WHAT ARE THE MAJOR DIFFERENCES BETWEEN NON-PROFIT AND FOR- PROFIT ACCOUNTING?

12.2 WHAT ARE THE MAJOR DIFFERENCES BETWEEN NON-PROFIT AND FOR- PROFIT ACCOUNTING?

While many aspects of non-profit and for-profit business accounting are similar (such as the tracking and reporting of income and expenses, and payroll taxes), there are significant differences. These arise out of the non-profit

o ga izatio s dut to d i e its esou es to a d its mission. For example, non- profits are required to itemize expenses across management (general and o ga izatio s dut to d i e its esou es to a d its mission. For example, non- profits are required to itemize expenses across management (general and

e pe ses a d the I‘“ e ui es that the e epo ted.

The requirement for non-profits to report functional expenses also highlights the importance of a cost allocation plan. This basically means establishing a system that defines how you will allocate expenses across the various functional areas and to specific programs. For exam ple, let s sa that those involved in administrative functions take up 20 percent of your office space. You might then allocate 20 percent of an expense like paper to the administrative functional area.

A cost allocation plan can be extremely useful in determining how much a program or activity actually costs and, done accurately, it gives a clearer

pi tu e of the o ga izatio s fi a es. The e a e se e al a epta le ethods – such as applying direct/indirect costs, and allocations based on percentage of

payroll or physical space used (as in the example above). Frequently, a combination of these methods will be appropriate. Consult with your accountant to determine the approach that best suits your organization.

Other key aspects of interest to non-profits are outlined by the Financial Accounting Standards Board (FASB), a non-profit organization authorized by the Securities and Exchange Commission to set accounting standards in South

Af i a. Of pa ti ula i po ta e is the FA“B s “tate e t of Fi a ial Accounting Standards No.116, which defines:

 Revenue in the form of contributions: These standards establish how and when to recognize that revenue has been earned. They include

standards for the accounting treatment of unrestricted and restricted funds, donated goods, in-kind contributions, pledges and the like.

 Value of donated services: This establishes standards for when it is necessary to record donated services (i.e., volunteer time) in the o ga izatio s fi a ial state e ts. A o di g to the FA“B, se vices to

e e og ized i lude those that a eate o e ha e o fi a ial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not

p o ided do atio .

Another ar ea that s i po ta t to o -profits, while rarely affecting for-profits, is the reporting of restricted contributions. While the amounts of restricted contributions are reported on a non- p ofit s ta etu , do o s ill t pi all require much greater detail about the use of restricted funds. This serves to inform the donor that the conditions of the gift have been (or are being) met, and enables staff to track what funds remain available for the restricted purpose.

Receipts and Payments Statement

A receipts and payments statement is an analysed and classified summary of the cash transactions as contained in the cashbook. It is, therefore, the most elementary version of a statement for a club or association.

It can thus be derived from the definition that this statement consists of the actual cash received on the debit side, and the actual cash paid out on the credit side. Since this statement is merely a summary of the cashbook, the opening balance of the statement represents the opening balance of cash on hand, and the closing balance of the statement represents cash on hand at the end of the period. All receipts and payments, whether of revenue or a capital nature, are included.

It will also be apparent that there cannot be a profit or a loss or surplus or deficit in this statement.

Income and Expenditure Statement

An income and expenditure statement is intended to show the surplus (net income or profit) or shortage (loss) for a certain period.

This statement is very similar to an income statement drawn up by a trading concern. The difference between the income (credits) and expenses (debits) represents the surplus (or deficit) and this is transferred to the Accumulated Fund Account (which represents the capital account of a non-trading organisation).

Special Funds

Institutions such as hospitals, clubs, educational and sports bodies often receive capital sums as gifts or legacies, with stipulations that income derived from the capital is to be applied for a specific purpose.

This implies that the capital amount is to be invested in a sound security. This capital amount must remain untouched, for the period prescribed by the

o ditio s of the lega , a d ust appea u de the title Fu ds o the e uit side of the balance sheet. The investments relating to these funds must be

shown as separate items on the asset side of the balance sheet.

Entrance Fees

Entrance fees are payable by a prospective member, when making application for membership of the club. The entrance fees are entered on the debit side of the receipts and payments statement, and credited to the entrance fees account.

These fees, being non-recurrent, are added directly to the accumulated fund in the balance sheet and are not shown in the income statement as normal income.

Exercise

The following information relates to the Green Golf Club:

1. Balances at 31 December 20.4 R

Green fees and caddy fees received 1600 Bank (debit balance)

550 Crockery and linen at cost – 31 December 20.3

700 Sundry debtors

210 Sundry creditors

1600 Sundry expenses

660 Dining room:

 Purchases 1450  Wages

1000  Sales

3000  Inventory – 31 December 20.3

100 Building at cost

16000 Land and improvements at cost

52000 Implements and tools:

 At cost 2100  Accumulated depreciation – 31 December 20.3 10 Maintenance expenses

1090 Entrance fees received

1050 Bar:

 Purchases 5000  Wages

1200  Sales

 Inventory -31 December 20.3 300 Membership fees

8400 Furniture:

 At cost 2500  Accumulated depreciation – 31 December 20.3 600 Accumulated fund - 32 December 20.3

15000 Interest expense (paid on mortgage loan to 30 June 20.4)

3750 Salaries and wages

3500 Stationary consumed

200 15% Mortgage loan

50000 Insurance prepaid – 31 December 20.3

2. Additional information

a) Bar inventory at 31 December 20.4 amounted to R250.

b) At 31 December 20.4, dining room inventory was not counted, but it can be

assumed that the usual gross profit margin of 50% on turnover was realized.

c) At 31 December 20.4, crockery and linen was valued at R500.

d) Implements and tools must be depreciated at 20% pa, using the diminishing balance method.

e) Furniture must be depreciated by R100.

f) Insurance premiums paid during the year, amounting to R160 were debited to the sundry expenses account. Half of this amount is to be regarded as insurance prepaid.

g) The balance of the membership fees account was compiled as follows: An amount of R180 in respect of prepaid membership fees at 31December

20.3 and cash received during the year, R8 220. The balance must still be adjusted for the membership fees in arrears to the amount of R100 and prepaid membership fees to the amount of R210 for the year 31 December

h) A e e e s egiste hi h is i use as desig ed a d p i ted at a quoted price of R10. This transaction must still be recorded in the books.

i) The club secretary went on leave before Christmas and was paid his January

20.5 salary of R120 in advance. This amount forms part of the balance of the salaries and wages account (R3 500). j) On 29 December 20.4 a club member deposited an amount of R50 in the

lu s a k a ou t as a do atio . This do atio as o l dis o e ed he the bank balance was compared with the balance of the bank statement and

must still be taken into account.

k) The mortgage loan is secured by a first mortgage over fixed property.

Required

The following statements for Green Golf Club:

1. The income and expenditure statement for the year ended 31 December

20.4 (NB: Show the calculations of the gross profit for the bar and dining room separately).

2. The statement of financial position at 31 December 20.4