Financial Accounting Non Trading Accounts – tryspring

By | December 16, 2018

Financial Accounting – Non-Trading Accounts

Some of the organizations or institutions are constituted to
provide valuable services to the society with the objective not
to earn profit. These organizations normally offer the services
such as education, medical, social clubs, charitable trusts,
trade unions, etc.

However, we can summarize these organizations in the following
three types of categories −

  • Clubs, associations, or society’s works for the welfare of
    their members.

  • Charitable institutions like hospitals, students’ hostels,
    and other educational institutions providing education to
    poor children as well as illiterate young and old groups.

  • Professional firms of lawyers, chartered accountants,
    architects, doctors, solicitors, etc.

What is Non-Trading Account?

Maintenance of proper books of accounts is necessary to safeguard
the money of its members and general public from any kind of
misuse or misappropriations. It is important to know the total
receipts, total payments, and also to know financial status of an
institution. Hence, the account opened and maintained for and by
the organizations discussed above is known as Non-trading
account.

Normally, registration of members, minute book, cash receipt
journal, cash payment journal, etc. are main record which is
maintained by these organizations/ institutions in their
non-trading accounts. At the end of an accounting period, these
institutions prepares its final accounts, which include the
following −

  • Receipt and Payment Account
  • Income and Expenditure Account
  • Balance-Sheet

Let’s discuss each of these in detail.

Receipt and Payment Account

It is a real account. Basic rule of double entries is followed to
prepare this account. It is prepared from a cash book at the end
of the accounting period. Every transaction regarding the cash
transactions is recorded in the Cash Book in a chronological
order. We may say that the Receipt and Payment account is a
summary of cash payment and cash receipts during the current
year.

For example, if rent and salary paid on monthly basis all over
the accounting period, and donation or subscription received
during the current year recorded in a cash book date wise, but at
the end of the accounting period, the Receipt and Payment account
will contain total amount of rent paid, salary paid, subscription
received and donation received. All cash receipt will be recorded
on the debit side and all cash payment will be recorded on the
credit side.

Income and Expenditure Account

Income and expenditure account is a nominal account and as an
equivalent to Profit and Loss account.

The essential features of an income and expenditure account are
as follows −

  • Expenses and losses are recorded in the debit side of it and
    all incomes and gains are recorded on the credit side.

  • Capital income and expenditure are excluded and revenue
    income and expenses are included in it.

  • It is based on a mercantile system of accounting, therefore,
    the income and expenses related to preceding years or
    subsequent years are excluded while preparing the income and
    expenditure account.

  • The credit balance of an income and expenditure account shows
    surplus. Further, excess of income over the expenditure and
    the debit balance of it show deficit i.e. excess of the
    expenditure over income.

  • Only nominal accounts are considered in preparation of this
    account.

Balance Sheet

The date on which a balance sheet is prepared, particulars of all
the assets and liabilities are recorded in the same manner as we
do in any other profit making firms. Its capital fund is made up
of surplus income over expenditure and other incomes capitalized
in the given period of time. Sometimes, two balance sheets need
to be prepared viz…

  • At the beginning of the accounting year to know the opening
    capital fund and
  • At the end of the financial year to know the financial
    position of the organization.

Conversion of Receipt and Payment Account into Income and
Expenditure Account

Following are the steps required to convert receipt and payment
account into income & expenditure account −

  • Opening balance and closing balance of a receipt and payment
    account representing opening cash in hand, opening cash at
    bank, closing cash in hand, and closing cash at bank need to
    be ignored.

  • Items of capital receipts and capital payment will be
    excluded while preparing an income and expenditure account.

  • Revenue items of an income and expenditure will be considered
    only at the time of preparation of an income &
    expenditure account from the receipt and payment account.

  • All adjustment regarding the outstanding expenses, prepaid
    expenses, provision for bad debts, provision for
    depreciation, income received in advance, and income
    receivable will be done.

  • An income and expenditure relating to preceding year or
    subsequent year will be ignored, and the items only related
    to the current year will be considered.

Method to Calculation

With the help of ledger accounts, we may calculate the value of
income or expenses.

The following two examples describe the method of calculation −

Example (1) − to calculate the amount of expenses of the
current year, we need to prepare a ledger account of a particular
expense and then the balancing figure of it will represent the
amount of expense for the current year.

From the following particulars, please find out the amount of
rent need to be shown in income & expenditure account −

Particulars Amount (in Rs.)
Outstanding Rent at the beginning of the year (as on
01-04-2013)
6,000
Amount as shown in the receipt and payment account 26,000
Outstanding Rent at the end of the year (31-03-14) 4,000

Solution

Rent Account

Date Particulars Amount Date Particulars Amount
01-04-13 By Balance b/d 6,000

To Cash Paid

(As per receipt and payment account)

26,000 31-03-14

By Income and expenditure a/c

(Balancing Figure)*

24,000
31-03-14 To Balance C/d 4,000
Total 30,000 Total 30,000

It is very clear from the above example that the balancing figure
represents rent for the current year i.e. to be transferred and
shown in the debit side of the income & expenditure account.
Following the same method, we can calculate the amount of any
other expenses.

Items Peculiar to Non-Trading Concern

There are certain peculiar items in the case of non-trading
concerns, which require a special treatment −

Donations

Non-trading concerns may receive donations time to time. The
treatment of donation depends upon nature of donation.

There are two types of donation as explained below −

  • Specific Donation − Some donation may be received for
    any specific purpose, for example, for the construction of a
    room or building and then donation is termed as specific
    donation. The amount of such donation cannot be used for any
    other purpose. It should be shown on liabilities side of the
    Balance-sheet and used only for the same purpose it is meant
    for.

  • General Donation − When a donation is received for a
    common purpose is termed as General Donation. If the amount
    of donation is small, it will be treated as recurring income
    and will be recorded in the credit side of income &
    expenditure account.

    Donation of the big amount should be fairly treated as
    capital receipts and will be shown in the liabilities side of
    the Balance sheet. However, donation is of a small amount or
    a big amount may depend upon the size of a concern and
    amount.

Legacy

Sometimes, as per the will of a person, an amount received is
called as legacy. It is as good as donation. It is of a
non-recurring nature, therefore should be treated as a capital
receipt, and hence will be appeared in the liabilities side of a
Balance sheet. However, it may also be treated as an income and
may be taken to income & expenditure account.

Entrance Fees

A club or society usually charge admission fees or entrance fees
for the membership. In case of club etc., admission fees or
entrance fees usually charged as capital receipts, but in case of
a hospital or educational institution, it is treated as a
recurring income.

Life Membership Fees

The life membership fees may be taken from the members of
institution only once in their lifetimes. On the basis of
lifetime membership, members may enjoy certain benefits. Amount
received as the Life Membership might be transferred to the “Life
Membership Fees Account” of the institution and can be dealt in
the accounts by any of the following methods −

  • May be taken as liabilities side of a Balance sheet as Life
    Membership Fees.”

  • Normal subscriptions of the members may be transferred from
    the Life Membership Fees account to the subscription account
    as an income and the balance may be carried forward to the
    following years.

  • On the basis of average life of a member, the amount may be
    transferred to the income and expenditure account annually
    and rest will be carried forward towards the following years.

Sale of Scrap or Old Newspapers

Without any dispute, it will be treated as recurring income and
will appear in the credit side of an income and expenditure
account.

Subscription

Subscription is the major source of an income for the non-trading
concerns. Subscriptions are received from the members of a club
or institution. A receipt and payment account records all the
actual subscription received during the current year and an
income & expenditure account shows the subscriptions, which
relates to the current accounting period. Therefore, some
adjustments require to calculate the subscription of the current
year.

Example (1) − to calculate the amount of Subscription for
the current year, the ledger account of a subscription account
needs to be drawn and the balancing figure of this will represent
the amount of subscription of the current year.

With the following particulars, please find out the amount of
subscription to be shown in an income & expenditure account −

Particulars Amount (in Rs.)
Outstanding subscription at the beginning of the year (as on
01-04-2013)
6,000
Amount as shown in the receipt and payment account 26,000
Outstanding subscription at the end of the year (31-03-14) 4,000
Subscription received in advance for the next year 2,000

Solution

Subscription Account

Date Particulars Amount Date Particulars Amount
01-04-13 To balance b/d 6,000 31-03-14 By Cash 28,000
31-03-14 To Advance Subscription (to be shown as Liabilities in
Balance Sheet)
2,000
31-03-14 To Income & Expenditure Account (Balancing
Figure)*
24,000 31-03-14 By balance c/d 4,000
Total 32,000 Total 32,000

It is very clear from the above example that the balancing figure
represents subscription for the current year, which needs to be
transferred to the income & expenditure account as an income.

Special Funds

Some special funds are created by the respective institutions for
specific purpose. For example, a prize fund may be created to
give the best player of the year award. Any income relating to
those funds should be added to the funds and deficit, if any may
be charged from the income & expenditure account.

Example (2) − to calculate the amount of an income related
to the current year, we need to prepare a ledger account of the
particular income. Further, the balancing figure of this account
will represent the amount of an income for the current year.

From the following particulars, please find out the amount of
Subscription that needs to be shown in the Income &
Expenditure account −

Particulars Amount (in Rs.)
Outstanding Subscription at the beginning of the year (as on
01-04-2013)
6,000
Amount as shown in the receipt and the payment account 26,000
Outstanding subscription at the end of the year (31-03-14) 4,000

Solution

Subscription Account

Date Particulars Amount Date Particulars Amount
01-04-13 To balance b/d 6,000
By Income and expenditure a/c (Balancing
Figure)*
24,000 31-03-14 By Cash (As per receipt and payment account) 26,000
31-03-14 By balance c/d 4,000
Total 30,000 Total 30,000

It is very clear from the above example that balancing figure
represents Subscription for the current year i.e. to be
transferred and shown in the credit side of the income &
expenditure account.

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