Treatment of Donations, Legacies, Entrance Fees and Other Special Items

A number of items received by a not-for-profit organization need a considered decision on whether they are a revenue receipt (credited to the Income and Expenditure Account) or a capital receipt (added directly to the Capital Fund, or to a specific fund, in the Balance Sheet). The Andhra Pradesh Intermediate Second Year Accountancy course expects a student to apply the following well-established treatment consistently, in the absence of any instruction to the contrary in a question:

Entrance fees / Admission fees. Paid once, by a member on joining. In the absence of any specific instruction, entrance fees are treated as a revenue receipt and credited in full to the Income and Expenditure Account, because the organization admits new members every year as a matter of routine, so the receipt effectively recurs annually even though no individual member pays it twice. (If a question specifically directs that a stated percentage or the whole amount be capitalized, that instruction is followed instead.)

Legacy. An amount received under the will of a deceased person. Since it is non-recurring and akin to a gift left to the organization's corpus, a legacy is treated as a capital receipt and added directly to the Capital Fund in the Balance Sheet, unless a question describes it as a small, recurring legacy meant for revenue purposes.

Life membership fee. A lump sum paid once by a member in place of paying annual subscription for life. As it is meant to relieve the member of a recurring liability forever, it is a capital receipt, added either directly to the Capital Fund or credited to a separate Life Membership Fund shown in the Balance Sheet.

General donation. A donation received without any condition attached is usually capitalized if it is a large, non-recurring amount, or credited to the Income and Expenditure Account if it is a small, recurring amount meant to meet running expenses — the size and recurring nature of the amount, and any wording in the question, decide which treatment applies.

Specific donation. A donation received for a stated purpose (a Building Fund, a Prize Fund) must be used only for that purpose. It is always capitalized — credited to the specific fund account shown as a liability in the Balance Sheet — and is never treated as income, regardless of size.

Sale of a fixed asset. The book value of the asset sold is removed from the asset account (shown in the Balance Sheet at its reduced figure); the difference between sale proceeds and book value — a profit or a loss on sale — is transferred to the Income and Expenditure Account. The sale proceeds themselves are not treated as income. …