Treatment of specific items used in accounts of non-trading concerns

The following items are frequently used in preparing the accounts of non-trading concerns (also known as non-profit organizations).

1. Capital fund
2. Subscription
3. Donation
4. Life membership fee
5. Admission or entrance fee
6. Legacy
7. Honorarium
8. Special fund

1. Capital fund

Capital fund (also known as general fund and accumulated fund) is a balance sheet item which represents the surplus of assets over liabilities of a non-trading concern. In other words, we can say that the capital fund of non-profit organizations is equivalent to the capital of for-profit organizations. It increases as a result of surplus and decreases as a result of deficit computed by preparing an income and expenditure account.

Treatment of capital fund

The capital fund is shown on the liabilities side of the balance sheet of non profit organizations. At any given date, the capital fund of the organization may be computed by applying the following equation/formula:

Capital fund = Total assets – Total liabilities

2. Subscription

Subscription is usually the main source of revenue for non trading concerns. It is the amount that members pay regularly to keep their membership alive. The amount of subscription normally becomes due at the beginning of each accounting period. All members of the organization are usually required to pay their subscription within a period specified by the rules of the organization. If a member does not pay his subscription within specified period, his membership may be cancelled.

Treatment of subscription

The subscription is treated as income and is shown on the credit or income side of the income and expenditure account. While entering in income and expenditure account, the total amount of subscription received during a period must be adjusted for outstanding and advance payments. Any unpaid subscription for the current period should be included and any subscription received in advance should be excluded.

3. Donation

The donation is the amount given to the organization by supporters and well wishers. Sometime members of the organization also provide donation in addition to their regular subscription. The donation may be general or for a special purpose such as donation for constructing a building or donation for buying some sports items or other assets etc.

Treatment of donation

The small and recurring donations should be credited to income and expenditure account for the relevant period. But if the amount of donation is large and non-recurring in nature, it should be added to the capital fund of the organization. Any donation received in the form of a non-cash asset should be credited to the particular fund for which the asset has been donated. In case of absence of such particular fund, the amount should be credited to the capital fund account.

If rules and regulations of the organization provide specific directions regarding donation, the amount of donation should be treated accordingly.

4. Life membership fee

Some organizations provide its members an option to pay a lumpsum amount to become members for the the whole life. The members opting for the payment of life membership fee are not required to pay periodic subscription.

Treatment of life membership fee

The amount of life membership fee is initially credited to a special fund account. Each year an amount equal to annual subscription is credited to income and expenditure account till the amount in special fund is fully exhausted. If a member who has paid life membership fee dies before the whole amount paid by him has been transferred to income and expenditure account, the balance should be transferred to capital fund account on the date of death.

An alternative approach is to transfer the entire amount of life membership to the capital fund account in the year in which it is received from the member.

5. Admission or entrance fee

Admission or entrance fee is the one time fee that a person is required to pay at the time of becoming a member of the organization. This is usually a small amount and is used to cover admission related expenses of the organization.

Treatment of admission or entrance fee

Generally, the admission/entrance fee is considered as revenue receipt and is credited to the income and expenditure account for the period concerned. But where the amount received as admission/entrance fee is large, it should be treated as capital receipt and credited to the capital fund account in the year in which it is received from the member.

6. Legacy

Legacy is the cash or another item of value that a deceased person gives to the organization under the terms of a will. It may be general or for a specific purpose.

Treatment of legacy

If the legacy is for specific purpose it should be transferred to a special fund in the name of that specific purpose. If the legacy is general, it should be credited to capital fund account.

7. Honorarium

It is a voluntary payment to a person who has provided some service to the organization voluntarily. Normally, the person providing the service does not demand a fee. The honorarium is therefore an expression of gratitude rather than payment of remuneration for the work done.

Treatment of honorarium

Any amount paid to someone as honorarium is treated as revenue expenditure and is debited to income and expenditure accounting for the period concerned.

8. Special fund

Special fund is different from capital fund. It is the fund that non profit organizations create for some special purpose such as construction of a new building, purchase of an equipment or machine etc. The amount for the creation of special fund comes from special donations, excess of income over expenditure and/or special fund-raising activities performed by the organization.

The amount of fund is invested in some trusted securities for a specific period. At the end of specific period, the investment is sold and the fund is used for the purpose for which it was created.

Treatment of special fund

The special fund is a balance sheet item which is shown on the liabilities side of the balance sheet of non profit organizations. The investment related to special fund is shown as asset on the assets side.

All special funds are transferred to capital fund at the time of the completion of purpose for which they were created.