ACCOUNTING OF NON-PROFIT MAKING ORGANISATION

SECOND TERM SCHEME OF WORK FOR SS 2 FINANCIAL ACCOUNTING LESSON NOTE

 

SCHEME OF WORK WITH WEEKLY LESSON NOTES FOR SS 2 SECOND TERM FINANCIAL ACCOUNTING

 

 

SUBJECT :

FINANCIAL ACCOUNTING

 

CLASS :

SS 2

 

TOPIC :

ACCOUNTING OF NON-PROFIT MAKING ORGANISATION

 

WEEK  :

WEEK 7

 

 

PREVIOUS LESSON :

SINGLE ENTRY / INCOMPLETE RECORDS 2

 

Objectives:

• To define non-profit making organizations
• To identify the characteristics of the accounts of non-profit making organizations
• To explain the treatment of income and expenses in non-profit making organizations
• To describe the methods of providing for depreciation of fixed assets
• To list the errors that affect the agreement of the trial balance
• To identify the classifications of the Ledger

Materials:

• Whiteboard and markers
• Handouts of examples of non-profit making organizations and their accounts
• Financial accounting textbooks
• Calculators
• Assessment sheets

 

 

 

CONTENT

ACCOUNTING OF NON-PROFIT MAKING ORGANISATION

A non-profit organization is a type of organization that does not aim to make a profit. Instead, it focuses on providing a service or benefit to the community. Examples of non-profit organizations include charities, schools, and religious organizations.

When it comes to accounting for non-profit organizations, there are a few key things to keep in mind. One important aspect is keeping track of the organization’s income and expenses. This is done through financial statements, which show how much money is coming in and going out.

Another important aspect of accounting for non-profit organizations is making sure that donations and other funds are being used appropriately. This is known as “financial stewardship” and it involves ensuring that the organization is using its funds in a responsible and transparent way.

One example of a non-profit organization that uses accounting is a charity. Let’s say that a charity receives donations from various individuals and companies. It would need to keep track of these donations and ensure that the funds are being used in accordance with the charity’s mission

Accounting is an essential aspect of managing any organization, including non-profit organizations. Non-profit organizations are organizations that do not operate with the primary goal of making a profit. Instead, they focus on fulfilling a social, charitable, or educational mission.

The accounting process for non-profit organizations involves tracking and managing the organization’s financial resources, including its revenue, expenses, and assets. It helps to ensure that the organization is financially stable and able to fulfill its mission.

Non-profit organizations may rely on different sources of funding, such as donations, grants, and fundraising activities. Accounting helps to ensure that these funds are used efficiently and effectively to achieve the organization’s goals.

In addition, non-profit organizations are subject to specific accounting standards and regulations, such as the Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board (FASB). These standards ensure that non-profit organizations are transparent and accountable to their stakeholders, including donors, members, and the public

Characteristics of non profit organizations

1. Emphasis on accountability: Non-profit organizations have a social or charitable mission, and as such, they are accountable to a wide range of stakeholders, including donors, members, volunteers, and the public. Accounting for non-profit organizations emphasizes transparency, accuracy, and accountability in financial reporting.
2. Focus on stewardship: Non-profit organizations are typically entrusted with resources and funds from donors and other sources. Accounting for non-profit organizations focuses on the responsible management and use of these resources, ensuring that they are used in accordance with the organization’s mission.
3. Compliance with specific regulations: Non-profit organizations are subject to specific regulations and standards related to accounting and financial reporting. These regulations include the Generally Accepted Accounting Principles (GAAP), the Financial Accounting Standards Board (FASB), and other state and federal regulations.
4. Importance of financial statements: Non-profit organizations use financial statements to report on their financial activities and performance. These statements include the statement of financial position (balance sheet), statement of activities (income statement), and statement of cash flows.
5. Diverse sources of revenue: Non-profit organizations may rely on a variety of sources of revenue, including donations, grants, membership fees, and fundraising activities. Accounting for non-profit organizations requires tracking and managing these diverse revenue streams to ensure financial stability

What is the best accounting method for nonprofit organizations?

Accrual accounting is generally considered the best accounting method for non-profit organizations as it provides a more accurate representation of the organization’s financial activities and performance.

Under accrual accounting, revenue is recognized when it is earned, even if payment has not yet been received. Similarly, expenses are recognized when they are incurred, even if payment has not yet been made. This method provides a more accurate picture of the organization’s financial situation and performance, as it takes into account all revenue and expenses that have been earned or incurred during a given period, regardless of when payment is actually received or made.

Accrual accounting is also preferred by many donors, grantors, and other stakeholders as it provides a more transparent and comprehensive view of the organization’s financial activities. Additionally, accrual accounting is generally required for organizations that receive federal funding or are required to file a Form 990 with the IRS

Examples of accounting transactions for non-profit organizations using the accrual accounting method:

1. A non-profit organization receives a grant of $50,000 to fund a specific project. The organization has not yet begun the project, but the grant has been awarded and is considered “earned” revenue under accrual accounting. The journal entry to record this transaction would be:Debit: Cash $50,000 Credit: Grant Revenue $50,000
2. The non-profit organization incurs $10,000 in expenses related to the project mentioned in Example 1. These expenses are considered “incurred” under accrual accounting, even if payment has not yet been made. The journal entry to record this transaction would be:Debit: Project Expenses $10,000 Credit: Accounts Payable $10,000
3. The non-profit organization receives $5,000 in donations from individuals during a fundraising event. The donations are considered “earned” revenue under accrual accounting, even if payment has not yet been received. The journal entry to record this transaction would be:Debit: Cash $5,000 Credit: Donations Revenue $5,000
4. The non-profit organization pays $2,000 in rent for office space. The rent expense is considered “incurred” under accrual accounting, even if payment has not yet been made. The journal entry to record this transaction would be:Debit: Rent Expense $2,000 Credit: Accounts Payable $2,000
5. The non-profit organization purchases new equipment for $20,000 to be used in its programs. The equipment is considered an asset and will be depreciated over its useful life. The journal entry to record this transaction would be:Debit: Equipment $20,000 Credit: Cash $20,000

Evaluation

1. Which of the following is a characteristic of accounting for non-profit organizations? a) Emphasis on profitability b) Focus on maximizing shareholder value c) Emphasis on accountability d) Focus on short-term gains

Answer: c) Emphasis on accountability

2. What is the recommended accounting method for non-profit organizations? a) Cash accounting b) Accrual accounting c) Tax accounting d) Budget accounting

Answer: b) Accrual accounting

3. Which financial statements are commonly used by non-profit organizations? a) Statement of cash flows b) Income statement c) Balance sheet d) All of the above

Answer: d) All of the above

4. Non-profit organizations may rely on which of the following sources of revenue? a) Donations b) Grants c) Fundraising activities d) All of the above

Answer: d) All of the above

5. What is the purpose of financial statements for non-profit organizations? a) To demonstrate profitability b) To track inventory levels c) To report on financial activities and performance d) To comply with tax regulations

Answer: c) To report on financial activities and performance

6. Under accrual accounting, when is revenue recognized? a) When payment is received b) When it is earned c) When expenses are incurred d) When it is convenient

Answer: b) When it is earned

7. Non-profit organizations are accountable to which stakeholders? a) Donors b) Members c) Volunteers d) All of the above

Answer: d) All of the above

8. Which of the following is a specific regulation that non-profit organizations must comply with? a) Generally Accepted Accounting Principles (GAAP) b) International Financial Reporting Standards (IFRS) c) Generally Accepted Auditing Standards (GAAS) d) All of the above

Answer: a) Generally Accepted Accounting Principles (GAAP)

9. Which of the following is an example of a non-profit organization? a) A restaurant b) A clothing store c) A charity d) A software company

Answer: c) A charity

10. What is the purpose of financial stewardship for non-profit organizations? a) To manage resources responsibly b) To maximize profits c) To avoid taxes d) To invest in risky ventures

Answer: a) To manage resources responsibly

 

 

Non-profit-making organizations exist to provide services for their members.

Non-profit organizations are typically focused on providing services or benefits to their members or the community, rather than on making a profit. These organizations may rely on fundraising activities to support their operations and provide additional services or benefits.

Example are. Sports and social clubs, dramatic societies, music clubs, etc.

Making a profit is not their main purpose, although many carry on fund – raising activities to provide more or more services for the members. The organization is owned by all its members and not by just one person or a few of the members.

Records of money received and spent are usually kept by a member who is not a trained bookkeeper or accountant. Besides, these records of money received and spent, usually no other records are kept. Because of this his topics is an extension of incomplete records treated in the previous weeks.

Making a profit is not their main purpose, although many carry on fund – raising activities to provide more or more services for the members. The organization is owned by all its members and not by just one person or a few of the members.

 

Accounting for non-profit organizations can be challenging, as records may be kept by individuals who are not trained in accounting or bookkeeping. However, it is important to maintain accurate records of money received and spent, as well as any other financial transactions, in order to ensure financial stability and accountability.

 

In some cases, non-profit organizations may also be required to file tax returns or other financial reports with government agencies. This further emphasizes the importance of maintaining accurate and complete financial records

 

SPECIAL FEATURES OF THE ACCOUNTS OF NON-PROFIT MAKING ORGANIZATIONS

There are several special features of the accounts of non-profit making organizations that distinguish them from accounts of for-profit organizations. Here are some of the key features:

1. Revenue Recognition: Non-profit organizations may receive revenue from a variety of sources, such as donations, grants, and program fees. Revenue recognition for non-profit organizations is typically based on the accrual method, meaning that revenue is recognized when it is earned, regardless of when it is received.
2. Restricted Funds: Non-profit organizations may receive funds that are restricted for a specific purpose, such as a grant or donation that is designated for a particular program or project. These funds are accounted for separately from unrestricted funds and must be used for their designated purpose.
3. Contributions: Non-profit organizations may receive contributions in the form of donations, grants, and other gifts. These contributions are typically recorded as revenue in the financial statements, and the value of the contribution may need to be estimated for tax and accounting purposes.
4. Expenditures: Non-profit organizations may incur expenses related to their programs, fundraising, and general administration. These expenditures are typically categorized by their function, such as program expenses or administrative expenses, in the financial statements.
5. Financial Statements: Non-profit organizations typically prepare financial statements to report on their financial activities and performance. These statements include a statement of financial position (balance sheet), statement of activities (income statement), and statement of cash flows.
6. Compliance: Non-profit organizations are subject to specific regulations and standards related to accounting and financial reporting, such as the Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board (FASB). Compliance with these standards is crucial for maintaining transparency and accountability

 

 

1. Income and Expenditure Account: Non-profit organizations typically prepare an Income and Expenditure Account to report on their financial activities, rather than a traditional profit and loss account. This statement shows the organization’s income and expenses over a specific period of time and is used to determine whether there is a surplus or deficit of income over expenditure.
2. Surplus of Income Over Expenditure: The term “Surplus of Income Over Expenditure” is used to describe the excess of income over expenses for a non-profit organization, which is similar to the concept of net profit for a for-profit organization.
3. Excess of Expenditure Over Income: The term “Excess of Expenditure Over Income” is used to describe a deficit of income over expenses for a non-profit organization, which is similar to the concept of net loss for a for-profit organization.
4. Accumulated Fund: Non-profit organizations typically use the term “Accumulated Fund” to describe their net assets or reserves, which is similar to the concept of a capital account for a for-profit organization.
5. Trading Account: Non-profit organizations may prepare a trading account for activities that are considered to be in the nature of trading and are carried out to increase the organization’s funds. This account shows the income and expenses related to these activities and helps to determine whether there is a profit or loss. However, not all non-profit organizations engage in trading activities, so a trading account may not be relevant in all cases

Evaluation

1. Non-profit organizations typically prepare an ___________ to report on their financial activities, rather than a traditional profit and loss account. a) Trading account b) Balance sheet c) Income and expenditure account d) Cash flow statement

Answer: c) Income and expenditure account

2. The term “Surplus of Income Over Expenditure” is used to describe: a) A deficit of income over expenses b) The net assets or reserves of a non-profit organization c) The excess of income over expenses d) The trading activities of a non-profit organization

Answer: c) The excess of income over expenses

3. Which of the following is typically used to describe the net assets or reserves of a non-profit organization? a) Accumulated fund b) Capital account c) Trading account d) Income and expenditure account

Answer: a) Accumulated fund

4. Non-profit organizations are typically accountable to: a) Shareholders b) Donors and other stakeholders c) Government agencies d) All of the above

Answer: b) Donors and other stakeholders

5. Which accounting method is recommended for non-profit organizations? a) Cash accounting b) Accrual accounting c) Tax accounting d) Budget accounting

Answer: b) Accrual accounting

6. The financial statements commonly used by non-profit organizations include: a) Statement of cash flows b) Income statement c) Balance sheet d) All of the above

Answer: d) All of the above

7. Non-profit organizations may rely on which of the following sources of revenue? a) Donations b) Grants c) Fundraising activities d) All of the above

Answer: d) All of the above

8. Which of the following is a specific regulation that non-profit organizations must comply with? a) Generally Accepted Accounting Principles (GAAP) b) International Financial Reporting Standards (IFRS) c) Generally Accepted Auditing Standards (GAAS) d) All of the above

Answer: a) Generally Accepted Accounting Principles (GAAP)

9. What is the purpose of financial stewardship for non-profit organizations? a) To manage resources responsibly b) To maximize profits c) To avoid taxes d) To invest in risky ventures

Answer: a) To manage resources responsibly

10. Which statement is commonly used by non-profit organizations to report on their income and expenses? a) Trading account b) Balance sheet c) Income and expenditure account d) Statement of cash flows

Answer: c) Income and expenditure account

 

Double Entry Records For Non Profit Making Organizations

1. A non-profit organization in Nigeria receives a grant of ₦100,000 to fund a specific project. The organization has not yet begun the project, but the grant has been awarded and is considered “earned” revenue under accrual accounting. The journal entry to record this transaction would be:Debit: Cash ₦100,000 Credit: Grant Revenue ₦100,000
2. The non-profit organization incurs ₦50,000 in expenses related to the project mentioned in Example 1. These expenses are considered “incurred” under accrual accounting, even if payment has not yet been made. The journal entry to record this transaction would be:Debit: Project Expenses ₦50,000 Credit: Accounts Payable ₦50,000
3. The non-profit organization receives ₦20,000 in donations from individuals during a fundraising event. The donations are considered “earned” revenue under accrual accounting, even if payment has not yet been received. The journal entry to record this transaction would be:Debit: Cash ₦20,000 Credit: Donations Revenue ₦20,000
4. The non-profit organization pays ₦10,000 in rent for office space. The rent expense is considered “incurred” under accrual accounting, even if payment has not yet been made. The journal entry to record this transaction would be:Debit: Rent Expense ₦10,000 Credit: Accounts Payable ₦10,000
5. The non-profit organization purchases new equipment for ₦30,000 to be used in its programs. The equipment is considered an asset and will be depreciated over its useful life. The journal entry to record this transaction would be:Debit: Equipment ₦30,000 Credit: Cash ₦30,000

THE TREATMENT OF INCOME

1. Subscriptions: Subscriptions are a common source of income for clubs and organizations, and are typically recorded as revenue in the Income and Expenditure Account. To determine the amount of subscription revenue to record, the annual subscription per member is multiplied by the number of members.
2. Subscriptions in Arrears and in Advance: Clubs may have policies for how to treat subscriptions that are in arrears (past due) or in advance (paid early). One approach is to treat these as accruals and prepayments, meaning that the amount owed or paid in advance is recorded as a liability or asset and recognized as revenue or expense when received or paid. Alternatively, clubs may use a cash basis, recording only the amount of subscriptions actually received during the year, regardless of whether they are for the current year, a previous year, or the next year.
3. Bad Debts: If subscriptions are not received after they are due, clubs may choose to write them off as bad debts in the following year. This means that the amount owed is no longer recognized as revenue and is instead recorded as an expense
4. Life Subscription and Entry Fees: Life subscriptions and entry fees are typically received as lump sums when a member joins a club or organization. However, these amounts should not be credited in full to the Income and Expenditure Account when received, as they represent income that will be earned over a period of years.
5. Deferred Income Account: To properly account for life subscriptions and entry fees, the club should create a Deferred Income Account. This account represents the amount of income that has been received but not yet earned, and should be credited when the lump sum is received.
6. Annual Installments: The deferred income should be recognized as revenue in equal annual installments over a period of time determined by the club committee. For example, if the club decides to spread the income over a period of five years, the deferred income should be credited to the Income and Expenditure Account in equal annual installments over a period of five years.
7. Policy Determination: The specific period over which the deferred income should be recognized as revenue is determined by the club committee. This period may vary depending on the nature of the club and the expected lifespan of its members
8. Donations and Legacies: Donations and legacies are gifts of money or property that are given to a club for a specific purpose, such as funding the cost of a new hall or equipment. To properly account for these gifts, the club should create a separate account to record the donation or legacy, and the expenditure related to it.
9. Special Purpose Account: The donation or legacy should be credited to the special purpose account, which is used to record all income and expenses related to the specific purpose of the gift. This account should be separate from the club’s general income and expenditure accounts to ensure that the funds are used for their intended purpose.
10. Expenditure: All expenditures related to the specific purpose of the gift should be debited to the special purpose account. This includes the cost of the hall or equipment that the donation was intended to fund.
11. Separate Bank Account: To further ensure that the funds are used for their intended purpose, the club should create a separate bank account to hold the funds received for the special purpose. This account should only be used for transactions related to the specific purpose of the gift
12. Supporting Activities: Supporting activities are additional activities that a club may engage in to supplement its income from subscriptions. These activities are not the club’s primary purpose, but they are used to generate additional revenue.
13. Trading Activities: If the supporting activities involve trading, such as selling merchandise or holding events that charge admission fees, a Trading Account should be prepared for them as part of the club’s annual accounts. The Trading Account shows the revenue and expenses related to the trading activity, and helps to determine whether there is a profit or loss.
14. Transfer to Income and Expenditure Account: After preparing the Trading Account, the profit or loss from the supporting activities should be transferred to the Income and Expenditure Account. This shows the impact of the supporting activities on the club’s overall financial position and helps to determine whether the club has a surplus or deficit of income over expenditure
15. Supporting Activities: Supporting activities are additional activities that a club may engage in to supplement its income from subscriptions. These activities are not the club’s primary purpose, but they are used to generate additional revenue.
16. Trading Activities: If the supporting activities involve trading, such as selling merchandise or holding events that charge admission fees, a Trading Account should be prepared for them as part of the club’s annual accounts. The Trading Account shows the revenue and expenses related to the trading activity, and helps to determine whether there is a profit or loss.
17. Transfer to Income and Expenditure Account: After preparing the Trading Account, the profit or loss from the supporting activities should be transferred to the Income and Expenditure Account. This shows the impact of the supporting activities on the club’s overall financial position and helps to determine whether the club has a surplus or deficit of income over expenditure

Evaluation

1. Which of the following is typically used to report on the financial activities of a non-profit organization? a) Profit and loss account b) Balance sheet c) Cash flow statement d) Income and expenditure account

Answer: d) Income and expenditure account

2. What is the term used to describe the excess of income over expenses in a non-profit organization’s financial statements? a) Net profit b) Gross profit c) Surplus of income over expenditure d) Trading profit

Answer: c) Surplus of income over expenditure

3. Which of the following is used to describe the net assets or reserves of a non-profit organization? a) Capital account b) Accumulated fund c) Trading account d) Income and expenditure account

Answer: b) Accumulated fund

4. Which accounting method is recommended for non-profit organizations? a) Cash accounting b) Accrual accounting c) Budget accounting d) Management accounting

Answer: b) Accrual accounting

5. What is the purpose of financial stewardship for non-profit organizations? a) To manage resources responsibly b) To maximize profits c) To avoid taxes d) To invest in risky ventures

Answer: a) To manage resources responsibly

6. Which of the following sources of revenue might a non-profit organization rely on? a) Donations b) Grants c) Fundraising activities d) All of the above

Answer: d) All of the above

7. How should life subscriptions and entry fees be recorded in a non-profit organization’s accounts? a) Credited in full to the income and expenditure account when received b) Credited to a deferred income account and recognized as revenue over a period of years c) Debited to the accumulated fund account d) Treated as a trading activity and recorded in a separate account

Answer: b) Credited to a deferred income account and recognized as revenue over a period of years

8. What is the purpose of a Trading Account in a non-profit organization’s financial statements? a) To report on the club’s trading activities b) To calculate the club’s net profit or loss c) To record donations and legacies d) To report on the club’s membership fees

Answer: a) To report on the club’s trading activities

9. How should donations and legacies be recorded in a non-profit organization’s accounts? a) Credited to the income and expenditure account b) Credited to a special purpose account and expended as needed c) Treated as a liability and recorded in the balance sheet d) Credited to the trading account and recognized as revenue

Answer: b) Credited to a special purpose account and expended as needed

10. How should supporting activities be recorded in a non-profit organization’s accounts? a) They do not need to be recorded separately b) They should be credited to the income and expenditure account c) A Trading Account should be prepared for them and any profit or loss transferred to the income and expenditure account d) They should be debited to the accumulated fund account

Answer: c) A Trading Account should be prepared for them and any profit or loss transferred to the income and expenditure account

 

Class work

1. What is the primary purpose of non-profit organizations?
2. What is the difference between a non-profit organization and a for-profit business?
3. What type of accounting method is recommended for non-profit organizations?
4. What is the purpose of the Income and Expenditure Account?
5. What is the difference between the terms “net profit” and “surplus of income over expenditure”?
6. What is the purpose of the Accumulated Fund in non-profit organizations?
7. What is the purpose of a Trading Account in non-profit organizations?
8. How should life subscriptions and entry fees be recorded in non-profit organizations?
9. How should donations and legacies be recorded in non-profit organizations?
10. What is the purpose of financial stewardship in non-profit organizations?

Summary

1. Income and Expenditure Account: Non-profit organizations use an Income and Expenditure Account instead of a Profit and Loss Account. This account records all the income and expenses for the period and shows whether there is a surplus or deficit of income over expenditure.
2. Surplus or Deficit: Non-profit organizations do not have a “net profit” or “net loss” like for-profit businesses. Instead, they have a “surplus of income over expenditure” or “excess of expenditure over income” depending on whether they have earned more or spent more during the period.
3. Accumulated Fund: The Accumulated Fund represents the net assets or reserves of the non-profit organization. It is similar to the capital account in a for-profit business, but it reflects the organization’s overall financial position rather than the investment of individual shareholders.
4. Trading Account: Non-profit organizations may engage in trading activities to supplement their income. If the trading activity is significant, a Trading Account should be prepared to show the revenue and expenses related to the activity.
5. Special Purpose Accounts: Non-profit organizations may receive donations or legacies for a specific purpose, such as building a new facility or funding a specific program. To properly account for these gifts, the organization should create a separate account to record the income and expenses related to the specific purpose. This ensures that the funds are used for their intended purpose and helps to maintain transparency and accountability

 

WEEKEND ASSIGNMENT

1. Which of the following is NOT a source of revenue to a non-profits-making organization? (a) Donation (b) Entry fee (c) fine (d) Provision
2. Subscriptions prepaid is (a) current capital (b) current liabilities (c) fixed asset (d) working capital
3. Subscription outstanding is (a) current asset (b) current liabilities (c) working capital (d) fixed asset
4. The capital of a non-profit organization is referred to as (a) Net profit (b) gross profit (c) accumulated fund (d) net deficiency
5. For a non-profit-making organization the equivalent of a profit and loss account in a profit-making business concern is (a) trading account (b) receipt and payment (c) accumulated fund (d) income and expenditure account

Answers

1. (d) Provision is not a source of revenue for a non-profit-making organization.
2. (b) Subscriptions prepaid is a current liability.
3. (b) Subscription outstanding is a current liability.
4. (c) The capital of a non-profit organization is referred to as accumulated fund.
5. (d) For a non-profit-making organization, the equivalent of a profit and loss account in a profit-making business concern is the income and expenditure account

 

Five special characteristics of the accounts of non-profit-making organizations are:

(i) Income and Expenditure Account: Non-profit organizations use an Income and Expenditure Account instead of a Profit and Loss Account. This account records all the income and expenses for the period and shows whether there is a surplus or deficit of income over expenditure.

(ii) Surplus or Deficit: Non-profit organizations do not have a “net profit” or “net loss” like for-profit businesses. Instead, they have a “surplus of income over expenditure” or “excess of expenditure over income” depending on whether they have earned more or spent more during the period.

(iii) Accumulated Fund: The Accumulated Fund represents the net assets or reserves of the non-profit organization. It is similar to the capital account in a for-profit business, but it reflects the organization’s overall financial position rather than the investment of individual shareholders.

(iv) Trading Account: Non-profit organizations may engage in trading activities to supplement their income. If the trading activity is significant, a Trading Account should be prepared to show the revenue and expenses related to the activity.

(v) Special Purpose Accounts: Non-profit organizations may receive donations or legacies for a specific purpose, such as building a new facility or funding a specific program. To properly account for these gifts, the organization should create a separate account to record the income and expenses related to the specific purpose. This ensures that the funds are used for their intended purpose and helps to maintain transparency and accountability.

2. (i) Subscriptions prepaid: Subscriptions prepaid refers to the receipt of subscription payments for a future period. These payments should not be credited to the income and expenditure account when received. Instead, they should be recorded as a liability until the period for which the subscription has been paid arrives.

(ii) Subscriptions accrued: Subscriptions accrued refers to the subscriptions that have been earned but not yet received. These should be recorded as income in the income and expenditure account for the period to which they relate.

(iii) Donations: Donations are contributions made to the organization for a specific purpose or as a gift. They should be recorded separately and credited to a special purpose account to ensure that the funds are used for their intended purpose. If the donation is for general use, it can be credited to the income and expenditure account. Legacies are similar to donations but are typically made as part of a will or trust. They should also be credited to a special purpose account.

 

GENERAL EVALUATION QUESTIONS

1. List five methods of providing for depreciation of fixed assets
2. State five reasons for making provision for depreciation of fixed assets
3. List eight errors that will affect the agreement of the trial balance
4. Give five reasons for preparing departmental accounts List and explain five classifications of the Ledger

Solution

1. Five methods of providing for depreciation of fixed assets are:

(i) Straight-line method: Depreciation is calculated as a fixed percentage of the asset’s cost each year.

(ii) Diminishing balance method: Depreciation is calculated as a fixed percentage of the asset’s net book value each year.

(iii) Units of production method: Depreciation is calculated based on the asset’s usage or production during the year.

(iv) Sum-of-years-digits method: Depreciation is calculated as a fraction of the asset’s cost, with the fraction decreasing each year.

(v) Annuity method: Depreciation is calculated as a fixed annual amount, with the asset being written off over a predetermined number of years.

 

2. Five reasons for making provision for depreciation of fixed assets are:

(i) To spread the cost of the asset over its useful life.

(ii) To allocate the cost of the asset to the periods in which it generates revenue.

(iii) To provide for the replacement of the asset when it wears out or becomes obsolete.

(iv) To reduce the book value of the asset over time, reflecting its declining value.

(v) To provide for the disposal of the asset when it is no longer needed

3. Eight errors that will affect the agreement of the trial balance are:

(i) Errors of omission: Where a transaction has not been recorded.

(ii) Errors of commission: Where a transaction has been recorded but with an incorrect amount.

(iii) Errors of principle: Where a transaction has been recorded using an incorrect accounting principle.

(iv) Errors of original entry: Where a transaction has been recorded incorrectly in the books of prime entry.

(v) Errors of reversal: Where a transaction has been recorded with the debit and credit reversed.

(vi) Errors of duplication: Where a transaction has been recorded twice.

(vii) Errors of casting: Where the total of a ledger account or a trial balance has been calculated incorrectly.

(viii) Errors of posting: Where a transaction has been recorded in the wrong ledger account

5. Five classifications of the Ledger are:

(i) Asset ledger: This records all the assets of the organization, including fixed assets, current assets, and investments.

(ii) Liability ledger: This records all the liabilities of the organization, including current and long-term liabilities.

(iii) Capital ledger: This records the organization’s capital, including contributed capital and retained earnings.

(iv) Revenue ledger: This records all the revenues earned by the organization.

(v) Expense ledger: This records all the expenses incurred by the organization

Lesson Presentation

Lesson Plan Presentation: Accounting for Non-Profit Making Organizations

Grade Level: SS 2

Subject: Financial Accounting

Objectives:

• To define non-profit making organizations
• To identify the characteristics of the accounts of non-profit making organizations
• To explain the treatment of income and expenses in non-profit making organizations
• To describe the methods of providing for depreciation of fixed assets
• To list the errors that affect the agreement of the trial balance
• To identify the classifications of the Ledger

Materials:

• Whiteboard and markers
• Handouts of examples of non-profit making organizations and their accounts
• Financial accounting textbooks
• Calculators
• Assessment sheets

Introduction (10 minutes)

• The teacher introduces the topic of non-profit making organizations and their accounts
• The teacher explains the importance of understanding the accounting principles of non-profit making organizations

Body (60 minutes)

• The teacher discusses the characteristics of the accounts of non-profit making organizations
• The teacher explains the treatment of income and expenses in non-profit making organizations, including subscriptions, donations, and supporting activities
• The teacher describes the methods of providing for depreciation of fixed assets and the reasons for making provision for depreciation
• The teacher lists the errors that affect the agreement of the trial balance
• The teacher identifies the classifications of the Ledger

Activity (20 minutes)

• The students work in groups to solve practice problems related to the topic
• The teacher monitors the progress of the students and provides guidance where necessary

Conclusion (10 minutes)

• The teacher summarizes the main points of the lesson
• The teacher gives the students assessment sheets to test their understanding of the topic
• The teacher encourages the students to ask questions for further clarification

Assessment:

• The assessment sheets will be used to evaluate the students’ understanding of the topic
• The teacher will also observe the students during the activity session to ensure they are applying the concepts correctly.

Weekly Assessment /Test

1. What is a non-profit making organization?
2. What is the difference between a non-profit making organization and a for-profit business?
3. What is the purpose of an Income and Expenditure Account?
4. What is the Accumulated Fund?
5. What is the Trading Account?
6. What are subscriptions?
7. What is a donation?
8. Why is it important to make provision for depreciation of fixed assets?
9. What are the errors that affect the agreement of the trial balance?
10. What are the classifications of the Ledger?