Concept and Terminologies of Non Trading Concern

INTRODUCTION TO NON-TRADING CONCERN

The non-trading concerns are the organizations which are established with a view to provide services to the society and not to make profits. The examples of such organization are sports, dub, school, hospitals, temples, etc. Though, they are not established with a view to earn profit but still it needs to maintain a set of accounting books in order to avoid misappropriation of funds. The main purpose of non-trading concern is to provide necessary services to its members and society through welfare activities. So, their main objective is not to arn profit.

Non-profit organizations can be defined as, “An entity whose prime motive is to provide services to the society and not to make a profit.” This organization prepares financial statement so that all the legal requirement can be fulfilled.

Features of Non-profit Organization

• It provides service to a certain group or the public at large.

• They are governed by the public or its members.

• The main source of their incomes is subscriptions, grants, donations, etc.

• Fund based items are credited to the capital fund or the general fund.

• Profit and loss derived from income and expenditure a/c is adjusted to capital fund in the balance sheet.

Important terminologies of non-profit organization

Subscription

Subscription is the amount paid by the members of the organization periodically. Subscription is the main source of income for non-profit organization. It is created in receipt side of receipt and payment and in income side of income and expenditure account. It is also called membership fee. The subscription received in receipt and payment account is shown for an irrespective period but in income and expenditure account is shown only for a current year.

For example:

A sports club received Rs.30000 subscription for the year 2009 of which Rs.3000 relate to the year 2008 and Rs.2000 to the year 2010 and at the end 2009 subscription still to be received Rs. 10000. The subscription for current year will be calculated as follows:

Solution:

Subscription received during the year 2009: 30000
(-) Subscription o/c for 2008: 3000
(-) Advance subscription for 2010: 2000
(+) O/S Subscription for 2009:10000
Income from subscription for the year 2009: 35000

The above amount of subscription is shown in subscription a/c as below:

Subscription a/c

Income and expenditure a/c

Entrance fee

Entrance fee is the amount paid by the new members at the time of joining the club. It is also called admission fee. When the entrance fee is received regularly every year then it is treated as income. When the entrance fee is received once for all then it is treated as capital.

Treatment of entrance fee:

The following are the different cases for the treatment of the entrance fee for the preparation of final account of non-profit organization.

Case I: During the year 2053, entrance fee received Rs.500000. The organization treats the entrance fee as a revenue receipt.

Income & Expenditure a/c

Case II: During the year 2065 entrance fee received Rs. 500000. The organization treats entrance fee as a capital receipt.

Balance Sheet

Case III: During the year 2068, entrance fee received Rs. 500000. The organization treats of entrance fee as a revenue receipt and the rest as capital receipt.

Income & Expenditure a/c

Balance Sheet

Legacy

Legacy is the amount given as per will of the deceased person. If it appears on the receipt and payment account, then it is treated as capital receipt and shown on the liabilities side of balance sheet. If the amount of legacy is nominal, then it may be treated as income and shown on the income side of income & expenditure.

Life membership fee

Life membership fee is the fee paid for the whole life in a lump sum instead of regular payment for the subscription by the members. It is a capital receipt and shown on the liabilities side of balance sheet.

Endowment fund

According to Eric L. Kohler,” It is a fund arising from a bequest or gift, the income of which is devoted to a specific purpose.” It is a capital receipt and shown on the liabilities side of balance sheet.

Grants

A grant is an amount provided by the government or public for the institution. It may be provided in cash or in kinds. Grants may be of following two types:

1. Operating Grants: Some institutions like school, college, hospital, clubs, etc. depends on a grant for their operation. It is provided to meet their operating expenses. It is a revenue receipt and treated as income of the institutions.
2. Development Grants: It is provided to meet the specific purpose. The amount received is utilized for the same purpose. It is a capital item and treated as a liability in the balance sheet.

Donations

The donation is the gift given by an organization or a person in the form of cash and property. It appears on the receipt side of receipt and payment account. Donation may be classified as below:

1. Specific donation: Specific donation is the donation received for a specific purpose. It is a capital item and treated as a liability in the balance sheet irrespective of amount big or small.
2. General donation: General donation is the donation received for general purpose. It is revenue receipts and treated as income in the income & expenditure a/c.

Sale of Fixed Assets

It is a capital receipt and should be deducted from the assets concerned in the balance sheet, and hence it should not be treated as income. However, profit or loss made from the sale of these assets can be treated as income (profit) & expenditure (loss).

Honorarium

An honorarium is the amount paid to the person for their volunteer’s service but who are not the employees of the organization. For e.g. amount paid to the visiting professors, guest artist, etc.

Other receipts

It is a revenue receipt and treated as income. It includes proceeds from charity, games, lectures, interest on investment, gain on sale of investment, a sale of newspaper and other revenue receipts, etc.

Financial Statements of non-profit organization consists the following statements:

• Receipt and Payment account
• Income and Expenditure account
• Balance Sheet

References:

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan, Kathmandu