CBSE Class 11 Financial Accounting NCERT Solutions: Chapter 12

Not-for-Profit Organisations (NPOs) are entities established with the primary objective of serving the public or a specific group, rather than earning profits. Their focus is on promoting social welfare, education, health, sports, or other community benefits. Examples include schools, hospitals, charities, clubs, and professional associations. The individuals managing these organisations are often referred to as trustees. NPOs typically generate their income through sources such as donations, grants, membership subscriptions, and life membership fees. Since profit generation is not their aim, they do not prepare a Trading and Profit and Loss Account. Instead, they maintain a Receipt and Payment Account, an Income and Expenditure Account, and a Balance Sheet to reflect their financial position and performance.

The Receipt and Payment Account is a financial statement prepared by Not-for-Profit Organisations that acts as a summary of all cash and bank transactions recorded in the Cash Book over an accounting period. It is a real account, meaning it deals with assets. All cash and bank receipts are recorded on the debit (Receipts) side, and all cash and bank payments are recorded on the credit (Payments) side. This account begins with the opening balance of cash and bank and concludes with the closing balance of cash and bank, which is determined as a balancing figure at the end of the period. It includes both capital and revenue items and may also reflect transactions related to previous or future accounting periods if cash was received or paid during the current period. Its primary purpose is to show the cash position of the organisation and the total cash inflows and outflows during the year.

The Income and Expenditure Account is a nominal account prepared by Not-for-Profit Organisations to ascertain their financial performance over an accounting period. It is analogous to the Profit and Loss Account prepared by business entities. This account records all revenue income and gains on the credit (Income) side and all revenue expenses and losses on the debit (Expenditure) side. It is prepared on the accrual basis, meaning it includes all incomes earned and expenses incurred during the current accounting period, regardless of whether cash has been received or paid. Adjustments for outstanding expenses, prepaid expenses, accrued income, and income received in advance are made. The balancing figure of this account represents either a 'surplus' (when income exceeds expenditure) or a 'deficit' (when expenditure exceeds income), indicating the net result of the organisation's operations for the period.

The key features of the Receipt and Payment Account are:

1. Nature: It is a Real Account, as it deals with cash and bank balances, which are assets. It is essentially a summarised version of the Cash Book.
2. Nature of Transactions: It records only actual cash and bank transactions. Non-cash items such as depreciation, profit or loss on sale of assets, and outstanding expenses are not included.
3. Distinction between Capital and Revenue Items: It records all cash receipts and payments, irrespective of whether they are of a capital nature (e.g., sale of assets, purchase of furniture) or revenue nature (e.g., salaries, rent).
4. Opening and Closing Balances: The account begins with the opening cash and bank balances and ends with the closing cash and bank balances, which are determined as the balancing figure.
5. Purpose: Its main purpose is to show the cash position of the organisation at the end of the accounting period and to summarise the total cash inflows and outflows that have occurred.

To prepare the Income and Expenditure Account from the Receipt and Payment Account, the following systematic steps are undertaken:

1. Transfer Revenue Expenditures: All items of revenue expenditure appearing on the Payments side of the Receipt and Payment Account that relate to the current accounting period are transferred to the debit (Expenditure) side of the Income and Expenditure Account.
2. Transfer Revenue Receipts: All items of revenue receipts appearing on the Receipts side of the Receipt and Payment Account that relate to the current accounting period are transferred to the credit (Income) side of the Income and Expenditure Account.
3. Adjust Expenses: For each expense transferred, adjustments are made based on additional information. Outstanding expenses (expenses incurred but not yet paid) for the current period are added to the related expense. Expenses paid in advance (prepaid expenses) pertaining to the current period but paid in a prior period are also adjusted.
4. Adjust Income: Similarly, for each income item transferred, adjustments are made. Accrued income (income earned but not yet received) for the current period is added to the related income. Income received in advance pertaining to the current period but received in a prior period is also adjusted.
5. Include Non-Cash Items: Non-cash items like depreciation on assets or appreciation in the value of assets, relating to the current accounting period, are recorded on the Expenditure side (depreciation) or Income side (appreciation) respectively.
6. Balance the Account: After all the revenue items for the current period have been recorded and adjusted, both the Income and Expenditure sides are totalled. If the total of the Income side exceeds the total of the Expenditure side, the difference is a 'surplus'. If the total of the Expenditure side exceeds the total of the Income side, the difference is a 'deficit'. This balancing figure is then recorded on the respective side to make both totals equal.

Subscription refers to the amount of money regularly paid by members of a Not-for-Profit Organisation to maintain their membership. It is a primary source of income for many such organisations, alongside donations and grants. Subscriptions can be collected on a monthly, quarterly, half-yearly, or annual basis. In the Receipt and Payment Account, the total amount of subscription received in cash or through bank during the year is recorded on the Receipts side. This total may include subscriptions relating to the current year, previous years, and future years. To calculate the subscription income to be shown in the Income and Expenditure Account for the current year, adjustments are necessary: 1. Add: Subscription outstanding for the current year: This is the amount of subscription due from members for the current period but not yet received. 2. Less: Subscription received in advance for the current year: This refers to subscriptions received during the current year that actually belong to future accounting periods. 3. Less: Subscription outstanding for the previous year: If any subscription from the previous year was outstanding and received in the current year, it should be excluded from the current year's income. 4. Add: Subscription received in advance for the previous year: If any advance subscription received in a previous year pertains to the current year, it should be added. The adjusted amount represents the total subscription income earned by the organisation for the current accounting period and is shown on the credit side of the Income and Expenditure Account.