AHSEC - CLASS 12 : Accounting for Not For Profit Organisation Important Notes for 2023 Exam

Accountancy Class 12 Notes
CLASS 12 ACCOUNTANCY

Chapter 1 Accounting for Not-for-Profit Organisation

Very short Answer Type Questions (carrying 2 marks each)

1.State the meaning of Not-for-Profit organisation.

Ans. Not-for-profit organisations or Non-profit organisations means an association, club or society for rendering different services to society in general or to their members. For example Educational institutions, clubs, Hospitals, Religious trusts, Trade Unions etc.

2. State two features of Not-for-profit organisation.

Ans. (a) Service: The main feature of not-for-profit organisations is to provide different services to its members or society as a whole.

(b) Form: These organisations may be educational, social, religious, entertainment etc. and are established in the form of schools, colleges, clubs, societies, trusts etc.

3. Give two distinctions between a not-for-profit organisation and a trading organisation.

Ans:-

4.Name four organisations which are not for-profit organisations.

Ans. Organisations which are not-for-profit organisations are

(a) Charitable Hospitals

(b) Libraries

(d) Literary Societies

5.Name two objectives of not-for-profit organisations.

Ans. Two objectives of not-for-profit organisations are

(a) Society feels certain needs in respect of promotion of education, sports, health etc. So some organisations are established to fulfill these needs of the society.

(b) These organisations donot operate with the objective of earning profits. They only provide service to the members or beneficiaries.

6.What is Receipts and payments Account?

Ans. Receipts and payments Account is a summary of cash transactions under proper account head which have taken place during a accounting period. It is prepared at the end of the accounting year Receipts and payments Account starts from opening balances of cash in hand and cash at bank and ends with closing balances of cash and bank. All receipts are written left side and all payments are recorded in right side of this account. It makes no difference that receipt is of capital or revenue nature Same as the payment is of capital or revenue nature.

7.Mention two limitations of Receipts and payments Account?

Ans. The two limitations of Receipts and payments Account are as follows

(a) Receipts and payments Account depicts cash transactions only. So it does not record non cash incomes or expenses i.e. accrued incomes, depreciation, outstanding

(b) Both the capital and revenue receipts and payments are recorded within it in a particular year. If does not show any surplus (excess of income over expenditure or defients (excess of expenditure over income).

8.What is Income and Expenditure Account?

Ans. The Income and Expenditure Account is similar of profit & Loss Account All revenue incomes related to the year are shown in right side and all revenue expenditures are shown in left side of this account. Adjustments relating to outstanding and prepaid expenses, accrued or unaccrued incomes, depreciations, losses etc. are recorded in this account. The main objective of this account is to disclose surplus or deficit of year.

9. What is Capital Fund?

Ans. Capital Fund is the surplus which got accumulated over so many years in the past. In case of a new organisation, there will be no capital fund at the beginning of first year To compute capital fund, at the end of second and subsequent years, the closing balance sheet of the previous year or the opening balance sheet of the current year is prepared. The excess of opening assets over the opening liabilities is called the amount of Capital Fund.

10. What is donation for a specific purpose?

Ans. Donation received from donors with specific instruction regarding the purpose is a liability of the organisation. The donor giving the donation mentions the purpose for which the amount is to be utilised is called "donation for a specific purpose"

11. What is Surplus/Deficit?

Ans. If the total of the credit side of Income and Expenditure Account is more the difference will be termed as surplus (excess of income over expenditure). This surplus will be added to Capital Fund in the Balance Sheet. If the total of the debit side of this account is more, the difference will termed as 'Deficit (excess of expenditure over income) and the same will be deducted from the Capital Fund in the Balance Sheet

12. What is cash basis of accounting?

Ans. Cash or receipts basis is the method of recording transactions under which revenues, costs, assets & liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made Entries are recorded only while cash is actually received or paid.

13. What is capital grant/specific grant?

Ans. Capital grants or specific grant are those grant which are received for some specific purposes. Examples are building grant, library grant etc. Its treated as capital receipts and transferred to the fund account where such fund accounts are separately maintained Otherwise it is added to the Capital Fund Account. Capital grants are not shown in the Income and Expenditure Account

4. What is accrual basis of accounting?

Ans. Accrual or mercantile basis of accounting is the method of recording transactions by which revenues, costs, assets and liabilities are reflected in accounts. in the period in which they are accrue All incomes and expenses belonging to the accounting period are recorded in the books, even if these are not transacted in cash during the accounting period.

Short Answer Type Questions (Carrying 3 marks each)

1. State three features of Receipts and payments Account.

Ans. Three features of this account are as follows

(a) Nature of Account : All receipts are shown on the debit side and all payments are shown on the credit side

(b) Opening and Closing Balances : It begins with a debit balance which represents cash in hand and cash at bank. However, in case of bank overdraft, this account may show a credit balance.

(c) Revenue and Capital Items : It records both revenue and capital nature items All the receipts whether capital or revenue are debited to it and all the payments whether capital or revenue are credited to it

2.State three objectives of Receipts and payments Account.

Ans. The following are three objectives of Receipts and payments Account

(a) It is possible to know at a glance, receipts and payments during a period under different head.

(b) While there is a receipts and payments account, it is easy to prepare an income and expenditure account.

3.Mention three distinguished features of cash basis accounting.

Ans. Three distinguished features of cash basis accounting are stated below.

(a) It records transactions on cash is actually received or paid out.

(b) Income is earned when cash is received and expenses are incurred when cash is paid.

4. What is Fund based Accounting?

Ans. In a Not-for-profit organisation different funds are established for different purposes. These are not generally available for normal activities Income received for a particular purpose for which Not-for-profit organisation has a fund is credited to that fund and expenses incurred are deducted form the fund Income and expenditure related to a fund are not shown in Income and Expenditure Account. Funds maintained by a Not-for-profit organisation are treated as separate accounting entities for accounting purposes. So it is called Fund based Accounting

5. Mention three features of Income and Expenditure Account.

Ans. The following are the features of income and expenditure account

(a) Income and expenditure account is a revenue account of a not for profit organisation. It is prepared at the end of a financial period for determining the surplus or deficit of that period

(b) It is a nominal account.

(c) It does not record those items of expenditure and income which do not relate to the current period. Only current year incomes and expenses are recorded in it.

6.Mention three principal sources of incomes and three principal heads of

expenses of a not for profit organisation.

Ans. Three principal sources of incomes are:

(a) Subscription;

(b) Donations and

(c) Entrance fees or Admission fees.

And three principal heads of expenses are (a) Construction works

(b) Salaries and

7.Write a short note on incidental trading activities carried on by a not for profit organisation.

Ans. Trading activities are carried on by a not for profit organisation. But sometimes it may carry on these activities in addition to their normal activities i.e. a Restaurant by a hospital, Book shop by a college, chemist shop by a hospital, canteen by a school/college etc. In this regards, a separate trading account for each of the trading activities should be prepared to ascertain the profit/loss. The profit/loss, from such trading activities should be transferred to income and expenditure Account.

8.Write short note on the following ;

(a) Donation for a specific purpose.

Aas. Donations given by the donors with specific instructions regarding the purpose for which they are to be spent are called specific donations. Such donations received may be;

(i) Donation for building

(ii) Donation for prizes,

(iii) Donation for books etc.

Such donations are not shown in income and expenditure Account. If there is a specific find for the same purpose, specific donations are added to that specific fund.

(b) Life membership fees.

Ans. The fees charged from the persons for making them life members is called life membership fees. Since this type of fees is received only once from a member, so it is a capital receipt in nature. Therefore, the amount is not shown in the income and expenditure Account and added to the Life Fund or Capital Fund

AHSEC 12 : Accounting for Not For Profit Organisation Important Notes for 2023 Exam, Accountancy Notes Class 12

(c) Entrance fees.

Ans. Entrance fees or admission fees is usually charged by a non-profit organisation from the new members apart from the amount of annual subscription. If the entrance fees is treated as Capital Receipt, it will be shown in the Balance sheetonly.

On the other hand, if the entrance fees is treated as Revenue Receipt, it will be credited in the income and expenditure account only. But sometimes, a portion of entrance fees is treated as revenue receipt, that portion will be shown in the credit side of income and expenditure account and remaining portion will be shown in Balance sheet.

(d) Sale of old assets (furniture).

Ans. Cash received from the sale of assets ie. (furniture) is income or not will depend upon the circumstances. The book value of the asset sold is deducted from the asset in the balance sheet. However, if there is any profit or loss on the sale of asset, the same should be recorded accordingly in the income and expenditure account where the books value of the asset is nil, the entire sale proceeds are treated as income

(e) Sale proceeds of sports materials.

Ans. While any amount is received from sale of old ports materials eg old cricket bats, balls, nets etc., it is treated as income and will be shown in the income and expenditure account on the assumption that there is no any book value of this materials.

(f)Legacy

Ans. Legacy is the amount or item in kind which has been given to the not for profit organisation as per the 'will' of a decased member It is a receipt of non recurring nature and should generally be taken on the liability side of the balance sheet However, small amounts received on account of legacy may be treated as acome and shown in the income and expenditure account

(g) Endowment Fund.

Ans. Endowment Fund is a fund created out of amounts received as gift it is a capital receipt and should be shown on the liabilities side of the balance sheet. Any income arising out of such a fund is also added to that Fund Account. Any expenses incurred out of that fund is dedutced from that fund. But interest received from Endowment Fund Investment is credited to income and expenditure account.

9.State the accounting principle followed in fund based accounting.

Ans. The accounting principles of fund based accounting are -

(a) If any amount realised for a specific purpose is credited to a separate fund account and is shown on the liabilities side of the Balance sheet (b) If there is any specific investment against that fund, such investment is shown on the assets side of the Balance sheet.

10. What is subscription? How is it calculated?

Ans. While a person is admitted to a not for profit organisation, he starts paying a fixed sum at regular intervals to keep his or her membership alive. This regular payment is called 'subscription. It is a income to the club or society to be received periodically The receipts and payments account records the actual amount of subscriptions received during the current year, whether the amount received belongs to the past, present or future years. Since subscription is an income of recurring nature, it is always treated as revenue income and hence it is shown in income side of income and expenditure account. The income and expenditure account records only the subscription which relate to the particular accounting period whether received or receivable.

11. Mention five distinctions between receipts and payments account and income and expenditure account.

Ans. Distinctions between receipts and payments account and income and expenditure account.

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READ ALSO : CLASS 12 ACCOUNTANCY ALL CHAPTER SOLUTION

AHSEC - CLASS 12 : Accounting for Not For Profit Organisation Important Notes for 2023 Exam | HS 2nd Year Accountancy Notes

Accountancy Class 12 NotesCLASS 12 ACCOUNTANCY

Chapter 1

Accounting for Not-for-Profit Organisation