Monday, October 22, 2012

Receipts and Payments account

Not-For-Profit Organisation
A Not-For-profit organisation is a voluntary association of persons, set up and operated not for the purposes of earning profit but, for the welfare of the society or promotion of art, culture, sports and general public utility. Examples of these are schools, hospitals and sports association. These organisations provide services to their members and to the public in general. Their main source of income is membership fees, subscription, donation, grant-in-aid, etc.
Characteristics of Not-for-profit organisations: Following are the main characteristics or the salient features of Not for Profit organisations:
a)      The objective of such organisations is not to make profit but to provide service to its members and to the society in general.
b)      The main source of income of these organisations is not the profit earned from purchase and sale of goods and services but is admissions fees, subscriptions, donations, grant-in-aid, etc.
c)       These organisations are managed by a group of persons elected by the members from among themselves. This group is called managing committee.
d)      They also prepare their accounts following the same accounting principles and systems that are followed by business for profit organisations that are run with an objective to earn profits.

The type of financial statements that are generally prepared by not-for- Profit Organisations are:
1.       Receipts and Payments Account
2.       Income and Expenditure Account
3.       Balance Sheet

Receipts and Payments Account
A Receipts and Payments Account is a summary of bank and cash transaction. Receipts are shown on the left hand side while payments are shown on the right hand side. It starts with opening cash and bank balances and ends with their closing balances. All receipts and payments are recorded in this account whether these are of revenue nature or capital nature.
Following are the main features of Receipts and Payments Account:
a)      It is prepared at the end of the year taking items from the cash book.
b)      It is the summary of all cash transactions of a year put under various heads.
c)       It records all cash transactions which occurred during the year concerned irrespective of the period they relate to i.e. previous/current/next year.
d)      It records cash transactions both of revenue nature and capital nature.
e)      Like any other account it begins with opening balance and ends with closing balance.
Advantages of Receipts and Payments Account:
a)      It is possible to know receipts and payments during a period under different heads.
b)      It helps in preparation of an income and expenditure account.
Limitations of Receipts and Payments account:
a)      It is prepared on cash basis of accounting. It does not record non-cash items.
b)      It records both the revenue and capital items. It does not show any surplus or deficit.

Need for preparing Receipts and Payments Account
As most of the transactions of Not-for-Profit Organisations are for cash, the Receipts and Payments Account shows most of the items at one place. As it is in a summary form, it gives an idea of large number of transactions at a glance. It contains accounting information under various heads. So it gives information item wise for the accounting year. It shows the closing cash or/and bank balance, this cash/Bank balance is taken to the Balance Sheet.
The Receipts and Payments Account serves the purpose of trial balance and becomes the basis of preparing financial statements i.e. Income and Expenditure Account and Balance sheet for the organisation. Very small Not-for-Profit Organisations (NPOs) prepare only Receipts and Payments Account.
As the name itself suggests, Receipts and Payments Account is an account which has two sides, the debit side and the credit side. All receipts are written on the debit side and payments on the credit side.

Difference between Receipts and Payments account and Cash Book
Basis
Receipts and Payment Account
Cash Book
1. Basis
It is prepared on the basis of cash book
It is prepared on the bases of each receipt
And payment.
2. Period
It is prepared at the end of the accounting year. It is a summary of the cash book.
It is written on a daily basis.
3. Date
Transactions under it are not written date wise.
Transactions are written date wise in the Cash book.

Difference between Receipts and Income (Payments and Expenditure Differentiated on the same Basis)
Basis
Receipts
Income
1.Capital and Revenue
Receipt can be a capital receipt or a revenue receipt.
But it is a revenue item only and is recorded in the income and expenditure account.
2. Period
It is the amount received during the year whether related to past, present or future years.
It is the amount received and receivable for the year.
3. Non-Cash Items
It related to cash items only.
It related to cash and non-cash earnings for the year.
4. Received amount
Any cash received is regarded as receipt.
Any cash received may or may not be regarded as income.
5. Side of the account
It is recorded on the debit side of cash book/ receipts and payments account.
It is recorded on the credit side of income and expenditure account.


Treatment of Some Specific Items in Receipts and Payments accounts
1. Subscription: It is a regular payment made by the members to the organisation. It is generally contributed annually. It is one of the main sources of income. It appears on the debit side i.e. Receipts side of the Receipts and Payments Account. Apart from amount for current year, it may include amount pertaining to previous year or advance payment for next years.
2. Entrance fees or Admission fees: Whenever a person is admitted as a member of the organisation certain amount is charged from him/her to give him/her admission. This is called entrance fee or admission fee. It is an item of income and is shown on the debit side of the Receipts and Payments Account.
3. Life membership fees: Membership, if granted to a person for the whole life, special fee is charged from him/her, this is called life membership fees. It is charged once in the life time of a member. It is a capital receipt for the organisation.
4. Endowment fund: It is a fund which provides permanent means of support for the organisation. Any contribution towards this fund is an item of capital receipt.
5. Donation: Donation is the amount received from some person, firm, company or any other body by way of gift. It is also an important item of receipt. It can be of two types:
(a) Specific donation: It is a donation received for a specific purpose. Examples of such donations are: donation for library, donation for building, etc.
(b) General donation: It is a donation which is received not for some specific purpose. It can be of two types:
(i) General donation of big amount
(ii) General donation of small amount
6. Legacy: It is the amount which is received by organisations as per the will of a deceased person. It is treated as a capital receipt.
7. Sale of old newspapers/periodicals and sports material: Old newspapers used/condemned sport material is sold and fetches some money. It is a source of revenue. It is taken to the debit of Receipts and Payments account.
8. Purchase of fixed assets: Assets such as building, machinery, furniture, books etc. are purchased for the organisation. These are items of capital expenditure. These are shown on the credit side i.e. the payment side of Receipts and Payments Account.
9. Payment of honorarium: This is another item of payment. This is an amount paid to persons who are not the employees of the organisation but take part in the management of the organisation. Remuneration paid to them is called honorarium. For example, payment made to the secretary of the club as honorarium. This is a payment of revenue nature.

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