Clubs and Non-Profit Making Organisations (NPMOs)
Welcome to one of the most interesting advanced topics in accounting! Up until now, you have focused on businesses that exist to make a profit (like Sole Traders and Limited Companies). This chapter introduces you to the world of Non-Profit Making Organisations (NPMOs), such as sports clubs, societies, and charities.
Don't worry, the double-entry principles you already mastered still apply! The main difference is the terminology and the types of financial statements we prepare. Instead of aiming for 'Profit', these organisations aim to manage their funds effectively to provide maximum service to their members.
1. The Fundamental Difference: Profit vs. Service
A typical business measures success by its profit. A club or NPMO measures success by its ability to provide services to its members without running out of cash or using up all its existing resources.
Key Accounting Terms for NPMOs:
- Revenue Income: Regular income sources used for day-to-day running (e.g., subscriptions, entrance fees, income from a trading activity).
- Capital Income: Large, irregular sources of income intended for long-term use (e.g., large donations for a new building, life membership fees).
- Surplus: What we call 'Profit' in a NPMO. It occurs when income for the period exceeds expenditure for the period.
- Deficit: What we call 'Loss' in a NPMO. It occurs when expenditure for the period exceeds income for the period.
- Accumulated Fund: The equivalent of 'Capital' or 'Equity'. This represents the total net wealth of the club built up since its inception.
Did you know? Even though they are "non-profit," they still calculate a surplus or deficit. A club needs a regular surplus to save for future asset replacement or expansion!
Key Takeaway: NPMOs focus on Surplus (or Deficit) in their Income and Expenditure Account, which acts like an Income Statement, and use an Accumulated Fund in their Statement of Financial Position.
2. The Required Financial Statements
You need to be able to prepare four main types of financial statements for a club.
2.1. Receipts and Payments Account
Think of this account as a highly simplified summary of the organisation's Cash Book or bank movements over the year.
- Basis: Pure Cash Accounting.
- Content: Records all actual cash received (Receipts) and all actual cash paid (Payments) during the period, regardless of when the income was earned or the expense incurred.
- Crucial Exclusion: It does not include non-cash items like depreciation, accruals, prepayments, or bad debts.
- Purpose: To show the movement in the cash/bank balance. It starts with the opening cash/bank balance and ends with the closing cash/bank balance.
Step-by-Step Layout:
Receipts (Debit Side)
Opening Balance (Cash/Bank)
Subscriptions received
Donations received
Sale of old non-current assets (NCA)
(Total Receipts)
Payments (Credit Side)
Salaries paid
Rent paid
Purchase of new NCA
(Total Payments)
Balancing Figure: Closing Balance (Cash/Bank)
2.2. Trading Account (Optional but Important)
Many clubs run auxiliary activities, like a small shop or bar, which are inherently profit-making activities. To accurately calculate the club's overall surplus/deficit, the results of this trading activity must be separated first.
- Purpose: To calculate the Gross Profit (or Loss) from goods sold.
- Transfer: The resulting Gross Profit is transferred as an item of income into the Income and Expenditure Account.
2.3. Income and Expenditure Account (I&E)
This is the most important statement, as it determines the success of the club for the year.
- Basis: Accrual Accounting (This is the key difference from the R&P Account).
- Content: Only records income earned and expenses incurred that relate to the specific financial year.
- Adjustments: Requires adjustments for items like prepaid rent, accrued salaries, and crucially, non-cash items (like depreciation) and subscriptions adjustments.
- Result: Calculates the Surplus or Deficit for the period.
I&E Structure Example:
Income
Subscriptions (Adjusted figure for the year)
Gross Profit from Trading Account
Donations (small, general)
(Total Income)
Less: Expenditure
Salaries and wages (Adjusted)
Rent and rates (Adjusted)
Depreciation of non-current assets
(Total Expenditure)
Result: Surplus (Income > Expenditure) or Deficit (Expenditure > Income)
2.4. Statement of Financial Position (SOFP)
This follows the standard format you are familiar with, but instead of 'Capital', we use the Accumulated Fund.
Equity & Liabilities
Accumulated Fund (Opening Balance)
Add: Surplus (or Less: Deficit)
Add: Capital Income (e.g., Life Membership)
Total Accumulated Fund
Non-Current Liabilities (e.g., long-term loans)
Current Liabilities (e.g., Subscriptions in Advance, Creditors)
Assets
Non-Current Assets (at carrying value)
Current Assets (e.g., Cash/Bank, Subscriptions Due, Inventory)
Quick Review: Statements
- R&P = Cash movements (liquidity check).
- I&E = Accrual basis (surplus/deficit check).
- SOFP = Assets and Liabilities, using the Accumulated Fund.
3. Advanced Calculations: Unique NPMO Items
These specific items are where detailed A-Level questions focus. Mastery of the T-accounts for these items is essential.
3.1. Subscriptions Account (The Crux of the Chapter)
Subscriptions are the main source of regular income. Since the Receipts and Payments account only shows what cash was *received*, we need a T-account (a control account) to find the amount that relates to *this year* for the I&E Account.
The Golden Rule for Subscriptions:
The amount of subscriptions *earned* for the year is the balancing figure that goes into the I&E Account.
Double Entry Approach (T-Account):
Remember that subscriptions owed to the club are Receivables (an Asset, increasing on the Debit side). Subscriptions paid early (Income Received in Advance) are a Liability (increasing on the Credit side).
Subscriptions Account
| Debit (Dr) | Credit (Cr) |
|---|---|
| Balance b/d (Subscriptions Due - Start of year, Asset) | Balance b/d (Subscriptions in Advance - Start of year, Liability) |
| Bank/Cash (Total cash received this year) | Income & Expenditure A/C (The required balancing figure - Income for the year) |
| Balance c/d (Subscriptions in Advance - End of year, Liability) | Balance c/d (Subscriptions Due - End of year, Asset) |
Don't worry if this seems tricky at first!
Just remember the simple rule:3.2. Accounting for Life Memberships
When a member pays a large, one-off fee to be a member for life, this is a form of Capital Income, as it benefits the club over many years. There are two accepted methods for treating this income:
- The Full Capital Method (Most Common): Treat the entire sum as an increase in the Accumulated Fund immediately. It is shown in the SOFP, not the I&E account.
- The Revenue Method (Spreading): If the club estimates a life expectancy, they may spread the income over that period (e.g., 10 years). In this case, 1/10th is transferred to the I&E Account each year, and the remainder is held as a liability (Deferred Income) on the SOFP.
Always check the question for specific instructions, but generally, treat life memberships as a direct increase to the Accumulated Fund unless told otherwise.
3.3. Accounting for Donations
- Small, General Donations: If someone drops a small amount of cash in a collection box, this is Revenue Income and is included directly in the Income and Expenditure Account.
- Large Donations (for Specific Purpose): If a donation is received to buy a specific non-current asset (e.g., $50,000 to buy a new boat), this is treated as Capital Income and is added directly to the Accumulated Fund in the SOFP.
3.4. Calculating the Accumulated Fund (The Starting Capital)
Often, you are not given the opening Accumulated Fund (AF). If the club is new, the AF is zero. If it's an established club, you must calculate it by preparing an opening Statement of Affairs.
A Statement of Affairs is just a simple SOFP prepared at the start of the year (usually Year 1, Day 1) to find the opening capital figure.
\[ \text{Accumulated Fund (Opening)} = \text{Total Opening Assets} - \text{Total Opening Liabilities} \]
This opening AF figure is crucial because it forms the starting balance in the Equity section of your final SOFP.
Common Mistakes to Avoid:
- Do NOT include the Accumulated Fund figure in the Income and Expenditure Account.
- Do NOT include Depreciation or Accruals/Prepayments in the Receipts and Payments Account.
- Remember that Subscriptions Due (Receivable) is a Current Asset, and Subscriptions in Advance (Unearned) is a Current Liability.
Key Takeaway: Subscriptions require careful accrual adjustments via a T-account to determine the annual income. Life memberships and large, specific donations usually bypass the I&E and go straight into the Accumulated Fund.
4. Final Preparation and Commenting
Once you have prepared the Income and Expenditure Account, the Trading Account (if needed), and the Statement of Financial Position, you must be able to comment on the club's financial performance and position.
4.1. Commenting on Performance
- Surplus/Deficit: If there is a Surplus, the club managed its finances well and can save for future needs. If there is a Deficit, expenditure exceeded regular income, which is unsustainable long-term and may require increasing subscription fees.
- Trading Activities: Comment on the gross profit margin of any trading (e.g., the bar). If the margin is low, is the club efficiently managing its cost of sales?
- Liquidity (R&P): Referencing the Receipts and Payments Account, comment on the final cash position. Does the club have enough cash/bank balance to cover immediate expenses?
4.2. Commenting on Financial Position (SOFP)
- Accumulated Fund: A growing Accumulated Fund shows the long-term health and stability of the club.
- Non-Current Assets: Are they maintaining their assets? Look at the depreciation charge and any new asset purchases. A lack of new asset purchases might indicate a failure to invest in the club's future.
The purpose of preparing these accounts is to provide reliable information to the club’s members and management so they can make sound decisions about subscription rates, controlling costs, and future investments!