Certainly, proper accounting is essential for non-trading institutions.

These concerns
maintain, generally, a cash book and later they prepare a summary of cash transactions
appearing in the cash book. This summary takes the form of an account known as receipts
and payments account.

Such concerns also prepare 'income and expenditure account' (which is more or less on
the lines of profit and loss account) and the Balance Sheet.

The day-to-day accounting consists of maintaining.

(i) Cash book for recording receipts and payments, and

(ii) Ledger for classification of transactions under proper heads.

Receipts and payments account

It is a summary of cash book for a given period, but the Receipts and Payments account
shows the totals of cash transactions under different heads. All the receipts, be cheque or
cash are entered on the debit (receipts) side (as in cash book) whereas all the payments
(both by cheque or cash) are shown on the credit (payments) side. Following features of
the receipts and payments account will help to identify its nature clearly :

1. It is a summary of cash book, like a cash book, receipts are shown on the debit side and

payments on the credit side.

2. Cash and bank items are merged in one column. That means receipts in cash as-well-as
by , cheque are entered in one column on debit and payments in cash as-well-as by
cheque are entered in one column on credit side. Contra entries between cash and bank
get eliminated.

3. It is not a part of double entry book-keeping. It is just a summary of cash book which
is a , part of double entry system.

4. Just like cash book, it starts with the opening balance of cash and bank and closes with
the closing balance of cash and bank.

5. Both revenue and capital receipts and payments are recorded in this account. For
example, ...An organization that is exclusively set up to carryon with the object of
carrying out social service or promo & organization of social activities, is a non-trading
enterprise. payment for rent and payment for building and machinery both are recorded
on its payments side. Similarly, receipts on account of subscription and machinery are
shown on the receipts side.
6. Usually, it shows a debit balance which represents cash in hand and at bank. However,
in case of bank overdraft, which is larger than cash in hand, the account will show a
credit balance.

7. Receipts and payments account fails to disclose gain or loss made by the concern
during the period because (a) it is prepared on actual receipt basis i.e. it records all
receipts-irrespective of the period to which it relates (previous year, current year or
future), (b) it also ignores the nature of the receipts and payments (whether capital or
revenue). I

8. Accounting concept of gain or loss is based on "accrual concept" which by its very
nature "receipts and payments account" is not capable of considering. Therefore, fails to
disclose gain or loss (earned or suffered by the concern) during the period. For example,
this account ignores: !

(i) Decrease or increase i.e. depreciation or appreciation in the value of assets;

(ii) Increase or decrease in the value of stock;

(iii) Provision for expenses incurred but payments not made-outstanding expenses.

(iv) Accounting for payment in advance for the services to be utilized in the next
accounting period-prepaid expenses.
It also fails to distinguish between:

(v) Capital and revenue payments-whether expenditure or purchase of an asset, and

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vi) Business charge and appropriation- whether business expenditure or drawings.

Limitations of receipts and payments account

Receipts and payments account suffers from following limitations :

(a) It does not show expenses and incomes on accrual basis.

(b) It does not show whether the club or society is able to meet its day-to-day expenses
out of its incomes.

(c) It does not show expenses on account of depreciation of assets.

(d) It does not explain the details about many expenses and incomes. In order to explain
such questions, treasurer of the club prepares 'Income and expenditure account' and
balance sheet.

Income and expenditure account

This account is prepared by non-trading concerns who want to know if during the
financial year their income has been more than their expenditure i.e. profit or vice versa
( i.e. loss). Since the object of these concerns is not primarily to' earn profit, therefore,
they feel shy in giving it the name of profit and loss account. Because the word 'profit' is
a taboo which any society 'looks down upon'. Of course, it discloses whether the
concerned institution earned or lost.

It is equivalent to and serves the purpose of 'profit and loss account'.

It is prepared on "accrual basis" (not on receipt basis) meaning thereby that all incomes
are to be included which have been earned in the relevant period (whether actually
received or not). Similarly, it includes all expenses incurred in the relevant period
(whether actually paid or not). This account serves exactly the purpose which 'profit and
loss account' serves in a trading concern. On the pattern of 'profit and loss account'
income is shown on the credit side and expenditure on the debit side. It also distinguishes
between 'capital & revenue' items i.e. it does not take into consideration capital items
{both receipts and payments). It follows double entry principles faithfully.

Balance Sheet

The balance sheet of a non-trading concern is on usual lines. Liabilities on left hand side
and assets on right hand side. In trading concerns, excess of assets over liabilities is
called 'capital'. Here, in non-trading concerns, excess of assets over liabilities is called
'capital fund'. The capital fund is built up out of surplus from income and expenditure
account.

Distinction between "receipts and payments account" and "Income and expenditure
account" :

Receipts and Payments Account

1. It is a real account.

2. It need not be accompanied by a balance sheet.

3. It is like a cash book.

4. Closing balance is carried forward to the next period.

5. Debit side is for receipts and credit side is for payments.

6. Closing balance represents cash in hand and at bank.

7. It includes both capital and revenue items.

8. It usually shows a debit balance.

9. It ignores outstanding items.

10. It ignores credit sales and purchases.

11. It includes prepaid items.

12. It begins with a balance.

13. It includes items relating to past, present or future periods.

14. It is not a part of double entry system.

15. It ignores non-cash items like depreciation, bad debts etc.

Income and Expenditure Account

1. It is a nominal account.

2. Must be accompanied by a balance sheet.

3. It is like a profit & loss account.

4. Closing balance is merged into capital fund.

5. Debit side is for expenses and credit side for incomes.

6. Closing balance represents either surplus or deficiency.

7. It includes only revenue items.

8. It may show a debit or credit balance.

9. It records outstanding items.

10. It records credit sales and purchases.

11. It excludes prepaid items.

12. It does not begin with a balance.

13. It includes items relating to current period only.

14. It is a part of double entry system.

15. It records non-cash items like depreciation, bad debts etc.

Peculiar items of non-trading concern's

Generally, in the exercises, the instructions are given as to the treatment of special items.
Such instructions are based on the rules of the concern. These should be followed while
solving the question. In cases, where no specific instructions are given, the following
guidelines may be considered:

1. Legacy

It is the amount received by the concern as per the 'will' of the 'donor'. It appears
on the receipts side of receipts and payments account. It should not be considered as
income but should be treated as capital receipt i.e. credited to capital fund account.

2. Subscriptions

The members of the associations, as per rules, are, generally, required to make
annual subscription to enable it to serve the purpose for which it was created. It appears
on the receipts side of the receipts and payments account and is, usually, credited to
income. Care must be exercised to take credit for only those subscriptions which are
relevant.

3. Life membership fees

Generally, the members are required to make the payment in a lump sum only once
which enables them to become the members for whole of the life. Life members are not
required to pay the annual membership fees. As 'life membership fees' is a substitute for
'annual membership fees', therefore, it is desirable that life membership fees should be
credited to a separate fund and fair proportion be credited to income in subsequent years.
In the
examination question, if there is no instruction as to what proportion be treated as income
then whole of it should be treated as capital.

4. Entrance fees

This is also an item to be found on the receipts side of receipts and payments account.
There are arguments that it should be treated as capital receipt because entrance fees is to
be paid by every member only once (i.e. when enrolled as memer, hence it is
nonrecurring in nature. But another argument is that since members to be enrolled every
year and receipt of entrance fees is a regular item, therefore, it should -be credited to
income. In the absence of the instructions anyone of the above treatment may be followed
but students should append a note justifying their treatment.

5. Sale of newspapers, periodicals, etc.

As the old newspapers, magazines, and periodicals etc. are to be disposed of every year,
the receipts on account of such sale should be treated as income, and therefore, to be
credited to income and expenditure account.

6. Sale of sports material.

Sale of sports material (used) is also a regular feature of the clubs. Sale proceeds should
be treated as income, and therefore, to be credited to income and expenditure account.

7. Honorarium

Persons may be invited to deliver lectures or artists may be invited to give their
performance by a club (for its members). Any money, paid to invitees, is termed as
honorarium and not salary. Such honorarium represents expenditure and will be debited
to income and expenditure account.

8. Special fund

Legacies and donations may be received for specified purposes. As discussed above,
these should be credited to special fund all expenses related to such fund are shown by
way of deduction from the respective fund and not as expenditure in income and
expenditure account.

9. Sale of old asset

It is a non-recurring item. It cannot be taken to income and expenditure account. It leads

to reduction in asset. Therefore, it is shown by way of deduction from the concerned
asset. It is important to note that it is the "book value" that is to be deducted from asset.
Profit or loss in such a case is taken to income and expenditure account. Where the book
value of asset is nil, the entire proceeds of sale be treated as income.

10. Specific Donations

These are received for specific purpose. For example: Donation for building; Donation
for prizes; Donation for pavilion etc. These are capital receipts and shown on liabilities
side. It is worthy to note that such donations should not be treated as income because if
they are taken to income and expenditure account, it will increase income. The increased
income may be utilized for any other purpose. Thus, the purpose of donation will not be
served. Such donations appear on the liability side because they create a long term
obligation (liability) on the institution. For example a donor may wish that prizes may be
awarded year after year out of the income earned on his donations. Such a donation
account can't be closed within a year by transferring to income and expenditure account.

11. General donations

These donations are not for any specific purpose and being a recurring income they are to
be treated as income and are shown on the income side of income and expenditure
account.

12. Endowment fund

It represents donation for a specific purpose. Here, the object of the donor is to provide a
source of permanent income to the institution. Thus, it is shown in the liability side of
balance sheet. Any income earned during the year in such fund is added to it and any
expenditure incurred during the year is deducted from it.

13. Proceeds of concerts, lectures and dramas or cultural shows

A concert is a program of musical entertainment. Concerts and lectures of eminent

personalities are arranged in aid of charitable Accounts of Non-Trading institutions.
Amount in the income side of institutions. Amount collected from such shows by sale of
tickets is an income of institution and shown in the income side of income and
expenditure account.

14. Govt. grants. These grants are of two types :

(i) Maintenance grants; and

(ii) Development grants.

The maintenance grants are for meeting recurring expenses. These are treated as income
and shown in the income side of income and expenditure account. The development grant
is for acquiring assets. A development grant is a liability.

15. Accumulated (Capital) Fund

All entities, profit seeking on non-profit seeking require money for carrying out their
activities. In business organization such money is called capital while in case of non-
profit organizations it is known by various names such as Capital fund or Accumulated
fund.

It represents the surplus of assets over outside liabilities of the organization. It is usually
made up by special donations; legacies; capitalization of admission fee ; life membership
fee etc. It is increased (or decreased) by any surplus (or deficit) on the Income and
Expenditure account. Some of the lesser known names given to this item are General
fund or Surplus account.
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Back Business What is Accommodation Bills and what are the rules for it?

What is Accommodation Bills and what are the rules for

it?

(Exception I to section 43) Many bills are drawn and accepted without any consideration; the various
parties sign the bills for the purpose of lending their names to oblige their friends. Such bills are called
accommodation bills. An accommodation bill is one for which no consideration has been given by the drawer
to the acceptor for the purpose of accommodating some other party who is to use it and is expected to pay it
when due. The party accommodating is called the “accommodation party”. The party accommodated is
called the “accommodated party”. When a person endorses a bill without consideration, he is called a
“backer” and the operation is called “backing the bill.”

Example:

P is in need of Rs. 2000. He approaches Q for this purpose. Q agrees to help him and proposes P to draw a
bill on him. Which he would accept. P can get the bill discounted with his banker? On or before the due date
P will have to provide Q with the necessary funds to enable him to meet his acceptance. Thus P is in a
position to raise money for the term of the bill. Such a bill which has been drawn and accepted without
consideration is called an accommodation bill.

Rules regarding accommodation bills

1. The accommodation party is liable on the bill to a holder for value. Thus, in the above example, if P
endorses the bill to C, his creditor, C can recover the amount of the bill from Q.

2. An accommodation bill may be negotiated after maturity and the holder of such a bill can recover thereon,
provided he takes it in good faith and for value. (Sec. 59).

3. The drawer is not discharged on account of the non-presentment of accommodation bill to the acceptor
(Sec. 76).

4. In the case of an accommodation bill, the failure to give notice of dishonor will not discharge the prior
parties from liability (Sec.98).
Definition and Explanation of an accommodation bill:
An accommodation bill of exchange is a bill of exchange which has been drawn
for the mutual financial accommodation of the parties involved. Generally it is drawn
not for value received. In order to oblige friends, many times bills are drawn,
accepted and endorsed by businessmen without any consideration. By accepting
such a bill the acceptor is able to lend his name, and the other party (drawer) taking
advantages of the reputation of the acceptor gets it discounted with his bank. After
meeting his aim with this temporary finance, he (drawer) sends back money to the
acceptor thus making it possible for him to meet the bill on the due date. Since such
bills are accepted without consideration, therefore, there is no liability of the
acceptor to the drawer but since the third party takes such a bill for value, therefore,
the acceptor is liable to the third party.

Difference Between Trade Bill and Accommodation

Bill:
Following is the distinction between a trade bill of exchange and an accommodation
bill of exchange.

Trade Bill Accommodation Bill

1 Trade bills are drawn for trade
purposes.
2 These are drawn against proper
consideration.
3 These bills are proof of debt
4 If discounted full sum retains with
holder of the bill
5 For obtaining the debt from drawee,
drawer can resort to legal action.
1 Accommodation bills are drawn and
accepted for financial assistance
2 These are drawn in absence of any
consideration
3 These are not a proof of debt
4 If discounted the amount may be
divided between drawer and acceptor
in pre-determined ratio.
5 Legal action cannot be resorted for
recovery of amount against these
bills by the immediate parties.

The bookkeeping entries in connection with accommodation bills are made in the
same way as for genuine bills. Generally there are three methods of raising money
on accommodation bills. They are as under:

1. When accommodation bill is written for the accommodation of the drawer.

2. When accommodation bill is written for the mutual accommodation of the
drawer and the drawee.
3. When the drawer and the drawee write accommodation bills on each other.

All these bills have been discussed below:

Accommodation of the drawer:
When a bill is written for the accommodation of the drawer then the drawee of the
bill accepts the bill without any consideration and returns the bill to the drawer. The
drawer gets the bill discounted with his bank and uses the amount in his business.
On the due date he remits the amount to the acceptor or the bill to enable him to
honour the bill on the due date.

Example (Accommodation of the Drawer):

A accepts a bill drawn by B for his accommodation on 1st January, 1991 for $500 at
3 months. The bill is discounted $ 490 on 4th January. On due date B sends a
cheque to A to meet the bill. A duly honours his acceptance.

Pass journal entries in the books of both the parties.

Solution:

Journal Entries in the books of B

1991 500
Jan. 1 Bills receivable account 500
To A
(Bills drawn on A)

Jan. 4 Bank account 490

Discount account 10
To Bill receivable account 500
(Bill discounted)

April 4 A 500
To Bank account 500
(Cheque sent to A)

Journal Entries in the books of A

1991
Jan. 1 B 500
To Bill payable account 500
(Acceptance given)

April 4 Cash account 500

 To B 500
(Cheque received)

April 4 Bills payable account 500

To Cash account 500
(Acceptance met)

Accommodation of the Drawer and the Drawee:

When a bill is drawn by one party for the mutual accommodation then the drawee
after accepting the bill returns to the drawer. The drawer gets the bill discounted
with his banker and after retaining the agreed portion of the proceeds of the bill
remits rest of the proceeds to the acceptor of the bill. On the date of maturity the
drawer of the bill remits rest to the acceptor the amount retained by him earlier to
enable the acceptor to honour the bill. The expenses of discount are shared by the
parties.

Example (Accommodation of the Drawer and the Drawee):

For mutual convenience of X and Y, X draws a bill for $1,000 on Y at three months
on 1at January, 1991. The bill is discounted on 4th January by X at 6 per cent per
annum with his bank: half the proceeds being handed over to Y. On the bill falling
due date, X remits $500 by cheque to Y who then pays the bill.

Pass journal entries in the books of X and Y.

Solution:

Journal Entries in the Books of X

1991
Jan. 1 Bills receivable account 1,000
To Y 1,000
(Bill drawn on Y)

Jan. 4 Bank account 985

Discount account 15
To Bills receivable account 1,000
(Bill discounted)

April 4 Y 500
To Cash account 492.5
To Discount account 7.5
(Half the proceeds remitted)

April 4 Y 500
 To Cash account 500
(Cheque sent to him)

Journal Entries in the Books of X

1991
Jan. 1 X 1,000
To Bills payable account 1,000
(Acceptance given)

Jan. 4 Cash account 492.5

Discount account 7.5
To X 500
(Half the proceeds received)

April 4 Cash account 500

To X 500
(Cheque received from him)

April 4 Bills payable account 1,000

To Cash account 1,000
(Acceptance given)

Accommodation Bills Written on Each Other:

In this case both the parties draw bills on each other and get them discounted from
their bankers. On the due date each meets his own bill. The expenses of discount is
to be paid by each on other's bill.

Example (Accommodation bills written on Each Other):

On 1st January 1991 P draws a bill on Q at four months for $500 and Q draws on P
for similar amount and term. Both the bills are accepted and discounted respectively
at 6 per cent. At maturity both the parties meet their respectively acceptances. Show
the journal entries in the books of both the parties.

Solution:

Journal Entries in the Books of P

Jan. 1 Bills receivable account 500
To Q 500
(Bill drawn on Q)

Q 500
To Bill payable account 500
(Acceptance given)
 Bank account 490
Discount account 10
To Bill receivable account 500
(Bill discounted)

May 4 Bill payable account 500

To Cash account 500
(Acceptance met)

Journal Entries in the Books of Q

Jan 1 P 500
To Bill payable account 500
(Acceptance given)

Bill receivable account 500

To P 500
(Acceptance received)

Bank account 490

Discount account 10
To bill receivable account 500
(Bill discounted)

May 4 Bill payable account 500

To Cash account 500