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CA Foundation · Accounting · Financial Statements of Not-for-Profit Organisations

A club's Income and Expenditure Account shows a deficit for the year. How is this deficit treated?

A deficit in the Income and Expenditure Account is deducted from the Capital Fund in the Balance Sheet. Because an NPO has no owners, the fund absorbs the shortfall of income compared with expenditure, just as a surplus increases it.

  1. AIt is added to the Capital Fund
  2. BIt is deducted from the Capital Fund in the Balance SheetCorrect
  3. CIt is shown as an asset
  4. DIt is carried to the credit side of the Receipts and Payments Account

Explanation

Excess of expenditure over income is a deficit. It reduces the Capital Fund, the reverse of treating a surplus. Showing it as an asset would be incorrect as it is a loss of resources.

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