not-for-profit organization in the accumulated funds section, where the surplus is added to the opening balance of the accumulated fund and the deficit is subtracted from it, further reducing the amount.
The income of the club is largely made up of the subscriptions paid by the club members, as this is their main source of income. The subscription amount only relates to the number of subscriptions that are related to the financial year, which is why they must be adjusted for any subscriptions paid in advance or owed by members.
Moreover, the profit made by the shop at the club which is found through the trading account is also a part of the club’s income, as well as the fees that the club receives through various competitions.
The expenditures of the club are the wages paid, rent, rates, and insurance, general expenses, cost of the prizes, depreciation, etc. with the respective accounts being adjusted for accruals and prepayments. The difference between the income and expenditure then gives the surplus or deficit for the year.
It can be concluded that whenever a club or a society conducts a fund-raising activity or any other one, the incomes and expenditures should always be set off against each other in the income and expenditure account in order to calculate the profit or loss on that activity.