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

Which of the following is the correct treatment of the profit earned by a club on running a canteen or bar, when the canteen trading account is prepared separately?

The profit from the club canteen is credited to the Income and Expenditure Account, and a loss is debited. The canteen is a revenue-generating activity, so its net result is an income or expense of the period, not an addition to the Capital Fund.

  1. AThe profit is credited to the Income and Expenditure Account, and a loss is debited to itCorrect
  2. BThe profit is added directly to the Capital Fund and a loss is deducted from it
  3. CThe profit is shown on the liabilities side of the Balance Sheet as a provision
  4. DThe profit is ignored because a canteen is not a main activity of the club

Explanation

A canteen or bar is a revenue activity of the club. Its trading account is prepared separately, and the resulting profit is credited, or the loss debited, to the Income and Expenditure Account. Taking it to the Capital Fund is wrong because it is a revenue item rather than a capital receipt.

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