Accounting for Clubs and Societies (Non-Trading Organisations)
Hello future accountants! In the previous chapters, we focused on businesses whose main goal is to make a profit (trading organisations, like shops or factories). This chapter introduces us to a different world: Clubs and Societies.
These organisations, often called non-trading organisations, exist to provide services or recreational activities for their members (e.g., sports clubs, chess clubs, charities). They don't aim to make a huge profit, but they absolutely must keep their finances healthy!
Why is accounting for clubs important?
- To prove to members that their money (subscriptions) is being used responsibly.
- To ensure the club remains financially stable (not running into a deficit).
- To help management make decisions about membership fees or future investments.
1. The Difference: Trading vs. Non-Trading
The basic principles of double entry accounting still apply, but the vocabulary changes because the objective is different.
Key Terminology Differences
| Trading Organisation (Goal: Profit) | Non-Trading Organisation (Goal: Service) | |---|---| | Profit (Income > Expenses) | Surplus (Income > Expenses) | | Loss (Expenses > Income) | Deficit (Expenses > Income) | | Owner's Capital or Equity | Accumulated Fund | | Income Statement | Income and Expenditure Account |
Remember the trick: When the club has more money left over, they have a Surplus. If they spend too much, they have a Deficit.
2. The First Financial Report: Receipts and Payments Account
Don't worry if this sounds confusing—the Receipts and Payments Account (R&P) is actually the easiest report to prepare!
What is a Receipts and Payments Account?
This is simply a summary of the Cash Book for the year. It shows all money physically received and all money physically paid out, regardless of when it was earned or incurred.
Analogy: Think of it as a super-detailed, sorted bank and cash statement.
Key Features of the R&P Account:
- It is prepared on a Cash Basis. This means it only includes actual cash movements (money in or out of the bank/cash box).
- It does NOT include non-cash items like depreciation, accruals, or prepayments.
- It starts with the opening balance of Cash and Bank and ends with the closing balance.
Structure Outline (T-Account Format):
| Receipts (Debit Side) | Payments (Credit Side) | |---|---| | Balance b/d (Opening Cash/Bank) | Rent paid | | Subscriptions received (Total cash) | Wages paid | | Sale of assets (Cash received) | Purchase of assets (Cash paid) | | Donations received | Balance c/d (Closing Cash/Bank) |
Quick Review: R&P vs. I&E
The Receipts and Payments Account is only about cash flow. It tells you if the club ran out of money, but it doesn't tell you the true profit (surplus) for the year. For that, we need the Income and Expenditure Account.
3. The Main Report: Income and Expenditure Account
The Income and Expenditure Account (I&E) is the non-trading organisation's equivalent of the Income Statement (or Profit and Loss Account).
What is the purpose of the I&E Account?
Its purpose is to calculate the Surplus or Deficit for the specific accounting period by applying the Matching Concept.
Key Features of the I&E Account:
- It is prepared on an Accrual Basis. This means it includes all income earned and expenses incurred during the year, regardless of whether cash was received or paid yet.
- It includes non-cash expenses, most commonly Depreciation.
- It must include adjustments for Accruals and Prepayments, just like a sole trader.
Don't worry if this seems tricky at first! The hard part is moving from the cash figures in the R&P to the accrual figures needed for the I&E.
Calculation Outline:
Total Income for the Year
Less: Total Expenditure for the Year
= Surplus (Profit) or Deficit (Loss)
4. Dealing with Special Club Income and Activities
Clubs have unique sources of income that need careful handling. The two most common in IGCSE are Subscriptions and Refreshment Trading.
4.1 Subscriptions (The most important adjustment!)
Subscriptions are the annual fees paid by members. They are the club's primary source of revenue. The amount of subscriptions shown in the I&E Account must be the amount earned during that specific year.
Step-by-Step: Finding the Subscriptions for the Year
We need to adjust the total cash received for subscriptions (from the R&P account) to find the amount earned.
The easiest way to do this is by creating a Subscriptions Account (T-Account):
- Start with the Opening Balances:
- Accrued/Owed at Start (Asset): Members who owed money from last year. This is a Debit balance (Balance b/d).
- Prepaid at Start (Liability): Members who paid early last year for this year. This is a Credit balance (Balance b/d).
- Record Cash Received: The total cash received for subscriptions during the year is credited (Bank/Cash).
- Record the Closing Balances:
- Accrued/Owed at End (Asset): Members who owe money for this year. This is a Credit balance (Balance c/d).
- Prepaid at End (Liability): Members who paid early this year for next year. This is a Debit balance (Balance c/d).
- Find the Missing Figure: The balancing figure is the amount transferred to the Income and Expenditure Account (this is the Subscriptions Earned for the year).
Memory Aid (Assets and Liabilities):
Subscriptions Accrued (Owed) are an Asset (money the club is owed).
Subscriptions Prepaid are a Liability (money the club owes a service for).
4.2 Trading Activities (e.g., Refreshments/Bar)
Sometimes, a club runs a small side business, like selling drinks or snacks. Even though the club is non-trading overall, we must calculate the profit (or loss) from this trading section separately.
We prepare a small Refreshments Trading Account (like a mini Income Statement):
Revenue (Sales)
Less: Cost of Goods Sold (Opening Inventory + Purchases – Closing Inventory)
= Gross Profit
This calculated Gross Profit is then transferred into the Income section of the main Income and Expenditure Account.
5. The Statement of Financial Position and the Accumulated Fund
Just like any business, a club prepares a Statement of Financial Position (SOFP) to show its assets, liabilities, and equity (or equivalent) on a specific date.
5.1 The Accumulated Fund (The Club's Equity)
The Accumulated Fund is the club's source of finance. It represents the total wealth of the club—the capital built up over the years through surpluses and donations. It is the equivalent of the owner's capital in a sole trader business.
Step 1: Calculating the Opening Accumulated Fund
You often need to find the opening Accumulated Fund first. You do this by looking at the financial position at the *start* of the year:
Accumulated Fund (Opening) \( = \) Total Assets (Opening) \( - \) Total Liabilities (Opening)
Assets to include: Cash/Bank Balance b/d (Debit), Non-current assets (cost - accumulated depreciation), Inventory, Subscriptions Accrued (Owed).
Liabilities to include: Subscriptions Prepaid, Other Accrued Expenses, Non-current liabilities (if any).
Step 2: Preparing the Statement of Financial Position (SOFP)
The SOFP structure mirrors that of a sole trader, but the final section focuses on the Accumulated Fund.
Content of the SOFP:
- Non-Current Assets: Show cost, accumulated depreciation, and net book value (NBV). Remember to include depreciation from the I&E account.
- Current Assets: Inventory, Cash/Bank (closing balance from R&P), Trade Receivables, Subscriptions Accrued (Owed), Prepaid Expenses.
- Current Liabilities: Trade Payables, Subscriptions Prepaid, Accrued Expenses.
- Non-Current Liabilities (e.g., long-term loans).
- Accumulated Fund:
- Opening Accumulated Fund (calculated in Step 1).
- Add: Surplus for the year (from I&E).
- Less: Deficit for the year (if applicable).
- = Closing Accumulated Fund.
The total (Assets - Liabilities) must equal the Closing Accumulated Fund.
Did you know?
In many countries, non-trading organisations (like charities) receive special tax treatment, but they must still prove their financials clearly, which is why accurate preparation of the I&E account is vital!
6. Summary of Key Concepts and Flow
When preparing financial statements for a club, always follow this order:
Step-by-Step Checklist for Financial Statements
- Calculate the Opening Accumulated Fund: (Opening Assets - Opening Liabilities). This is your starting point for the SOFP.
- Prepare the Trading Account (if applicable): Calculate Gross Profit from Refreshments/Bar sales.
- Calculate Adjusted Income and Expenditure: Focus heavily on the Subscriptions Account to find the *earned* income for the I&E. Include all accruals, prepayments, and depreciation.
- Prepare the Income and Expenditure Account: Determine the Surplus or Deficit for the period.
- Prepare the Statement of Financial Position: Use the Closing Accumulated Fund (Opening AF + Surplus) and the closing balances for all assets (including the closing cash/bank balance from the R&P).
Common Mistake to Avoid:
Do not use the total subscriptions received (the cash figure) in your Income and Expenditure Account. You must use the adjusted figure—the amount earned for the year!
You have successfully tackled one of the most complex areas of IGCSE Accounting! Keep practicing those subscription adjustments, and you'll master Clubs and Societies in no time.