Converting Receipts to Income: The Youth Sports Club, Patiala
The Youth Sports Club, Patiala, maintains its records on a cash basis and has asked you to prepare its Income and Expenditure Account for the year ended 31 March 2024 from its Receipts and Payments Account. Subscriptions appearing in the Receipts and Payments Account are ₹3,40,000. Of this amount, ₹18,000 relates to 2022-23 and ₹24,000 has been received in advance for 2024-25. Subscriptions outstanding on 31 March 2023 were ₹18,000, all of which were received during the current year, and on 31 March 2024 they are ₹30,000. During the year the club enrolled five life members at ₹12,000 each, and a donor gave ₹1,00,000 with the express condition that it be used only for the new pavilion. Opening and closing stock of sports material was ₹35,000 and ₹42,000 respectively, and purchases of sports material during the year were ₹1,20,000. Old sports material that had cost ₹40,000 and had been fully written off in earlier years was sold for ₹26,000. The treasurer proposes to credit the entire life membership fees and the entire donation to the Income and Expenditure Account so that the year's surplus appears healthier.
1. Compute the subscription income to be credited to the Income and Expenditure Account for 2023-24, showing the adjustment for each item.
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Working: Subscription income for 2023-24
| Item | Working | ₹ |
|---|---|---|
| Subscriptions received during the year (per Receipts and Payments A/c) | given | 3,40,000 |
| Less: Relating to 2022-23 (received now, earned earlier) | given | (18,000) |
| Less: Advance for 2024-25 (received now, not yet earned) | given | (24,000) |
| Sub-total: relating to 2023-24 already received | 2,98,000 | |
| Add: Outstanding for 2023-24 (earned, not yet received) | given | 30,000 |
| Subscription income for 2023-24 | 3,28,000 |
Why no separate adjustment for the opening outstanding of ₹18,000. That amount was earned in 2022-23 and was already recognised as income in that year. It was received in cash during 2023-24 and is therefore already inside the ₹3,40,000; adding it again would double-count. It is removed only to the extent that it appears inside the receipts figure - here ₹18,000 of the receipts is stated to relate to 2022-23, which is exactly that opening outstanding, so subtracting ₹18,000 removes it once and for all.
Cross-check using the accrual logic. Cash received 3,40,000 − prior-period 18,000 − advance 24,000 + closing outstanding 30,000 = 3,28,000. If one instead added the opening outstanding and did not deduct it, the answer would be inflated by ₹18,000 - the standard error this question is designed to test.
2. Compute the amount of sports material to be debited to the Income and Expenditure Account and state how the ₹26,000 from the sale of old material should be treated.
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Sports material consumed
| Item | ₹ |
|---|---|
| Opening stock (1 April 2023) | 35,000 |
| Add: Purchases during the year | 1,20,000 |
| Less: Closing stock (31 March 2024) | (42,000) |
| Amount debited to Income and Expenditure A/c | 1,13,000 |
Treatment of the ₹26,000 sale proceeds. The old material had already been fully written off, so it carries nil book value in the accounts. There is therefore no loss to recognise and no need to compute a book-value/realisation difference: the entire ₹26,000 is income of the year.
Where to show it. Best practice is to show it separately on the credit (income) side of the Income and Expenditure Account as "Sale of old sports material – ₹26,000", so that both the consumption and the recovery are visible. It may alternatively be deducted from the ₹1,13,000 on the expenditure side; the surplus is identical either way, but separate presentation is more informative and is the safer answer.
Contrast worth stating. If the material had not been written off, the sale would have been matched against its book value: sale proceeds ₹26,000 against book value (say ₹40,000) would give a loss of ₹14,000, shown on the expenditure side, and the ₹26,000 would not be treated as income. Because the asset was already expensed in earlier years, crediting the whole ₹26,000 is correct and does not overstate anything.
3. Evaluate the treasurer's proposal to credit the life membership fees and the ₹1,00,000 donation to the Income and Expenditure Account.
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Neither amount should be credited to the Income and Expenditure Account in full.
1. Life membership fees - ₹60,000 (5 × ₹12,000). A life member pays once and receives the club's services for life; the payment therefore buys a benefit extending far beyond the current year. Crediting all ₹60,000 to 2023-24 would show a surplus the club has not earned and would create a recurring obligation with no matching income in later years. The fee is a capital receipt: it is added to the Capital Fund (or credited to a separate Life Membership Fund and transferred to income over the estimated membership period, which is the more refined treatment). Either way, it does not inflate the current year's surplus.
2. Donation for the pavilion - ₹1,00,000. The donor has imposed a condition, so this is a specific donation. It must be kept in a separate Pavilion Fund, shown on the liabilities side of the Balance Sheet and used only for the stated purpose. It is not income of the general fund. Only a general donation with no condition attached may be credited to the Income and Expenditure Account.
3. Effect of the treasurer's proposal. The reported surplus would be overstated by ₹1,60,000 while a ₹1,00,000 restricted obligation would be shown as free income - the club would look prosperous and would be free to spend money it is legally bound to use for the pavilion. This would also invite objection from the donor and from the auditor.
Correct presentation. Surplus for the year excludes both items; ₹60,000 is added to the Capital Fund and ₹1,00,000 is shown as the Pavilion Fund, to be reduced only by expenditure on the pavilion.