Introduction to Financial Accounting and Reporting of Not-for-profit Organizations:
Financial statements prepared by clubs, societies, and associations are different than those prepared by sole traders, partnerships, and limited companies.
As compared to for-profit organizations whose main objective is to generate profit, clubs, societies, and associations are non-profit organizations whose aim is to provide their own members with some sort of services and facilities, and therefore, making a profit is not their goal.
Their main source of income is through subscriptions, which is the amount paid by the club members annually in order to avail of the facilities provided by the societies.
Examples of such organizations are sports clubs, youth clubs, amateur dramatic clubs, golf clubs, scout groups, old pupil’s associations, welfare societies, etc.
The final accounts prepared by these organizations are, the trading account, the receipts and payments account, the income and expenditure account and the balance sheet, as briefly defined below:
- The trading account: is only prepared when the club carries out a trading activity such as the operation of a small shop or a cafe, in order to calculate the profit or loss earned on that operation, which is transferred to the income and expenditure account and is prepared in the same way as it is prepared by a for-profit organization.
- The receipts and payments account: is considered as a summary of the cash book that records all the payments received, which are debited, and all the payments made, which are credited.
- The income and expenditure account: is similar to the profit and loss account prepared by for-profit businesses and is a summary of all the incomes earned and the expenditures incurred by the organization.
- The balance sheet: is the same as the ones prepared by businesses, but there is no capital section since money isn’t invested in clubs or taken out as drawings in the same way as in businesses. Therefore, the capital section is replaced by the accumulated funds of the organization.
What is a receipts and payments account?
The receipts and payments account of a club and society is regarded as a summary of the cash book for the accounting period, in which all types of cash received by the organization are debited and all cash paid is credited.
However, there is no distinction between cash and bank transactions, so the final amount may represent the cash in hand, cash at the bank, or even both.
Financial Accounting and Reporting of Receipts and Payments Account:
After recording all the transactions, the account is then balanced with the difference between the receipts and the payments and the balance carried down becomes the new opening balance for the next accounting period, where a debit balance represents the cash owned by the organization, appearing as cash or bank in the current assets in the balance sheet, and a credit balance means the amount that the organization is liable to pay in the future, which is recorded as a bank overdraft in the current liabilities in the balance sheet.
In the receipts and payments account, all types of cash and bank payments made as well as all payments received are recorded for the specific accounting period, regardless of whether they relate to the financial year or not, which means that there are no adjustments to be made for accruals and prepayments.
Moreover, there is no distinction made between capital receipts and revenue receipts, and between capital expenditures and revenue expenditures, all of which are recorded in the receipts and payments account.
However, this account does not incorporate non-monetary items such as depreciation, and thus, it won’t be included.
In the receipts section of the receipts and payments account, the subscriptions make up a huge amount of the receipts as they are the main source of income for clubs and societies.
The subscription amount relates to the full amount of subscriptions received during the financial year, regardless of whether they relate to the financial year or not.
Other receipts include the cash already in hand at the start of the year, receipts from small shops at the club, and the fees paid by members to enter into a competition.
The payments made include the amounts paid for the purchases of goods for resale, purchases of equipment needed for competitions at the club, prizes for the competition members, wages paid to the shop assistants or coaches hired, and other expenses such as rent, rates, and insurance, general expenses, etc.
The receipts and payments account only shows the money coming in and going out of the organization and not the surplus or a deficit, which is then found by preparing another account known as the income and expenditure account.