Introduction - Non-Profit Making Organisations

Introduction to the Non-Profit Making Organisations resource.

Non-Profit Making Organisations

Introduction

This resource aims to give students help with financial statements from non-profit making organisations including clubs and societies. The nature of these types of organisations means that students should also be able to understand the effect of life membership schemes and donations.

The resource is relevant to:

  • OCR: Module 2502, Final accounts
  • AQA: Module 5, Further aspects of financial accounting

What are non-profit making organisations? Are they businesses that make losses? Are they businesses that are run badly?

Non-profit making organisations are also known as 'not for profit' organisations and this is the name we give them simply because they want to do something or provide something rather than make more and more money.

What kind of organisations are we talking about that just want to do something rather than making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's Club? They are probably examples of non-profit making organisations. Here's a bigger list!

  • Associations
  • Clubs
  • Societies
  • Unions
  • Charities
  • Universities
  • Churches

Walk around town with your eyes open and you'll find loads of them!

Non-Profit Making Organisations

KISS: Keep It Simple, Stupid

Why are these organisations important for accountants though? They are important because the accounts of these organisations are simpler than they are for a sole trader, a partnership or a limited company. The accounts are simpler for at least two reasons:

  • The members of these organisations are normally the only people interested in them
  • They are usually very simple organisations:
    • Not that many members
    • Not a huge amount of money involved
    • Not that many activities

In lots of cases the only thing that the Treasurer (the bookkeeper or accountant) of a club or society needs to do is to keep track of the cash and not a lot more than that. Well, why bother with having to set up a full set of ledgers for a Dog Club that has, say, 50 members paying subscriptions of £10 a year that meets 10 times a year and just has one dog show and an annual dinner each year? Not worth the bother is it?

There's profit Jim but not as we know it

Then again, just because an organisation doesn't intend to make a profit doesn't mean that it won't: lots of them do and in the end, all organisations have to make some profit or they won't survive.

Jargon buster

The cash account or cash book is called the Receipts and Payments Account and the Trading and Profit and Loss Account is called the Income and Expenditure Account. Profits are not called profits, they are called surpluses (or deficits if it's a loss) and the capital account isn't the capital account now, it's called the accumulated fund.

Profit Making Jargon Non-Profit Making Jargon
Cash Book
Profit and Loss Account
Profit
Loss
Capital Account
Receipts and Payments Account
Income and Expenditure Account
Surplus
Deficit
Accumulated Fund

Let's just accumulate

The capital account is called the Accumulated Fund and that tells us that there are no private owners who have the right to keep the profits themselves or take an income from the organisation and so on - non-profit making organisations belong to all of their members together.

Guess what they call the balance sheet, by the way? It's still called the balance sheet!

Collecting data

What data will a fairly simple club or society collect? For lots of them, they will receive money for:

  • Subscriptions
  • Sale of refreshments
  • Raffles and other competitions
  • Sale of publications
  • Annual dinner ticket sales
  • Interest on deposit account at the bank
  • Sale of old equipment

Receipts will come from such things as:

  • Purchase of refreshments
  • Purchase of raffle prizes
  • Costs of running an annual dinner
  • Purchase of new equipment
  • Rent of hall

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Non-Profit Making Organisations

Simple but not Stupid

In the simplest of all cases, all we need to do at the end of a year is to prepare an account like this:

Receipts Payments
Subscriptions Purchase of refreshments
Sale of refreshments Purchase of raffle prizes
Raffles and other competitions Purchase of publications
Sale of publications Costs of running annual dinner
Annual dinner ticket sales Purchase of new equipment
Interest on deposit account at the bank Rent of hall
Sale of old equipment  

Then there would be a balance carried down which is either positive or negative depending on whether they received more than they spent or spent more than they received. Let's put some figures to this example now to see how it works; but don't forget, we are dealing here with a receipts and payments account which is the same as a cash book so there are no accruals and prepayments to take into account.

Receipts Payments
Balance b/d 1,250 Purchase of refreshments 923
Subscriptions 1,219 Purchase of raffle prizes 337
Sale of refreshments 704 Purchase of publications 79
Raffles and other competitions 118 Costs of running annual dinner 314
Sale of publications 126 Purchase of new equipment 421
Annual dinner ticket sales 404 Rent of hall 110
Interest on deposit account at the bank 11 Balance c/d 1,962
Sale of old equipment 314  
  4,146   4,146

That's it! Wasn't too bad was it? Now try a question of your own - very, very similar to the one you just saw!

 

For You To Do 1:

Prepare the Receipts and Payments Account for the Russian Culture Society for the year 2004.

Subscriptions 1,346
Purchase of new equipment 512
Costs of running annual dinner 264
Sale of refreshments 591
Purchase of publications 63
Annual dinner ticket sales 530
Purchase of refreshments 804
Interest on deposit account at the bank 15
Sale of old equipment 258
Rent of hall 112
Sale of publications 142
Purchase of raffle prizes 322
Raffles receipts 101
Balance b/d 1,286
Balance c/d 2,192

Now take a look at the solution...

 

Now try this - this question looks a lot different but the method is just the same as the previous question.

For You To Do 2:

Prepare the Receipts and Payments account for the Steel Social Club from the following information. As part of your answer you need to calculate the cash balance c/d.

Steel Social Club letter

Now take a look at the solution...


 

For You To Do 3:

Prepare the Receipts and Payments account for the Sawyer's Medieval England Society for the year ended 31 December 2004 from the following information.

Sawyer's Medieval England Society for the year ended 31/12/04
  £
Cash Balances b/d 467
  c/d 331
 
Payments Refreshments 554
  New equipment 1576
  Rent of hall 360
  Local government levy 125
  Printing costs 55
  Stationery costs 71
  Postage and telephone 39
  Repairs to equipment 322
  Lighting and heating 200
  Wages 847
  Annual dinner expenses 1085
  Lottery prizes 513
Receipts Subscriptions 2311
  Sale of annual dinner tickets 1886
  Lottery tickets 1093
  Refreshments 321

Now take a look at the solution...

 

Final remarks: some problems with the Receipts and Payments Account

Clubs and societies prepare a Receipts and Payments Account that just tells us what has been received and paid in cash. This means that such non-profit making organisations might not always apply the accruals concept of accounting. Not applying the accruals concept is not a problem for the kinds of organisations we are dealing with here.

There are problems with the Receipts and Payment Account approach to accounting too:

  • Apart from the cash balances, it doesn't show any assets or liabilities.
  • There is no real indication, except in the simplest cases, of whether the organisation has made a surplus or a deficit or whether they have made a surplus or deficit on anything that it does.

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Non-Profit Making Organisations

The Analysed Receipts and Payments Account

Because we can't tell whether we have made a surplus or deficit on the things that a club or society does, we can prepare what is called an analysed receipts and payments account. The term 'analysed' is used as it breaks down the accounts into constituent parts to help give a clearer picture. Here's an example of what they are and what they do.

Worked Example

Here are the transactions of the Bristol Mountain Bikers Society for the first four months of the year. Prepare an analysed Receipts and Payments Account for the Society for this period.

Date Details Amount
January Subscriptions 1,000
January Sale of drinks 250
January Cost of drinks 150
January Postage costs 50
March Subscriptions 600
April Sale of drinks 150
April Cost of drinks 90
April Postage costs 30

Before we show the answer to this question, let's look at what we would have prepared until now:

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to April
Receipts Payments
Balance b/d 275 Cost of drinks 150
Subscriptions 1,000 Postage costs 50
Sale of drinks 250 Cost of drinks 90
Subscriptions 600 Postage costs 30
Sale of drinks 150 Balance c/d 1,955
Totals 2,275 Totals 2,275

That's what we would have done; now here's what we can do now. You might appreciate that analysed statements like these are ideally prepared in a spreadsheet.

Worked Example Solution

Bristol Mountain Bikers Society Receipts and Payments Account for the period January to April
Receipts Payments
  Total Sub-
scriptions
Drinks Postage   Total Sub-
scriptions
Drinks Postage
Balance b/d 275   Cost of drinks 150   150  
Subscriptions 1,000 1,000   Postage costs 50   50
Sale of drinks 250   250   Cost of drinks 90   90  
Subscriptions 600 600   Postage costs 30   30
Sale of drinks 150   150   Balance c/d 1,955  
Totals 2,275 1,600 375 0 Totals 2,275 0 240 80

See what's happened. It's a fairly simple example but it gives you the idea. Look at just one example of the additional information we've got now:

Sales of drinks 375
Costs of drinks 240
Surplus on sale of drinks 135

See? By analysing the receipts and payments in this way we can get summaries of all major items. Notice also that we used the term surplus rather than profit.

For You To Do 4

Prepare the analysed Receipts and Payments Accounts for the Russian Culture Society in For You To Do 1. In addition, calculate the surplus or deficit on refreshments for the period.

Now take a look at the solution...


 

For You To Do 5

Prepare the analysed Receipts and Payments Accounts for the Steel Social Club in For You To Do 2. In addition, calculate the surplus or deficit on the 100 Club for the period.

Now take a look at the solution...


 

For You To Do 6

Prepare the analysed Receipts and Payments Accounts for Sawyer's Medieval England Society in For You To Do 3. In addition, calculate the surplus or deficit on the annual dinner for the period.

Now take a look at the solution...

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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.

  1. 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.
  2. 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:

Received = Revenues and Paid = Costs

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

  1. as a simple calculation, and
  2. 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:

  1. the horizontal, and
  2. 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...

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Non-Profit Making Organisations

Accumulated Fund and the Balance Sheet

We already know that the capital account of a non-profit making organisation is called the accumulated fund... but where is it? Why haven't we seen one yet? Well, we didn't want to make your life too much of a misery all at once by giving you too much to think about so we saved it until last! More than that, we have put the accumulated fund with our balance sheet explanations... we think it makes sense!

The accumulated fund works in exactly the same way as the capital account:

Accumulated Fund
Balance b/d XX
± Surplus/Deficit of income over expenditure XX
Balance c/d XXX

By far the best way of sorting it all out is to work through an example although in the first case we won't prepare a full balance sheet.

Worked Example

Buckingham Sports and Social Club - Receipts and Payments for the year ended 31/08/04
Receipts £ Payments £
Cash in hand 01/09/03 3,000 Bar purchases 24,000
Interest 1,500 Purchase of equipment 20,000
Subscriptions 36,000 General expenses 26,000
Bar sales 50,000 Competition costs 3,000
Competition receipts 2,000 Cash balance 31/08/04 19,500
  92,500   92,500

Other Balances as at 01/09/03
Clubhouse and land 100,000
Equipment 25,000
Bar stock 4,000
Investments 20,000
General expenses owing 500
Subscriptions due 1,000
 
Additional information as at 31/08/04
Bar stock 6,000
Bar creditors 400
General expenses prepaid 300
Subscriptions prepaid 900
Equipment held on 31/08/03 to be depreciated by 20%

Required

  1. Prepare a statement showing the club's accumulated fund at 01/09/03
  2. Prepare the club's income and expenditure account for the year ended 31/08/04
  3. Prepare the club's balance sheet as at 31/08/04

Worked Example Solution

a. The club's accumulated fund at 01/09/03:

This first part is probably very similar to many questions you tried when you first learned the accounting equation:

assets = liabilities + capital

Strictly speaking, we need to change that for non-profit making organisations to be:

assets = liabilities + accumulated fund

Then you would go on to working with this equation, including the evaluation of the capital balance at the start of the year given a list of assets and liabilities. What you are about to see is exactly the same as that.

Buckingham Sports and Social Club Accumulated Fund at 01/09/03
Assets Liabilities + Accumulated Fund
Cash in hand 01/09/03 3,000 General expenses owing 500
Club house and land 100,000 Balance c/d 152,500
Equipment 25,000  
Bar stock 4,000  
Investments 20,000  
Subscriptions due 1,000  
  153,000   153,000

b. Prepare the club's income and expenditure account for the year ended 31/08/04:

The IEA that follows is again given in vertical format and where possible we have just inserted the final surplus or deficit figure rather than putting all of the detail in. For example, we have opened an account for subscriptions and just shown the final figure on that account in the IEA. The same applies to the bar and to general expenses. This is a very good and efficient way of working, by the way!

Buckingham Sports and Social Club Income and Expenditure Account for the year ended 31/08/04
  Note  
  Subscriptions for the year 1   34,100
  Surplus on bar a/c 2,3   27,600
  Interest   1,500
  Gross surplus before deficit on competitions   63,200
  Deficit on competitions 4   1,000
  Gross Surplus   62,200
less Expenses  
  General expenses for the year 5 25,200  
  Depreciation of equipment 6 9,000 34,200
  Net surplus carried forward to accumulated fund   28,000

Here are all of the notes to explain the adjustments we have made for the IEA.

Notes
1 Subscriptions a/c Dr Cr
  Balance b/d 1,000  
  Subscriptions   36,000
  Prepayments c/d 900  
  IEA subscriptions for the year 34,100  
  36,000 36,000
2 Bar a/c  
  Bar sales   50,000
  Bar stock as at 31/08/03 4,000  
  Bar purchases for the year 24,400  
  Bar stock   6,000
  IEA surplus on bar a/c 27,600  
  56,000 56,000
3 Bar purchases a/c  
  Bar purchases 24,000  
  Bar creditors c/d 400  
  Bar purchases for the year   24,400
  24,400 24,400
4 Competitions a/c  
  Competition receipts   2,000
  Competition costs 3,000  
  IEA deficit on competitions   1,000
  3,000 3,000
5 General Expenses a/c  
  General expenses owing at 01/09/03   500
  General expenses 26,000  
  General expenses prepaid c/d   300
  IEA general expenses for the year   25,200
  26,000 26,000
6 Equipment a/c  
  Equipment as at 31/08/03 25,000  
  Purchase of equipment 20,000  
  Depreciation   9,000
  Balance c/d   36,000
  45,000 45,000

c. Prepare the club's balance sheet as at 31/08/04:

Finally, the balance sheet - and it balances!

Buckingham Sports and Social Club Balance Sheet as at 31/08/04
Fixed Assets  
Clubhouse and land   100,000
Equipment   36,000
Investments   20,000
  156,000
Current Assets  
Bar stock   6,000  
General expenses prepaid   300  
Cash balance 31/08/03   19,500 25,800
Total assets   £181,800
 
Accumulated Fund b/d   152,500  
Net Surplus carried forward to accumulated fund   28,000  
Accumulated Fund b/d   180,500  
 
Bar creditors 400  
Subscription prepayments 900 1,300  
  £181,800

Even though that isn't an especially difficult question, it does take time to work through it. However, any good bookkeeper will have learned to be methodical, logical and careful and it is that approach that will help you to succeed with such questions.

Why not try another, very similar question to the Buckingham question now? Go on, you know you want to! Here it is.

For You To Do 8

Pudsey Sports and Social Club Receipts and Payments for the year ended 31/12/04
Receipts £ Payments £
Cash in hand 01/01/04 2,961 Bar purchases 38,546
Interest 1,399 Purchase of equipment 19,038
Subscriptions 35,176 General expenses 25,686
Bar sales 72,704 Competition costs 3,992
Competition receipts 2,216 Cash balance 31/12/04 27,194
  114,456   114,456

Other balances as at 01/01/04
Land and buildings 120,885
Machinery and Equipment 23,420
Bar stock 4,172
Investments 24,981
General expenses owing 641
Subscriptions due 1,433

Additional information as at 31/12/04
Bar stock 2,648
Bar creditors 281
General expenses prepaid 274
Subscriptions prepaid 1,596
Machinery and Equipment held on 31/8/2003 to be depreciated by 12%

Required:

  1. Prepare a statement showing the club's accumulated fund at 01/01/04
  2. Prepare the club's income and expenditure account for the year ended 31/12/04
  3. Prepare the club's balance sheet as at 31/12/04

Now take a look at the solution...


 

For You To Do 9

Note: this is a complex question that calls on your bookkeeping and accounting for clubs and societies skills and there is no need to prepare a balance sheet.

The Balance Sheet of the Midlothian Sports Club as at 31 December 2003 showed the following:

Subscriptions paid in advance 310
Subscriptions in arrear 24
Bar stocks at cost 540
Bar creditors 173
Balance at bank and cash in hand 1,437
Furniture and fittings 3,110

The treasurer keeps a receipts and payments book and the totals for the year ended 31 December 2004 are as follows:

Subscriptions 5,110
Bar sales 5,716
Sales of dance tickets 2,176
Dance expenses 749
Rent and rates of premises 2,200
Lighting and heating 1,420
Barperson's wages 2,500
Steward's salary 5,000
Collections made on behalf of charities 2,650
Distributions to outside charities 2,600
Purchase of new furniture 1,460
Disposal of old furniture 150
Payments for bar purchases 2,610

The following information as at 31 December 2004 is also vital:

Subscriptions in arrears 40
Subscriptions in advance 410
Bar stocks at cost 470
Bar creditors 190
Rent unpaid 200
Book value of furniture disposed of 270

Depreciation of furniture for the year at 5% of book value on 31 December 2003.

Required:

  1. Prepare an analysed Receipts and Payments Account for the year ended 31 December 2004.
  2. Prepare an Income and Expenditure Account for the year ended 31 December 2004. The Income and Expenditure Account should show clearly the profit or loss on the various activities.

Notes:

  • A Balance Sheet is not required.
  • You need to decide where the Steward spends most of his/her time.
  • Think carefully about the collections and disposals made on behalf of charities as far as the IEA is concerned.

Now take a look at the solution...

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Non-Profit Making Organisations

Calculating Losses of Stock and Cash

In the busy and often tempting environment of small organisations, mistakes can happen and so can theft. A barman in a busy bar or lounge can be forgiven from time to time if a few bottles of beer go missing or the till is short of a few pounds. However, what we are concerned with here is working out whether beer or cash have gone missing.

In some cases we might assume that accountants, auditors and the police find that a barman had 'lost' some beer and some cash from their bar. To carry out our own investigation, here is what we need:

Stock

  • A true record of the opening stock, taken from the annual, monthly or weekly physical stock take or stock check
  • Accurate delivery records from the brewery, wholesaler or supplier
  • Accurate sales records
  • A true record of the closing stock, taken from the annual, monthly or weekly physical stock take or stock check

That's it! When we have all of that, there's nothing we don't know or can't prove!

Cash

We really need the same information as for stocks of goods for sale, since cash is really only a stock of notes and coins. This is what we need then:

  • Bank statements and statements of cash in hand for the start of the period - cash balance b/d
  • Accurate records of all cash received
  • Accurate records of all cash paid
  • Bank statements and statements of cash in hand for the end of the period - cash balance c/d

Of course, with a large club that might have several bars, a café, restaurant and a sports hall and a gym, reality can be more complicated than a simple list suggests but the principles are the same whatever the size of club or organisation.

Worked Example: Stock

What do you make of the following information?

The basic data
Stock at start 1,000
Purchases 10,000
Sales 15,000
Stock at end 400
The average mark up on cost of sales is 30%

Working directly and only from the basic data we can estimate the cost of sales and sales using the formula:

Opening stock
+ Purchases
- Closing stock
= Cost of sales
+ Estimated mark up
= Estimated Sales

Based on the data supplied
Opening stock 1,000
Purchases 10,000
Available for sale 11,000
Closing stock 400
Cost of sales 10,600
Estimated mark up (30%) 3,180
Estimated sales 13,780

See the problem? We have been told that the actual sales were £15,000 but using the formula we find that sales seem to be £13,780. Here's what we do to resolve this issue:

Assuming that the figure for sales of £15,000 is correct then working backwards from actual sales we can find what closing stocks should have been. You might find the right hand column in the table that follows useful as it confirms the percentages to work with when working backwards from the actual sales.

Calculations from what should have happened
Opening stock 1,000.00  
Purchases 10,000.00  
Available for sale 11,000.00  
Estimated closing stock 538.46  
Estimated cost of sales 11,538.46 100%
Average mark up on actual sales 3,461.54 30%
Actual sales 15,000.00 130%

So actual sales are £15,000, 130% of the estimated cost of sales. Therefore, the estimated cost of sales is equal to:

Estimated cost of sales = Actual sales * 100% = £15,000 * 100 = £11,538.46
130% 130

Then we find the estimated value of closing stock by subtracting the estimated cost of sales from the value of goods available for sale:

= £11,000 - 11,538.46 = £538.46

Conclusion: We have found a problem. The closing stock check revealed that there is £400 worth of goods in stock yet our calculations show that there should be £538.46 worth of stock. The committee of the organisation would now investigate what had gone wrong and take the appropriate action.

For You To Do 10

Draw your own conclusions from the following data as to whether you think the stock of the Briney Seafarer's Association has been looked after properly for the year ended 31 March 2004.

Stock at start 1,277
Purchases 9,222
Sales 17,965
Stock at end 889
The average mark up on cost of sales is 20%

You might find it useful to calculate using the same tables as in the above Worked Example.

Now take a look at the solution...

 

Worked Example: Cash

Remember we said that holding cash really means having a stock of cash? So it should come as no surprise that finding out whether cash is missing is remarkably like finding out if stocks are missing.

What do you make of the following information?

Cash and bank at start 1,063.54
Payments 16,704.25
Receipts 17,693.50
Cash and bank at end 723.03

In a sense, the workings are easier than with stock, as the following solution shows.

Worked Example Solution: Cash

The logic of the solution to this problem is:

Cash and bank at start
+ Receipts
= Available cash
- Payments
= Estimated cash and bank at end
- Actual cash and bank at end
= Cash discrepancy, if any

Applying that template to the data in the question gives:

Based on the data supplied
Cash and bank at start 1,063.54
Receipts 17,693.50
Available cash 18,757.04
Payments 16,704.25
Estimated cash and bank at end 2,052.79
Actual cash and bank at end 723.03
Cash appears to be missing (1,329.76)

So £1,329.76 of the cash is missing, or unaccounted for. What should we do now? We are dealing with a year's accounts so need to see the problem in that context. A total of £1,329.76 for a year is just over £25 a week and that's probably a serious enough problem to take action. Management by exception tells us how serious a problem it is and it gives us clues as to what to do with it!

Management by exception (MBE) means that we leave things alone unless they are a problem - unless they are exceptional, that is. Here's a really good example of MBE - would you ever change the tyres on your bicycle if they weren't causing you a problem and they weren't breaking the law? No, you wouldn't unless you wanted a new colour or style. In the same way, if a business has plenty of cash in the bank, why worry about it? In this case, though, more than £1,300 is missing and that is exceptional. £1.30 over a year wouldn't be exceptional and neither would £13. £130 could begin to be a problem. Can you see how we look at things in an exceptional way now?

For You To Do 11

Evaluate the cash position from the following data and discuss what you would do as a result of your investigations.

The Bally Elliott Twinkle Toes Club's treasurer presents the following end of year information to the chairman of the club and just as the treasurer is about to reveal what these numbers mean, his wife bursts through the door and drags him away to deal with an urgent family crisis.

As the chairman you have to work out what these figures mean so that you can explain their meaning to the Club's committee in half an hour's time.

Prepare your workings and your speech!

The Bally Elliott Twinkle Toes Club for the year ended 31/12/03
Cash and bank at start 931.44 Payments 16,292.01
Cash and bank at end 855.82 Receipts 15,830.77

You might find it useful to calculate using the same table as in the above Worked Example.

Now take a look at the solution...

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Non-Profit Making Organisations

The Remaining Issues

There are three issues that we can deal with relatively quickly and which will complete this introduction to the accounts of non-profit making organisations.

  • Life membership fees
  • Joining up fees
  • Projecting the fees needed

Life Membership Fees

Many clubs and societies have life membership schemes where we can pay a relatively large amount at the beginning and then never pay any more membership fees... ever. Take a look at a few clubs and societies and see how many of them do that.

The accounting problem with life membership is to solve the problem - how long is life? Ah, the eternal question!

In some cases, life membership could just be a year or two, for example, if someone pays their membership fee and then, sadly, dies after a short time. On the other hand, the 18 year old who becomes a life member of a wildlife society could be an active member for 60 or 70 years or even more.

The solution to the problem is that the organisation has to set a policy on how long life will be. That is, the club will agree that all life membership fees are to be spread over 10, 15 or 30 years and then each year this calculation is done:

Jack Smith signs up for life membership from 1 January 2004 by paying £150. The club's life membership term is 20 years so each year £7.50 (£150 ÷ 20 years) will be charged to the IEA for Jack. Life membership works a bit like depreciation, doesn't it?

Watch out for tricky questions here because life membership fees will change. Old members die and new members join so there will be changes to the life membership account to take care of. In an exam, all of these issues will be set out for you.

For You To Do 12

From the information supplied, carry out the following tasks:

a. Based only on the information you see below calculate what you think should be the amount to be shown in the end of year IEA for Life Membership fees for the Duncanstone Horticultural Society.

Membership profile Number Average age Duration of life membership (years)
Male 48 51 25
Female 100 42 35

Respondents saying they would become life members
male 25%
female 35%

Life membership fee = £95

b. Having seen the calculations in part a, the committee decided that life membership fees should be spread over 10 years for all life members. Calculate the revised amount to be shown in the IEA if all life members' fees are spread over 10 years.

c. The Society has undertaken more detailed research into the life membership issue and presents you with the following additional information.

  Number Duration of life membership (years)
Couples 40 25
Singles 30  
Breakdown of singles
Male 30% 25
Female 70% 35
Life membership fee
Couple 125  
Single 95  

As a result of this additional information, calculate the amounts to charge to the IEA providing the life membership fees are spread over:

  1. expected duration of life membership
  2. 10 years

Extension: Now consider offering life membership to couples or singles. If they took out life membership would members do so as a couple/family or as an individual?

Now take a look at the solution...

 

Joining Up Fees

Lots of non-profit making organisations have joining up fees and they might be a bookkeeping problem too. The solution to this problem is really the same as the life membership problem - the organisation itself decides what to do with its joining up fees. Here are two suggestions:

  • Put them into the IEA when the member joins.
  • Spread them over two or three years so that if Jill Smith joins and pays the joining up fee of £30 and we spread it over three years, then we will put £10 (£30 ÷ 3) for each of her first three years of membership in the IEA under the heading of joining up fees.

Questions relating to joining up fees aren't difficult, so let's go straight to...

For You To Do 13

RocURBaby Music Club, which has a financial year ending on 31 December, charges a signing on fee for all new members in addition to its annual fees.

  1. For new members signing on in 2004 only and assuming that the club's policy is to spread the signing on fee over three years, show the entries for the signing on fees in the IEA for the club.
    Note: Signing on fees are charged to the IEA in full for each year of membership and it doesn't matter at what stage of their first year they join. So, even if they joined on 1 January or 12 November or even 31 December, their first year signing on fee is charged in full for that year.
  2. For all new members signing on from 2004 to 2006 show the entries for each of the three years for the signing on fees in the IEA for the Club.
Year Number of new members signing on Signing on fee (£)
2004 30 50
2005 33 55
2006 36 70

Now take a look at the solution...

 

Projecting the Fees Needed

How does a non-profit making organisation know how much its fees should be? That is, how does the Flora and Fauna Society know that it should have an annual fee of £15 or £500?

The World Wide Fund For Nature UK (WWF) has several layers of membership, for example:

  • Members at £2 per month
  • Companions at £5 per month
  • Benefactor at £10 per month, and
  • Any other amount that you would like to pay

The Great Yarmouth Gilbert & Sullivan Society has two levels of membership:

  • Singing Member - £15
  • Patron - £13

Patrons receive a complementary ticket to the May show, priority booking for further tickets and regular updates from the Society, including information about concerts and social events.


How about the Norsey Wood Society of Billericay?

  • Standard - £3 per household
  • Senior Citizen - £1 per household

If you live outside Billericay, please add £1.00 towards the postage and packing of the newsletter (sorry UK only!).

Membership entitles you to free entrance to Society meetings and talks and to four informative newsletters per year.

Simplest solution of all - have just one level of membership and then:

Average cost per member = total costs ÷ total membership

The society can then either charge that amount or add something on to cover inflation, things they hadn't thought about and unexpected costs such as the need for a new item of equipment.

Worked Example

A 200 Club needs to work out how much to charge per ticket. Imagine that your local church has decided to have a 200 Club. The 200 Club aims to sign up 200 people a year who will pay exactly the same amount as each other. Every month some names are drawn out of a hat and these people are paid an agreed amount of money by way of a prize. At the end of the year the 200 Club aims to donate its surplus to the church.

All we know so far is how many members the 200 Club wants. What we don't know includes:

  • The likely actual number of members (it can't be more than 200 but it could be fewer)
  • The value of the prizes
  • The amount to donate to the church at the end of the year.

Imagine that we have talked to the treasurer of the 200 Club and he/she has provided us with the following additional information. St Birinus Church 200 Club needs to decide how much to charge for membership on the basis of one of the following two suggestions:

  Suggestion 1 Suggestion 2
Monthly prizes 1 £50 1 100.0
  2 50 2 75.0
  3 20 3 22.5
  4 20  
  5 20  
  6 20  
  7 20  
Likely number of members   175   190
Amount to donate to St Birinus at year end   £2,000   £2,000

Calculate the cost per 200 Club ticket for suggestion 1 only.

Worked Example Solution

Total prize money per year (50+50+20+20+20+20+20)*12= £200 *12 = £2,400
Amount to donate to St Birinus at year end £2,000
Total amount of money to raise per year £4,400
Average annual fee per member £4,400 ÷ 175 = £25.14

For You To Do 14

Work out the annual fee for suggestion 2.

Now take a look at the solution...

 

Other Resources

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