Preparing the Income and Expenditure Account and Balance Sheet; Capital Fund

Since most Not for Profit concerns keep only a Receipts and Payments Account through the year, the Income and Expenditure Account and the Balance Sheet must be prepared out of it at the year end, using additional information about outstanding and prepaid items. The conversion follows a fixed method — exactly the method the Maharashtra State Board (MSBSHSE) expects every HSC Commerce student to be able to apply to any Receipts and Payments Account given in the Standard XII examination.

Steps in converting a Receipts and Payments Account into an Income and Expenditure Account

1. Ignore the opening and closing balances of cash and bank shown in the Receipts and Payments Account — they belong on the assets side of the Balance Sheet, not in the Income and Expenditure Account at all.
2. Exclude every capital item — proceeds of a loan taken, purchase or sale of a fixed asset, a legacy, or a specific donation meant to be added directly to a fund — from the Income and Expenditure Account; capital items go to the Balance Sheet.
3. Carry only the revenue receipts to the credit (income) side, and only the revenue payments to the debit (expenditure) side, of the Income and Expenditure Account.
4. Adjust each revenue item for the amount outstanding, prepaid, or received/paid in advance, at the beginning and at the end of the year, so that only the portion relating to the CURRENT year is finally shown.
5. Provide for depreciation on fixed assets, and any other non-cash adjustment (such as a provision for doubtful debts on subscriptions), even though these never appear in the Receipts and Payments Account at all.
6. Balance the account. If the credit (income) side exceeds the debit (expenditure) side, the difference is a Surplus; if the debit side exceeds the credit side, the difference is a Deficit.

The Balance Sheet and Capital Fund

A Not for Profit concern's Balance Sheet is prepared in exactly the same "assets = liabilities" format as a trading concern's, with one key difference: since there is no owner and no trading profit, there is no "Capital" account either. In its place, the concern maintains a Capital Fund (also called an Accumulated Fund or General Fund).

Where the Capital Fund at the start of the year is not given directly, it must first be calculated as the balancing figure of the opening Balance Sheet (total assets at the start of the year, minus total liabilities at the start of the year, other than the Capital Fund itself).

The closing Capital Fund is then built up as: …