	You are here: Home > Learning Materials > Accounting > Financial Accounting > Non-Profit Making Organisations > Accruals Concept

Accounting

Non-Profit Making Organisations

Accruals Concept

Take a look at the Between the Sheets glossary to see a broad definition of the accruals concept. Very briefly, the accruals concept tells us that sometimes people owe us money in January but won't pay until February. Similarly, someone may have paid their subscriptions for 2005 in November 2004 but unless we use the accruals concept this £30 will be shown in the Receipts and Payments Account for 2004 when it shouldn't be.

What all of this means is that a Receipts and Payments Account (RPA) needs to be changed to take account of accruals and prepayments so that it:

follows the accruals concept
shows us a true and fair value of the organisation

When we take these ideas into account we turn a RPA into an Income and Expenditure Account (IEA). An IEA is just another name for the Trading and Profit and Loss Account and if the organisation carries out any trading activities, such as running a bar or buying and selling plants, fertilisers and so on, it includes the trading account as part of the IEA.

Worked Example

Let's prepare an Income and Expenditure Account now by looking at a very similar example to For You To Do 1 but this time with a couple of adjustments.

In horizontal format prepare the IEA for the Russian Culture Society for the year 2004 from the following list of balances and adjustments that follow.
In vertical format prepare the IEA for the Russian Culture Society for the year 2004 from the following list of balances and adjustments that follow.

Receipts
Balance b/d	1,307
Rent of hall	101
Sale of old equipment	378
Costs of running annual dinner	290
Purchase of new equipment	516
Purchase of publication	65
Purchase of refreshments	1,004
Subscriptions	1,009
Purchase of raffle prizes	390
Raffles receipts	134
Sale of publications	107
Sale of refreshments	682
Interest on deposit account at the bank	11
Annual dinner ticket sales	448
Balance c/d
Adjustments
Subscriptions not yet received	161
Annual dinner ticket money still owing	45
Rent of hall paid in advance	11

Worked Example Solution

a. Make sure you agree with this horizontal style IEA:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04
Expenditure		Income
Rent of hall	90	Subscriptions	1,170
Costs of running annual dinner	290	Raffles receipts	134
Purchase of publication	65	Sale of publications	107
Purchase of refreshments	1,004	Sale of refreshments	682
Purchase of raffle prizes	390	Interest on deposit account at the bank	11
Surplus of Income over Expenditure	758	Annual dinner ticket sales	493
	2,597		2,597

Have you spotted this?

Receipts = Income and Payments = Expenditure

This is exactly how it should behave according to double entry bookkeeping principles and it's the same as this:

Here is how we have dealt with the adjustments - we have shown these adjustments in two ways, side by side:

as a simple calculation, and
in ledger account format

Subscriptions: this is revenue

		Subscriptions Account
Amount received, shown in the RPA	1,009	IEA	1,170	RPA	1,009
Plus amount is owing for this year but not yet received	161			Accrual c/d	161
Amount that should have been received during the year	1,170		1,170		1,170

Annual Dinner: this is revenue

		Annual Dinner Account
Amount received, shown in the RPA	448	IEA	493	RPA	448
Plus amount is owing for this year but not yet received	45			Accrual c/d	45
Amount that should have been received during the year	493		493		493

Rent of Hall: this is a cost

		Rent of Hall Account
Amount paid, shown in the RPA	101	IEA	101	RPA	11
Less amount paid in advance	11			Accrual c/d	90
Amount that should have been paid during the year	90		1,170		1,170

b. Now the vertical style IEA for the Russian Culture Society for 2004:

Russian Culture Society Income and Expenditure Account for the period ended 31/12/04
	Subscriptions	1,009
plus	Subscriptions not yet received	161	1,170
	Raffles receipts		134
	Sale of publications		107
	Sale of refreshments		682
	Interest on deposit account at the bank		11
	Annual dinner ticket sales	448
plus	Annual dinner ticket money still owing	45	493
				2,597
	Less: costs for the period
	Rent of hall	101
less	Rent of hall paid in advance	11	90
	Costs of running annual dinner		290
	Purchase of publication		65
	Purchase of refreshments		1,004
	Purchase of raffle prizes		390	1,839
	Surplus/(Deficit) for the period			758

Notice how the adjustments have been incorporated very nicely within the vertical format. It is possible to do the same with the horizontal format but it doesn't look so nice!

These examples help us to learn the Golden Rules of Adjustments:

Revenues		Costs
Owing but not received in the period	Add to RPA amount	Owing but not paid in the period	Add to RPA amount
Received but relates to next period	Subtract from RPA amount	Paid but relates to next period	Subtract from RPA amount

For You To Do 7

Prepare:

the horizontal, and
the vertical format IEA

for the Steel Social Club from the following information.

Steel Social Club for the year ended 30/09/04
Cash Received	Subscriptions	130.55	Visitors' fees	95.82	Sale of Refreshments	100.18
	Sale of mementoes	154.08	100 Club Ticket sales	172.00	Interest on Deposit Account	12.34
Cash Spent	Postage	9.51	Secretary's fee	62.15
	Refreshments	41.40	Treasurer's fee	70.12
	New Equipment	125.53	100 Club Prizes	79.00

Adjustments	Subscription paid this year but relating to last year	7.83	Subscription paid this year but relating to next year	26.11
	Postage stamps bought in advance	0.95

Now take a look at the solution...

| Index | Previous | Next |