NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1- Accounting for Not-for-Profit Organisation

Accountancy is crucial for all kinds of businesses. Businesses run with the main aim of earning a profit year-on-year. But some organisations are not run for profit motive; charitable trusts, schools, welfare societies, trade unions and societies for the promotion of culture and art are some examples of not-for-profit organisations. These organisations are operated by trustees responsible to their members and society for using the funds raised to achieve their goals. These organisations do not engage in any commercial activity. But even so, accounting for such an organisation is necessary to help keep track of income and expenditure. Hence it becomes important for students to learn about accounting for not-for-profit organisations. 

The NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1 will help the students identify the need and nature of accounting records for not-for-profit organisations and the financial accounts they must make. 

Students should read the NCERT Solutions for each chapter to improve their understanding and clarity of the subject. For many students, it cannot be easy to figure out the solutions to the NCERT exercises. NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1 is developed by Extramarks to encourage students to learn, structure their responses, and enhance them with the help of solutions. These Class 12 Accountancy Partnership Accounts Chapter 1 NCERT Solutions are made by subject matter specialists who adhered to the most recent CBSE guidelines and wrote them to accommodate all students, regardless of their level. Students benefit from fully understanding the subject matter, which helps them do well on exams.

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Key Topics Covered in NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1

The introductory chapter of Class 12 Accountancy is vital for students to comprehend. The NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1 will provide students with insights into Preparing the Receipt and Payment Account and Income and Expenditure Account; Preparing Income and Expenditure Account and Balance Sheet from a given Receipt and Payment Account and the treatment of certain peculiar items such as subscriptions from members, special funds, legacies, sale of old fixed assets, etc.

Some key topics covered in NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1 are as follows:

• Meaning of not-for-profit organisations
• Characteristics of not-for-profit organisations
• Accounts maintained for not-for-profit organisations
• Receipts and Payment Account
• Income and Expenditure Account
• The Differentiation between Income and Expenditure Accounts and Receipts and Payments Accounts.  
• Balance Sheet 
• Treatment of Peculiar Items

Let us now look at the detailed information on each of the above-listed subtopics in the NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1:

Meaning of Not-for-Profit Organisations

Not-for-profit organisations (NPOs) serve society rather than make a profit. Hospitals, religious institutions and labour unions are some organisations that fall under NPO. Life membership fees, subscriptions, grants, contributions and other forms of income are sources of income for not-for-profit organisations.

Since the primary motive is public welfare, they do not deal in trading and manufacturing activities, and the requirement of maintaining trading and profit and loss account does not exist. 

Characteristics of not-for-profit organisations

The characteristics of not-for-profit organisations, as given in the NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1, are mentioned under

• These organisations provide services to a particular group or the general public, such as sports, recreation, health care, and education, without considering caste, creed, or colour. Instead of making a profit, its only goal is to provide services that are either free or inexpensive.
• These are set up as charitable trusts or societies, and people who subscribe to such organisations are known as members.
• A managing/executive committee chosen by its members is often in charge of running its affairs.
• Such organisations primarily rely on membership dues, public donations, bequests, grants-in-aid, investment income, etc., as funding sources.
• The cash raised by such organisations from various sources is credited to a capital fund or a general fund.
• The surplus generated as an excess income over expenditure is not given to the members. It is added to the capital fund.
• Not-for-profit organisations build their reputation by contributing to the welfare of society rather than by satisfying clients or owners.
• The accounting information offered by such organisations is intended for current and potential contributors and to meet statutory requirements.

Accounts maintained for not-for-profit organisations.

• Subscriptions from members, gifts, grants from the government, and income from investments are the main sources of funding for not-for-profit organisations. They conduct the majority of their transactions in cash or through banks. 
• According to the law, not-for-profit organisations must maintain accurate accounting records and control how their assets are used. For this reason, they typically keep a cash book in which all payments and receipts are accurately recorded. 
• Additionally, they keep a ledger that includes all of the accounts for revenues, expenditures, assets and liabilities. It makes it easier to produce financial statements after the accounting period. 
• Not-for-profit organisations must keep an inventory registry updated with a detailed list of all fixed assets and consumables.
• They do not keep a capital account. Instead, it maintains a general fund, also known as a capital fund, which continues to grow due to surpluses, money collected annually from life membership fees and other sources, etc.

They must prepare the final accounts to provide the financial information to the members of the not-for-profit organisations, donors, contributors and the Registrar of societies. The final accounts that the not-for-profit organisations prepare are as below:

1. Receipt and Payment Account
2. Income and Expenditure Account, and
3. Balance Sheet.

A detailed explanation of the final accounts is provided in the NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1.

Receipts and Payment Account

The receipts and payments account (R & P Account) summarises actual cash receipts and payments taken from the cash book for a specific period. Cash payments are recorded on the Payments side of the R & P Account, and cash receipts are recorded on the Receipts side. The Cash Book, constructed based on all these transactions, has records of all cash and bank transactions. All cash and bank transactions of revenue and capital nature are recorded. It keeps track of all transactions, including cash and bank receipts.

This account assists in estimating the closing balance of bank and cash receipts, thereby assessing the cash position of a non-profit organisation or NPO.

Features of Receipts and Payment Account:

• The receipts and payments account is a real account because it is a summarised version of the cash book. The debit side keeps a record of all receipts, while the credit side keeps a record of all payments.
• All receipts and payments are recorded regardless of whether they are of a capital or revenue nature. The cash basis is used to record transactions.
• It begins with cash in hand or cash at the bank balance. Cash always has a debit balance, whereas banks might have either a debit or a credit balance (overdraft). Similarly, cash in hand or cash in the bank is represented by the closing balance.
• It does not include any adjustments for unpaid balances, depreciation, accrued income, etc., because all transactions are recorded using a cash basis.
• It spans the fiscal year. On the receipt side, all receipts are recorded, whether they relate to the current year, a previous year or a future year. The credit side shows payments that the not-for-profit organisation made during the current year, the year before or the year after.
• Receipts and Payments A/c show cash in hand and cash in the bank at the end. It does not indicate a surplus of revenue over expenses or vice versa.

Income and Expenditure Account

The Income and Expenditure (I & E) account is the same as the Profit and Loss (P & L) account (Profit and Loss Account). While a P&L account determines net profit or loss at the end of the accounting period, an income and expenditure account determines surplus and deficit throughout the accounting period. It is a nominal account that only tracks transactions with a financial component. The closing balance is either deficit or surplus.

The income and expenditure account features, as given in NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1, are mentioned below.

• The asset side of the opening balance sheet will display the opening balance of cash on hand and the bank balance that appears in the receipt payment account. The closing balance of cash and the bank will appear in the closing balance sheet.
• All cash receipts are displayed on the liabilities side of the balance sheet while keeping in mind that expenses connected to these funds are subtracted from the relevant fund, and income related to the appropriate fund is added to it.
• After making the required adjustments for accrued and prepaid expenses in the relevant expense, the items of revenue expenditure are debited to the income and expenditure account.
• The income and expense account is balanced and closed. It indicates either a surplus or a deficit.

Difference between Receipts and Payments Account and Income and Expenditure Account

Balance Sheet 

Non-profit organisations create a Balance Sheet to determine the financial position of the organisation. It follows the same format as that of normal business entities. Liabilities are displayed on the left, while assets are displayed on the right. But in place of the capital, there will be a Capital Fund or General Fund. Any surplus or deficit of the Income and Expenditure Account is either added or subtracted from the capital fund. Additionally, it is usual to include some capitalised assets, such as inheritances, admission fees, and life membership payments, directly in the capital fund.

Treatment of Peculiar Items

A couple of sources of income and expenses of these organisations have unique characteristics; thus, their presence in the final accounting needs additional consideration. They are peculiar to these organisations.

• Subscriptions- A subscription is an annual membership fee the member must pay. It is how most of these organisations make their money. The members’ subscription payments are recorded as a receipt in the receipt and payment account and income in the income and expense account. The amount shown in the Receipt and Payment Account displays the total subscriptions received throughout the year. In contrast, the amount shown in the Income and Expenditure Account is restricted to the figure related to the current period only. It is regardless of whether the amount has been received or not.

• Donations- It is these form of gifts that you get in the form of money or property from a person or organisation. It is shown on the receipt side of the Receipts and Payments account. Donations may be made for specialised or general causes.

1. Specific Donations- When a donation is used to accomplish a specific goal, it is referred to as a Specific Donation. The particular objective could be to expand the current building, develop a new computer lab, establish a book library, etc. Regardless of the donation size, it must be capitalised and recorded on the liabilities side of the balance sheet. The money will only be used for the intended purpose, as stated.
2. General Donations- General donations are to be used to support the organisation’s overall objective. Since this is a consistent source of income, it is recognised as revenue and added to the income side of the current year’s Income and Expenditure Account.

• • Legacies- The amount obtained due to a deceased person’s will may or may not indicate how the not-for-profit will use the money. Specific legacies are those whose use is predetermined and are reflected as liabilities on the balance sheet. If the purpose is not stated, it is assumed to be revenue-generating and is credited to the income and expense account.
  • Life Membership Fees- Some members would rather pay a one-time charge for a life membership than a recurring one. This sum is considered a capital receipt and is immediately credited to the capital or general fund.
  • Entrance Fees- The entrance cost, also known as the admission charge, is paid only once when the member becomes a member. Limited and expensive entrance fees apply to organisations like clubs and some charitable institutions. As a result, it is considered a one-time expense and is credited to the capital or general fund.
  • Sale of Old Assets- The receipts from the sale of an old asset are recorded in the year’s receipts and payments account. However, any profit or loss from the sale of an asset is added to the income and expense account. A gain from the asset’s sale is listed on the income side of the income and expenditure account. The income and expenditure account will show a loss on the expenditure side.
  • Sale of Periodicals- It appears on the income side of the Income and Expenditure Account and is a recurring item.
  • Sale of Sports Materials- Any sports club regularly offers the sale of sporting goods (used goods like old balls, bats, nets, etc.). Typically transaction of this nature appears in the Income and Expenditure account as income.
  • Payment of Honorarium- Honorarium is the sum paid to a person who isn’t a regular employee of an institution. An honorarium is a payment to a performing artist for their appearance at the club. The income and expenditure side of the expense account displays this honorarium payment.
  • Endowment Funds- A fund is made by a gift or bequest, the revenue from which it is used for a certain objective. It is a capital receipt and is listed as an item of a special purpose fund on the liabilities side of the balance sheet.
  • Government Grants- Public hospitals, colleges, and other institutions rely on government funding for their operations. The recurring funds in the form of maintenance grants are credited to the Income and Expenditure account and are recognised as revenue receipts (i.e., the current year’s income). However, grants like the building grant are viewed as capital receipts and deposited into the building fund account. The organisation should mention that some financial assistance from the government or government agencies is received. The year the subsidy is received is also counted as revenue income.

• Special Funds- For specific goals or activities, the Not-for-Profit Organisations office creates special funds, such as “prize funds,” “match funds,” and “sports funds,” among others. These funds invest in securities, and the income is added to their fund. It is not credited to the income and expense account. Similarly, the costs associated with such particular purposes are subtracted from the special fund. The balance sheet displays the special funds. However, suppose the balance in a specific or special fund is negative after adjustments to revenue and expenses. It is either transferred to the debit side of the Income and Expenditure Account or adjusted following the established guidelines.
• Stationery – Charges for stationary, consumables and other expenses are typically made to the income and expense account. However, if a stationery stock (opening or closing) is provided, the procedure would be to make the required adjustments to stationery purchases, calculate the cost of stationery consumed, and then show that amount in the income and expense account along with the stock of stationery in the balance sheet.

NCERT Solutions Class 12 Accountancy Partnership Accounts Chapter 1: Exercise and Solutions

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