CSEET · Fundamentals of Accounting

Accounting for Non-Profit Organizations: formula sheet

Full chapter guide

Key formulas

Surplus or deficit: Surplus = Total income − Total expenditure (if positive); Deficit = Total expenditure − Total income (if positive); Surplus is added to the Capital Fund. Deficit is deducted from it.
Capital Fund (opening): Capital Fund = Total assets − Total liabilities; Used when the opening Balance Sheet is not given. It is the non-profit equivalent of owner's capital.
Closing Capital Fund: Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit); Specific funds, such as a prize fund, are shown separately, not inside this.
Statement names: Profit-making: Trading A/c, P&L A/c, Balance Sheet. Non-profit: Receipts and Payments A/c, Income and Expenditure A/c, Balance Sheet; Most direct comparison asked in exams.
Debit side (receipts): Opening cash + Opening bank balance + All cash and bank receipts; Include subscriptions, donations, entrance fees, sale of assets, interest received, and loans taken, in the year they are actually received.
Credit side (payments): All cash and bank payments + Closing cash + Closing bank balance; Closing balance is the balancing figure. Show cash in hand and bank separately if given.
Balancing rule: Total of debit side = Total of credit side; If a bank overdraft is the opening balance, show it on the credit side. A closing overdraft is shown on the debit side.
Cash basis: Amount shown = amount actually received or paid in the year; Do not adjust for outstanding, prepaid or accrued items in this account.
Income for an item (accrual): Income of the year = Received during the year − Outstanding at start + Outstanding at end + Advance at start − Advance at end; Use for subscriptions and other income items. Drop any term that is not given.
Expense for an item (accrual): Expense of the year = Paid during the year − Outstanding at start + Outstanding at end + Prepaid at start − Prepaid at end; Use for salaries, rent, stationery and similar items. Drop any term that is not given.
Surplus or deficit: Surplus = Total income − Total expenditure (if positive); Deficit = Total expenditure − Total income (if positive); Surplus increases the Capital Fund. Deficit reduces it.
Capital or revenue test: Benefit lasts beyond the year and creates an asset = capital (leave out). Benefit used up in the year = revenue (include).; Purchase of an asset is capital. Depreciation on that asset is a revenue expense and is included.
Layout: Debit side: Expenditure. Credit side: Income. Balancing figure: Surplus or Deficit.; Opening and closing cash and bank balances never appear here.
Subscription income for the year: Income = Cash received − opening arrears + closing arrears + opening advance − closing advance; Use the subscription account format: opening arrears and advance, then cash, then closing balances. Opening advance is added; closing advance is deducted.
Subscription received, if income is known: Cash received = Income + opening arrears − closing arrears − opening advance + closing advance; Do not memorise this. Build the account and find the missing figure as the balancing number.
Entrance fees, legacies, general donations: Capital receipt → add to Capital Fund in Balance Sheet; Unless told to treat as revenue, or the amount is small and recurring.
Life membership fees: Capitalise the full amount as a Life Membership Fund; transfer a yearly share to income only if the question says so; Default: capital, shown as a separate Life Membership Fund on the liability side, not added directly to the Capital Fund. Some questions spread it over the expected life.
Specific donations and specific legacies: Show as a separate fund in the Balance Sheet. Purpose expenses reduce the fund.; Specific fund investment income is added to the fund.
Sale of old asset: Sale proceeds − book value = profit or loss. Profit or loss goes to Income and Expenditure; proceeds are not income.; Remove the asset at book value from the Balance Sheet. The sale of an asset is a capital transaction, so follow the question's instruction. The usual exam treatment is to take the profit or loss on sale to Income and Expenditure.
Special events: Income from event − expenses of event = net surplus or deficit. Show the net, or show both sides, in Income and Expenditure.; Examples: concert, annual day, tournament.
Opening Capital Fund: Capital Fund = Total Assets − Total Outside Liabilities; Use balances at the start of the year. Specific funds (such as a Prize Fund) are liabilities, not part of the Capital Fund.
Closing Capital Fund: Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit) + Capitalised receipts; Capitalised receipts are items such as entrance fees, legacies and general donations that the question says to treat as capital.
Income for subscriptions: Subscription income = Received − Opening outstanding − Advance at end + Closing outstanding + Advance at start; Apply the same logic to any expense or income with outstanding or advance amounts.
Expense for the year: Expense = Paid − Opening outstanding + Closing outstanding − Opening prepaid + Closing prepaid; Use this for salaries, rent and similar items before showing them in the Income and Expenditure Account.
Closing fixed asset: Closing value = Opening value + Purchases − Depreciation − Book value of assets sold; Depreciation is charged in the Income and Expenditure Account and reduces the asset on the Balance Sheet.
Balance Sheet check: Capital Fund + Liabilities = Assets; Closing cash and bank come directly from the Receipts and Payments Account.

Quick revision

Non-profit bodies earn no profit; their surplus belongs to the organization and is added to the capital fund.
Receipts and Payments Account is a summary of cash and bank transactions; it starts with opening balances and ends with closing balances.
Income and Expenditure Account is a nominal account prepared on the accrual basis; it shows surplus or deficit.
Capital receipts and capital payments never appear in the Income and Expenditure Account.
Opening capital fund = total opening assets − total opening outside liabilities.
Subscription income for the year = subscriptions relating to the current year, whether received or not; exclude arrears of earlier years and advances for the next year.
Specific donations go to the named fund or capital; general donations are income.
Legacies are capital receipts unless the question says otherwise; entrance fees are normally capital receipts, but follow the question if it treats them as income.
On sale of an old asset, remove the asset at its book value; the difference between sale proceeds and book value is a profit or loss on sale, shown in the Income and Expenditure Account (or adjusted in the capital fund, if the question says so).
Depreciation, outstanding expenses and prepaid expenses are adjusted in the Income and Expenditure Account; they are not in the Receipts and Payments Account.
Closing Balance Sheet: capital fund = opening fund + surplus (or − deficit) + capital items added. Entrance fees and legacies are normally capital receipts, so add them unless the question treats them as income.
Stock of consumables used = opening stock + purchases − closing stock.
Always check that both sides of the Balance Sheet agree.

Common mistakes

Writing that non-profit organisations cannot earn any income or surplus. Fix: Say that they may earn a surplus, but it is not distributed to members and is used for the objects.
Using the words profit and loss for a club or trust. Fix: Use surplus and deficit, and call the account Income and Expenditure Account.
Including depreciation, outstanding expenses or prepaid items in the account Fix: Remember that this account is on a cash basis. If no cash moved, the item does not appear.
Putting receipts on the credit side and payments on the debit side Fix: Treat it as a cash book summary. Cash coming in is debit and cash going out is credit.
Including purchase of assets such as furniture or sports equipment in the account. Fix: Ask if the benefit lasts beyond the year. If yes, it is capital. Show it in the Balance Sheet and charge only depreciation.
Taking the cash received for subscriptions as income without adjusting. Fix: Always adjust for opening and closing outstanding and advance subscriptions, using the accrual formula.
Showing the cash received as subscription income without adjustment. Fix: Always prepare the subscription account and adjust arrears and advances to get the amount for the current year.
Treating entrance fees and legacies as income by default. Fix: Treat them as capital unless the question says to treat them as revenue. Say your assumption in a note.
Taking the Capital Fund from the Receipts and Payments Account or guessing it Fix: Always list all assets and outside liabilities at the start and subtract. Do this even when the opening balance sheet is not given directly.
Forgetting to add the surplus (or deduct the deficit) in the closing Capital Fund Fix: Make closing Capital Fund the fifth step of your method: opening + surplus (or − deficit) + capitalised receipts.

Exam tips

Differences between profit and non-profit bodies are asked often. Practise a clean four to six point comparison.
Use correct terms. Marks are lost for writing profit, loss or capital instead of surplus, deficit and Capital Fund.
Give one example such as a club, school or hospital to support your definition.
If a numerical question gives no opening Balance Sheet, find the Capital Fund from assets minus liabilities.
Write the three statements in order so the examiner sees you know the full process.
Read the question for the words received and paid. Only those go into the account.
Write a short note below the account that non-cash items are excluded. It shows the examiner you know the logic.
Keep the debit side to receipts and credit to payments, with closing balance on the credit side. Total both sides and show they agree.