Week 7 and 8 – SS2 Third Term Financial Accounting Notes

WEEK SEVEN AND EIGHT
TOPIC: PREPARATION OF ACCOUNTS OF NON-PROFIT-MAKING ORGANIZATIONS-PRACTICAL ILLUSTRATION
Example
The star sports and social club provides recreational activities, refreshments and social events for its members. Its assets and liabilities at 31^st December, 2003 were as follows
Fixed Assets                                 N
Pavilion                                     120,000
Club sports equipment                              40,000
Motor roller                                      2,000

 Current Assets                                 
Stock of equipment for sale to members                 4,000
Annual subscription owing                          1,200
Bank balance                                 6,730

 Current liabilities
Creditors for equipment for sale to members             1,300
Annual subscription received in advance                  800
Life subscriptions fund                              1,750

 In the year ended 31^st December, 2003 the club’s cash receipts and payments were as follows.
Receipts                                     
Annual subscriptions                             N18,000
Proceeds from sale of equipment                     N12,000
Sale of tickets for dinner-dance N4,400. Refreshment and bar takings N2660. Life members subscription N400

 
 Payments
Caretaker’s wages N8,000. Repairs to club equipment N1,700 purchase of club equipment N2000. Equipment for sale to members N4000. Heating and lighting N1800. Food for refreshment bar N1400. Secretary’s expenses N840.
Dinner – dance expenses: – Hire of band N 200 – Catering N 1000

 Further information

1. At 31^st December 2004: annual subscriptions in arrears N1400, annual subscriptions received in advance were N900
2. Stock of equipment for sale to members N200
3. Creditors of equipment for sale to members N900
4. A member donated N5000 to a fund to encourage young people to train for sport. This donation was invested in saving bonds.
5. the club transfers life subscriptions to the income and Expenditure Account in equal installment over five years
6. Depreciation is to be provided on fixed assets by the reducing – balance method as follows:- pavilion 6%. Sport equipment 20%, motor roller 20%. Required (a) prepare the star sport and social club’s income and Expenditure Account for the year ended 31^st December, 2004 (b) prepare the club’s balance sheet as at 31^st December, 2004

 
 Solution
Step 1:    Prepare an opening statement of affairs. This will give the balance on the Accumulated fund at 1^st January 2004 and will be the starting point for recording the transactions during the year.

 Statement of affairs as at 31^st December, 2003.

 Fixed Assets:-                                      N
Pavilion Sport equipment                             120,000
Club sports equipment                                  40,000
Motor roller                                          20,000
Current Assets
Stock of equipment for sale to members                      4,000
Annual subscriptions owing                              1,200
Bank balance     6,730
Total Assets     173,930

 Current Liabilities
Creditors for equipment for sale to members          1,300
Annual subscription received in advance              800
Life subscription fund                         1,700     3,850
Accumulated fund 1^st January, 2004                    170,080    
Step 2:-    prepare a receipt and payments Account. This will summarize all the transactions affecting the Income and Expenditure Account and balance sheet and calculate the bank balance at 31^st December, 2004.

 Receipts and payments account for the year ended 31^st December, 2004

		N		N
1 Jan.	Balance b/f	6,730	31 Dec. Caretaker’s wages	8000
31 Dec.	Annual subscriptions	18,000	Repair’s club equipment	1,700
	Sales of equipment	12,000	Purchase club equipment	2,000
	Sales of tickets dinner-dance	4,400	Purchase of equipment for resale	4,000
	Takings-refreshment	2,660	Heating and lighting	1,800
	Life membership subscriptions	400	Dinner dance hire of band	200
			Catering	1000
			Food for refreshment bar	14000
			Secretary’s expenses	840
			Balance c/d	23,250
		44,190		44,190

 
 Step 3:- prepare workings to adjust for accruals, prepayments, depreciation and any other items. Show these workings with your answer.

 1.            Purchase of equipment for resale

	N		N
Cash part	4000	Creditors b/f (opening bal.)	1,300
Creditors c/f	900	Income and Exp. a/c	3,600
	4,900		4,900

 
 2.                 Annual subscriptions A/C

	N		N
Owing at 1st January	1,200	Prepaid	800
Prepaid at 31st December	900	Cash (R & Payt a/c)	18,000
I & E a/c 9for the up)	18100	Owing at 31st December	1,400
	20,200		20,200

 3.                Life Subscriptions A/C

 

	N		N
I & Exp. A/C (1/5 x 2/50 )	430	B/F	1,700
Balance c/f	1,720	Cash received (i.e. additional)	400
	2,150		2,150

 4.                Club Sport equipment A/C

	N		N
Bal b/f	40,000	I & Exp a/c (20% x 4200)	8,400
Cash (addition)	2,000	Bal c/d	33,600
	42,000		42,000

 
 Step 4: The income and expenditure A/C and Balance sheet may now be copied out from steps 1, 2 and 3. As the sale of equipment to members is trading, a trading A/C should be prepared even though the question did not ask for it.

 If steps 1, 2 and 3 have been carefully carried out, preparing the income & Expenditure A/C and balance sheet is now only copying exercise and can be completed in little time.

 Sales of equipment A/C

 STAR SPORTS AND SOCIAL CLUB
INCOME & EXPENDITURE ACCOUNT FOR THE YOUR ENDED 31/12/04

 BALANCE SHEET
AS AT 31ST DECEMBER, 2004

 Current Assets

 Fund to encourage young people to train for sports     N5000
Presented by savings fund                     N5000

 Evaluation
Write short note on (a) subscription prepaid (b) subscription accrued

 Reading Assignment
Financial accounting with Ease by Onafowokan O., Harold Randall pages 95-98
WEEKEND ASSIGNMENT

1. Life subscription A/C should have a (a) debit balance (b) credit balance (c) neutral balance (d) none of the above

1. Club sports equipment A/C should have a balance (a) credit (b) debit (c) debit and credit (d) neutral

1. Sales of a equipment to members is a form of (a) asset (b) trading (c) gambling (d) debating

1. Subscriptions accrued is an/a_______ (a) asset (b) liabilities (c) accumulated fund (d) working capital

1. Repair of club equipment is a ______ expenditure (a) revenue (b) capital (c) fixed (d) floating

 THEORY

1. Write short notes on (a) annual subscription (b) life subscriptions (c) subscription prepaid (d) subscription accrued
2. Differentiate between life membership subscriptions and annual subscription of a non-profit-making organization.

 GENERAL EVALUATION QUESTIONS

1. 
   List five sources of income for a not-for-profit making organizations
2. State five differences between a Receipts and Payments Account and

   an Income and Expenditure Account

3. State five uses of a Control Account
4. State six errors that will not affect the agreement of the trial balance
5. Explain the objective of transfer pricing in Manufacturing Accounts.