Accounting Treatment of Special Items of Non-trading Concerns

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 9, 2021

Several special items are used in the accounts of non-trading concerns (i.e., non-profit organizations). This article highlights the main special items and provides brief explanations.

1. Subscriptions

A subscription is an amount paid by the members of non-trading concerns at regular intervals to keep their memberships active. It is the main and regular source of income for non-profit organizations.

The name of a member may be deleted from the membership roll if they do not pay their subscriptions within a specified time. Normally, subscription payments are made annually.

ACCOUNTING TREATMENT

As noted earlier, subscriptions are the main source of income for non-profit organizations. Therefore, they should be entered as a form of income in the income and expenditure account.

Subscriptions may be received for the previous, current, and next year, and so care should be taken to ensure that only subscriptions relating to the current year are treated as income.

Example

Suppose that 2019 is the current year for which an income and expenditure account is being prepared. How would the following subscriptions appear in the income and expenditure account for 2019?
Subscription List

Solution

Income and Expenditure Accounting After Subscriptions

2. Admission Fee

The admission fee (or entrance fee) is the amount received from new members at the time of their admission, in addition to subscriptions. Every member pays an admission fee only once (i.e., when they become a member).

ACCOUNTING TREATMENT

Accountants are divided on the treatment of admission fees.

Some accountants state that admission fees are received only once from a member, and so they constitute a receipt of a non-recurring nature. Therefore, they should be treated as capital receipts and should be added to the capital fund.

Another opinion is that although admission fees are only received once, membership remains open throughout the year. Each year, many new members are admitted, which leads to a receipt of a recurring nature that should be treated as an income.

Where the admission fee amount is small, some accountants argue that just to cover the expenses of admission, it should be treated as a revenue receipt and should be recorded on the income side of the income and expenditure account.

3. Sale of Newspapers

Old newspapers and periodicals (magazines) are sold at regular intervals. The amount realized in this way is very nominal and recurring in nature.

ACCOUNTING TREATMENT

It is a revenue receipt and treated as an income. Therefore, it should be credited to the income and expenditure account.

4. Sale of Old Sports Materials

In sports clubs, this is a routine activity due to the fact that sports materials and equipment age with extensive use.

ACCOUNTING TREATMENT

Proceeds from the sale of old sports materials are revenue receipts and should be credited to the income and expenditure account.

If, however, depreciation is charged on sports material, then sports materials are an asset. In this case, the sale of old sports materials will be deducted from sports materials on the assets side of the balance sheet.

5. Donations

A donation is an amount or item received by way of a gift from members and the general public. The number of subscriptions may not sufficient to meet the expenses of a non-trading concern, and this is why they often seek to receive donations.

Donations may be received for general or specific purposes. For example, donations are often received by universities and other organizations for the construction of new buildings.

ACCOUNTING TREATMENT

If the donation is received for any specific purpose, it will be treated as a capital receipt and will be recorded on the liabilities side of the balance sheet.

If the donation is not for a specific purpose and the amount received is not a fairly large amount, it will be treated as an income and recorded on the income side of the income and expenditure account.

6. Life Membership Fee

Sometimes, an organization offers its members the chance to become lifetime members by paying a lump sum. This fee is known as a Life Membership Fee.

ACCOUNTING TREATMENT

There are several ways that accountants may treat life membership fees.

First, the amount received as a life membership fee may be treated as a capital receipt. This is because organizations will have to provide services to these members for their lifetime. In this case, the amount of the life membership fee will be recorded as a liability in the balance sheet.

In addition, an amount equal to an annual subscription is transferred every year to the income and expenditure account as an income. The balance will be shown as a liability in the balance sheet.

Second, if the amount of the life membership fee is small, then it may be treated as an income.

When a specific direction has been given, it should be treated accordingly.

7. Legacy

The amount or property received by non-trading concerns by way of the will of a deceased person is called a legacy. It is a non-recurring receipt by nature.

ACCOUNTING TREATMENT

It is a capital receipt and will be added to the capital fund on the liabilities side of the balance sheet.

8. Special Subscriptions

The additional amount collected from members for some special purposes is called a special subscription. A special fund is created and a special subscription is transferred to this fund (e.g., building fund, tournament fund, and prize fund).

ACCOUNTING TREATMENT

The amount of the special subscription is credited to the special fund that is recorded as a liability in the balance sheet.

Any expenses out of these funds will be deducted from the special fund in the balance sheet. Also, they will not be recorded as expenses in the income and expenditure account.

9. Sale of Assets

Some non-trading concerns sell old assets (e.g., old furniture or equipment). These sales are non-recurring in nature.

ACCOUNTING TREATMENT

Sale of assets is not an income; rather, it is a decrease in assets and will be deducted from the respective assets in the balance sheet.

Any loss on the sale of an asset is recorded on the debit side of the income and expenditure account.

Any profit on the sale of assets will be added to the capital fund on the liabilities side of the balance sheet.

10. Honorarium

An honorarium is a token payment made to a person who is invited to give a lecture or to perform for the members of the non-profit organization. For example, an honorarium payment may be made to a singer or renowned scholar.

ACCOUNTING TREATMENT

An honorarium is a revenue payment and, being an expense, will be recorded on the debit side of the income and expenditure account.

11. Purchase of Newspapers and Periodicals

This recurring expense should be recorded on the expenditure side of the income and expenditure account.

12. Purchase of Sports Materials

In organizations such as sports clubs, sports material is consumed over a short time period. Therefore, buying and selling sports materials is a routine activity for these clubs.

ACCOUNTING TREATMENT

Purchase of sports materials is treated as revenue expenditure and is recorded as an expense on the debit side of the income and expenditure account If, however, depreciation is charged on sports material, it is treated as an asset.

13. Depreciation

Depreciation is the permanent and gradual decrease in the value of fixed assets due to usage and general wear and tear.

ACCOUNTING TREATMENT

This is an item of revenue expenditure and will be recorded on the debit side of the income and expenditure account.

14. Capital Fund

The capital of a non-trading concern consists of the contributions of the members, special donations, admission fees, and the transferring of surplus. Thus, the excess of total assets over total liabilities in non-trading concerns is called the capital fund.

ACCOUNTING TREATMENT

Just like the capital of trading concerns, the capital fund is recorded on the liabilities side of balance sheet. Surplus is added to it and deficit is deducted from it.

15. Unrestricted Fund

An unrestricted fund is at the disposal of the management committee of a non-trading concern. It is available for use as authorized by the management committee.

16. Restricted Fund

Funds that can only be used by donors are known as restricted funds.

17. Endowment Fund

To “endow” is to provide a permanent income for something. An endowment fund is one where the principal is retained in an income-producing investment for an indefinite time period.

ACCOUNTING TREATMENT

Endowment funds, like other funds, are treated as liabilities. Investments made from endowment funds are treated as assets. Additionally, interest on the investment of endowment funds is treated as an income.

18. Annuity Fund

An annuity fund is a fund established by non-trading concerns to make specified payments periodically for a particular period for the assets received.

19. Loan Fund

Non-profit organizations use loan funds to grant loans to members.

20. Agency Fund

This fund is created with the amount held by the non-profit organization as a custodian. An example is a fund established using the security deposits of the members. This would be shown as a liability on the balance sheet.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

1 thought on “Accounting Treatment of Special Items of Non-trading Concerns”

  1. Very clear and easy understanding about non-profit making account, can you show the T-account for the subscription received?
    I am not ok with the Advance and prepaid in this account. Thank you.

    Reply

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