👋 Welcome to the World of Club Accounts!
Welcome to a really interesting chapter! When we usually talk about Accounting, we think about businesses trying to make a profit. But what happens when an organisation exists purely for its members or for a charitable cause?
This chapter teaches you how to prepare and understand the financial statements for organisations that are Non-Profit Making Organisations (NPMOs), like sports clubs, social clubs, or community centers. They still need careful accounting to manage their money, but their goal isn't profit—it's providing a service!
Don't worry if this seems different; we will use many of the skills you already learned (like accruals and depreciation) and apply them in a slightly new format. Let's dive in!
The Core Difference: Surplus vs. Profit
In traditional for-profit businesses, we calculate Net Profit or Net Loss.
For clubs and NPMOs, we calculate:
- Surplus: This is what a club calls a "profit." It means their income was greater than their expenses for the period.
- Deficit: This is what a club calls a "loss." It means their expenses were greater than their income for the period.
Key Term: The main financial statement used to determine Surplus or Deficit is the Income and Expenditure Account.
Statement 1: The Receipts and Payments Account (The Cash Tracker)
Before diving into the complex statements, clubs often start with a Receipts and Payments Account.
Think of it like this: This statement is simply a summary of the club's bank statement or cash box. It only records actual cash movements (money coming in and money going out) during the accounting period. It ignores non-cash items like depreciation or accruals.
- Receipts (Debit Side): All cash inflows (money received). Example: Subscriptions actually paid, money from the bar, loans received.
- Payments (Credit Side): All cash outflows (money paid). Example: Rent paid, wages paid, purchase of fixed assets.
Important Caveat: The Receipts and Payments Account is useful for tracking cash flow, but it is not the final measure of performance because it doesn't follow the accrual concept.
Statement 2: The Income and Expenditure Account (The Performance Tracker)
This is the most important statement for performance. It adheres strictly to the Accrual Concept, meaning we match income earned and expenses incurred to the period, regardless of when cash was exchanged.
Analogy: Imagine filling a bathtub (the accounting period). The I&E Account measures the water *used* during the period (expenses) and the water *earned* during the period (income), not just the cash that went into or out of the drain on the final day.
Structure:
Income (Revenue items earned)
Less: Expenditure (Revenue items incurred)
= Surplus (Income > Expenditure) or Deficit (Expenditure > Income)
Handling Subscriptions (The Trickiest Part!)
Subscriptions (membership fees) are the main source of income for most clubs and are often the most complex calculation. We must only include the amount of subscriptions earned in the current year.
Step-by-Step Adjustment Process (T-Account Method Recommended):
To find the subscription income for the I&E account, start with the cash received during the year and adjust for amounts owing or paid in advance:
Subscription Income = Cash Received
Add: Subscriptions owing at the end of the year (Accrual, Current Asset)
Less: Subscriptions owing at the start of the year (Accrual, Previous Asset)
Less: Subscriptions paid in advance at the end of the year (Prepayment, Current Liability)
Add: Subscriptions paid in advance at the start of the year (Prepayment, Previous Liability)
Quick Tip Memory Aid: "The current year adjustments are always added if they increase income (End Accrual, Start Prepayment) and subtracted if they decrease income (Start Accrual, End Prepayment)."
Handling Trading Sections (Bar or Canteen)
Many clubs run a small trading section (like a bar or shop) primarily to serve members and generate a small income stream.
We must calculate the profit or loss from this trading section separately using a simple trading account calculation:
Sales Revenue (Bar)
Less: Cost of Goods Sold (Opening Inventory + Purchases – Closing Inventory)
= Gross Profit
Less: Trading Expenses (e.g., Barman's wages, utilities dedicated to the bar)
= Net Profit (or Net Loss) from Trading
This Net Profit from Trading is then transferred and shown as an Income item in the main Income and Expenditure Account.
Handling Other Specific Income Items
- Legacies: A sum of money left to the club in someone's will. If it is a large sum, it is usually treated as a capital receipt and added directly to the Accumulated Fund (see below). If it is a small, routine amount, it may be treated as income in the I&E Account. Follow exam instructions carefully! (In most basic cases, treat capital items like fixed assets and legacies as going to the SFP).
- Donations: Unless specified otherwise, general donations are usually treated as revenue income and included in the Income and Expenditure Account.
- Life Membership Fees: Large, one-off fees paid by members for lifetime access. Because the benefit spreads over many years, the club usually recognizes this income over several years. We only include a fraction of the total life membership fees (e.g., 1/10th or 1/5th) in the current year's I&E Account, treating the remainder as a liability on the SFP.
Calculating Depreciation and Accruals/Prepayments for Expenditure
Just like a normal business, clubs must:
- Include Depreciation as an expense in the Income and Expenditure Account.
- Adjust general expenses (Rent, Insurance, Wages) for any Accruals (owing) or Prepayments (paid in advance) to ensure they reflect the true cost of the current period.
Key Takeaway for I&E: The purpose is to find the true performance (Surplus or Deficit) for the year by applying the accruals concept to *all* revenue and expenditure items.
Statement 3: Statement of Financial Position (SFP)
The SFP (Balance Sheet) for a club looks almost identical to that of a company, showing assets, liabilities, and capital/funds at a specific date.
The crucial difference: Instead of ‘Capital’ owned by the proprietor/shareholders, clubs have the Accumulated Fund.
Calculating the Accumulated Fund (The Club’s Capital)
The Accumulated Fund represents the accumulated wealth (assets minus liabilities) of the club since it began. It acts as the club’s capital.
Often, the opening Accumulated Fund is not provided in the question, meaning you must calculate it first!
Step 1: Calculate Opening Accumulated Fund
Use the financial data provided for the *start* of the year:
\( \text{Opening Accumulated Fund} = \text{Total Opening Assets} - \text{Total Opening Liabilities} \)
(Remember to include fixed assets, opening bank/cash balances, and opening accruals/prepayments related to subscriptions or expenses!)
Step 2: Update the Accumulated Fund for the SFP
Once you have the opening balance, you update it for the current year’s performance:
Accumulated Fund (Opening Balance)
Add: Surplus for the year (from I&E Account)
Less: Deficit for the year (from I&E Account)
Add: Capital items received directly (e.g., large legacies)
= Accumulated Fund (Closing Balance)
Structure of the SFP (Closing Date)
- Non-Current Assets: Fixed Assets (cost minus accumulated depreciation).
- Current Assets: Inventory, Cash/Bank, Subscriptions Owing (Accrued), Prepayments (Insurance paid in advance).
- Current Liabilities: Trade Payables, Accruals (Expenses owing), Subscriptions in Advance (Prepaid).
- Financing: This section includes the final Accumulated Fund and any Non-Current Liabilities (like long-term loans).
Quick Review: The SFP proves that the club's Assets are always equal to its Liabilities plus its Accumulated Fund.
Analyzing and Commenting on Financial Statements
As an accountant, you don't just prepare the numbers; you must interpret them for the committee or members. Your comments should be clear, concise, and focused on the club’s specific goals.
What to Look For and Comment On:
1. Performance (From the Income and Expenditure Account)
-
Overall Result: Did the club achieve a Surplus or a Deficit?
- Comment example: "The club achieved a small surplus of \$5,000 this year, which is positive, but income growth has slowed."
- Trading Profit: Was the bar/canteen profitable? If not, why? (High cost of sales, or high wages?)
- Subscription Strength: Look at the total subscription income. Is it stable, or is there a high level of subscriptions in arrears (owing)? If many members haven't paid, the committee needs to chase them up!
- Cost Control: Are any expenses significantly higher than expected (e.g., electricity or repairs)? Suggest ways to save money.
2. Financial Position (From the SFP)
- Accumulated Fund: Is the Accumulated Fund growing or shrinking? A growing fund indicates financial strength over time.
- Liquidity: Does the club have enough cash/bank balance to cover its short-term liabilities (current liabilities)? This is critical for paying bills promptly.
- Fixed Assets: Has the club invested in new equipment or buildings? (e.g., "The purchase of new kitchen equipment demonstrates investment in the trading section.")
Pro Tip for Commentary: Always link your comments back to the club’s activities. For example, if repairs expense doubled, comment that "This indicates significant maintenance was carried out this year, which should reduce costs next year."
⚠️ Common Mistakes to Avoid
- Mixing Cash and Accruals: DO NOT include fixed asset purchases (capital expenditure) in the Income and Expenditure Account. Only include depreciation.
- Ignoring the Accumulated Fund: If the opening fund is missing, you must calculate it first. This is often the hidden trap in exam questions!
- Subscription Confusion: Remember which adjustments are assets (owing/accrued at end) and which are liabilities (in advance/prepaid at end) for the SFP.
- Ignoring the Trading Section: Do not mix bar purchases and sales with the general club expenses; calculate the profit/loss separately and transfer only the profit/loss to the I&E Account.