Statements of a Not-for-Profit Entity — full notes
Paper No. 1: Financial Accounting · Statements of a Not-for-Profit Entity
Statements of a Not-for-Profit Entity
1. Different purpose, different words
A not-for-profit entity exists to serve members, not earn profit for owners. Vocabulary reflects that: Capital becomes Accumulated Fund, Sales/Revenue becomes Income, Expenses becomes Expenditure, Profit/Loss becomes Surplus/Deficit, and the Statement of Profit or Loss becomes the Income and Expenditure Account.
2. Two different statements, two different bases
Receipts and Payments Account — a summary of the cash book: every amount in, every amount out, cash basis, no adjustments. Easy to prepare, but does not show true financial performance since it ignores what is owed or prepaid.
Income and Expenditure Account — the accrual-basis equivalent of a Statement of Profit or Loss. Income earned this year regardless of collection, expenditure incurred this year regardless of payment. This is the one showing the real surplus or deficit.
3. Subscriptions — the adjustment that matters most
Cash received during the year
Add: subscriptions owed to the club at year end (in arrears)
Less: subscriptions owed at the start of the year (relate to last year)
Add: subscriptions received in advance at the start of the year (relate to this year)
Less: subscriptions received in advance at year end (relate to next year)
= Subscription income for the year
4. Worked example — Nyayo Sports Club
Cash received from subscriptions: KES 450,000. Arrears: KES 15,000 at start, KES 25,000 at end. Advance: KES 10,000 at start, KES 18,000 at end. Other income KES 80,000. Expenditure: rent KES 120,000, wages KES 90,000, general expenses KES 60,000, depreciation KES 40,000. Opening Accumulated Fund KES 600,000.
Subscription income:
| KES | |
|---|---|
| Cash received | 450,000 |
| Add arrears at year end | 25,000 |
| Less arrears at start of year | (15,000) |
| Add advance at start of year | 10,000 |
| Less advance at year end | (18,000) |
| Subscription income | 452,000 |
Income and Expenditure Account:
| KES | |
|---|---|
| Subscription income | 452,000 |
| Other income | 80,000 |
| Total income | 532,000 |
| Rent | (120,000) |
| Wages | (90,000) |
| General expenses | (60,000) |
| Depreciation | (40,000) |
| Total expenditure | (310,000) |
| Surplus for the year | 222,000 |
Accumulated Fund:
| KES | |
|---|---|
| Opening Accumulated Fund | 600,000 |
| Add surplus for the year | 222,000 |
| Closing Accumulated Fund | 822,000 |
If expenditure had exceeded income, the result would be a deficit, deducted from the Accumulated Fund rather than added.
The Statement of Financial Position follows the same shape as any other entity's, with the Accumulated Fund taking Capital's place, and closing subscriptions in arrears/advance appearing as a receivable and a liability respectively, the same way any other accrual would.