Financial Statements of Not-for-Profit Organisations and Company Financial Statements
What the exam tests
Two statement types appear: not-for-profit organisations, where the Receipts and Payments account is compared with the Income and Expenditure account and subscriptions are adjusted; and companies, where the Statement of Profit and Loss and Balance Sheet are prepared in Schedule III format.
Core rules
- Receipts and Payments is cash-based; Income and Expenditure is accrual-based and includes depreciation, outstanding expenses and prepaid expenses. Only revenue receipts and expenses enter the Income and Expenditure account; capital receipts go to the balance sheet.
- Subscription income = amount received − opening outstanding + closing outstanding + opening advance − closing advance.
- General donations are revenue income; donations for a building or corpus are capital receipts. Life membership fees are capitalised and credited to a separate fund.
- For companies, follow Schedule III, match expenses with the revenue of the same period, and provide for depreciation and tax. Under current law, proposed dividend is not recognised as a liability; it is disclosed in the notes.
Worked example
Subscription received is ₹1,20,000. Outstanding subscription is ₹5,000 at the beginning and ₹8,000 at the end; advance subscription is ₹3,000 at the beginning and ₹4,000 at the end. Income = 1,20,000 − 5,000 + 8,000 + 3,000 − 4,000 = ₹1,22,000. Opening outstanding was received in cash but relates to last year; closing outstanding is earned this year but not received; opening advance relates to this year; closing advance relates to next year.
Traps
- Mixing cash and accrual statements.
- Treating sale of old newspapers or sports receipts as capital receipts.
- Ignoring depreciation in the Income and Expenditure account.
- In company accounts, failing to adjust closing stock or outstanding expenses.
- Showing proposed dividend as a liability.