ACCA Applied Skills · Financial Reporting

Not-for-profit and public sector entities: formula sheet

Full chapter guide

Key formulas

Surplus or deficit: Surplus or deficit = Income − Expenditure; Used instead of profit or loss. A surplus is reinvested, not distributed to owners.
Accumulated fund: Accumulated fund = Net assets (assets − liabilities) of the entity; Replaces owners' equity. It is built up from past surpluses and any capital contributed.
Value for money (three Es): Value for money = Economy + Efficiency + Effectiveness; Economy is low cost of inputs. Efficiency is the best output from inputs. Effectiveness is achieving the objectives.
Accumulated fund (opening): Accumulated fund = total assets − total liabilities; Use this when the opening fund is not given. Include arrears of subscriptions as an asset and subscriptions in advance as a liability.
Subscriptions for the year: Income = cash received − opening arrears + closing arrears + opening advance − closing advance; Or build a subscriptions ledger account and find the income as the balancing figure. This is the figure for the income and expenditure account.
Surplus or deficit: Surplus (deficit) = total income − total expenditure; Income includes subscriptions, donations and profit on activities. Expenditure includes depreciation and accrued expenses. Capital items are excluded.
Closing accumulated fund: Closing fund = opening fund + surplus (or − deficit); Add other items taken directly to the fund, such as capital donations or legacies, if the question treats them that way.
Profit on an activity (e.g. bar): Profit = sales − (opening inventory + purchases − closing inventory) − direct costs; Adjust purchases for payables first. Show only the net profit or loss in the income and expenditure account.
Life membership: Annual income = life membership fee ÷ expected years of membership; Hold the unreleased balance as a liability or deferred income. Follow the method the question states.
Economy: Economy = spending less on inputs, for the same quality; Compare actual input cost with budget or with a benchmark price. Measure of input cost only.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs); Example: patients treated per nurse, or cost per patient treated. State clearly which way round you use.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective or target; Example: percentage of pupils reaching a target grade. Needs a stated objective to judge against.
Value for money: VFM = economy + efficiency + effectiveness (together); Strong VFM needs all three. Good performance on one does not guarantee the others.
Economy: Economy = spending less on inputs of the right quality (compare cost of inputs with budget or benchmark); Concerned with the cost of resources used, such as staff and supplies.
Efficiency: Efficiency = outputs ÷ inputs (or cost per unit of output); For example, cost per patient treated or pupils taught per teacher.
Effectiveness: Effectiveness = actual outcome compared with the intended objective; For example, the percentage of patients recovering, or the target met.
Budget variance: Variance = Actual − Budget; State if it is favourable or adverse. For spending, actual below budget is favourable, but check service quality.
Cost per unit of service: Cost per unit = total cost ÷ number of units of service delivered; Used to compare years, sites or similar bodies.

Quick revision

Not-for-profit entities aim to deliver a service or social purpose, not to make profit for owners.
Their stakeholders often include donors, members, beneficiaries, government and regulators, and these groups may want different things.
Funds may be restricted to a specific purpose, so you must track how they are used.
Such bodies report a surplus or deficit, not a profit, and often use income and expenditure accounts.
Value for money means getting the best result from the resources used.
Economy: buying inputs of the right quality at the lowest cost.
Efficiency: getting the most output from the inputs used.
Effectiveness: whether the outputs achieve the entity's objectives.
Cost per unit of service, such as $500,000 ÷ 2,000 patients = $250 per patient, is an efficiency-type measure.
The three Es can conflict. Cutting costs may harm quality and reduce effectiveness.
Public sector bodies often have objectives that are hard to quantify, so non-financial measures matter.
Good measures are linked to objectives, controllable and clear. Always say what the result means.

Common mistakes

Saying a not-for-profit entity cannot make a surplus. Fix: State that it can make a surplus. The difference is that the surplus is kept and used for the purpose, not paid to owners.
Treating profit as the main performance measure. Fix: Add service delivered, value for money and use of funds. Mention non-financial measures.
Using the cash received for subscriptions as the income figure. Fix: Always adjust for opening and closing arrears and advance. Build a subscriptions account and use the balancing figure.
Adding arrears when you should deduct them, or the reverse. Fix: Think about what the cash contains. Opening arrears collected relate to last year, so deduct. Closing arrears are earned but unpaid, so add. Do the opposite for advance.
Treating economy and efficiency as the same thing. Fix: Economy concerns the cost of inputs bought. Efficiency concerns output produced from inputs used. Buying cheaper paper is economy; printing more pages per hour is efficiency.
Saying low cost means good value for money. Fix: Always test effectiveness too. Cheap services that fail to meet objectives are poor value.
Judging a public body mainly on profit margin or return on capital. Fix: State that the objective is service delivery. Use surplus only as a check on financial sustainability.
Mixing up economy, efficiency and effectiveness. Fix: Remember: economy is input cost, efficiency is output per input, effectiveness is outcome against objective.

Exam tips

Always compare with a commercial business: purpose, ownership, funding, performance and users. Examiners reward structured comparison.
In objective questions, reject options that say the main aim is to maximise return for owners.
Use correct terms: surplus or deficit, accumulated fund, stewardship, value for money.
In written answers, tie each point to the scenario's funders and services to earn the application marks.
Remember performance measures are not only financial. Mention non-financial indicators briefly.
In objective questions, the subscriptions calculation is the favourite. Write the four adjustments in order and check the sign of each by asking what the cash contains.
Know the difference between a receipts and payments account (cash only) and an income and expenditure account (accruals). A one-line definition is often tested.
In a constructed response question, lay out the answer with clear headings: workings first, then the income and expenditure account, then the statement of financial position. Show your workings so marks are available even if a figure is wrong.