Accounting for NPOs and Clubs Revision Notes for Grade 11 NSC Matric Accounting

Accounting for NPOs and Clubs

What are non-profit organisations?

Non-profit organisations (NPOs) are special types of organisations that exist to provide services rather than to make profits. Examples include sports clubs, community centres, and youth organisations. These organisations have a management committee that looks after the resources and ensures they benefit the members and the organisation as a whole.

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Even though NPOs don't aim to make profits, they still need to follow proper accounting principles. This means keeping accurate records of all money coming in and going out, preparing financial statements, and managing resources responsibly.

Key features of NPO accounting

NPOs differ from profit-making businesses in several ways:

Purpose: They provide services to members rather than making profits for owners
Management: Run by a management committee (not a board of directors)
Income sources: Main income comes from membership fees, donations, and fundraising activities
Financial statements: They prepare a Receipts and Payments Statement and a Statement of Income and Expenditure instead of an Income Statement

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NPOs still use the same accounting principles as businesses, including:

Recording transactions accurately
Following the accrual concept (matching income and expenses to the correct period)
Preparing proper financial records
Managing assets and liabilities

Accounting for membership fees

Membership fees are the regular amounts that members pay to belong to the organisation. These fees are a major source of income for most NPOs and clubs.

Recording membership fees

When accounting for membership fees, you need to consider several adjustments:

Accrued income (Membership fees owing): This represents fees that members owe but haven't paid yet. These are still income for the current period because members have had the benefit of membership during the year.

Income received in advance: Sometimes members pay their fees early (for the next year). This money shouldn't be counted as income for the current year because it relates to the next period.

Refunds: If members leave the club mid-year or move away, they may be entitled to a partial refund of their fees. These refunds reduce the total membership fee income.

Write-offs: When members are expelled or their debts become uncollectible, their outstanding fees must be written off. This means removing them from the accounts and reducing the membership fee income.

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Worked Example: Membership Fees Calculation

Let's say the Apex Athletic Club charges R600 membership fees per year. Here's how to account for various situations:

Scenario:

300 members on 1 January 20.3
20 new members joined during the year
3 members resigned mid-year
4 members expelled from 1 January 20.2 (fees for 20.2 must be written off)
Secretary and treasurer's fees offset against their honorariums

Calculations:

Total potential members for the year: $300 + 20 = 320$ members

Adjustments needed:

Refunds: 3 members received half their fees back = $3 \times (R600 \div 2) = R900$
Write-offs: Members expelled who owed fees from previous year need their 20.2 fees written off
Offsetting: Secretary and treasurer's membership fees are cancelled against what the club owes them (honorariums)

The General Ledger account for Membership Fees would show:

Debits: Cash received, accrued income from previous year
Credits: Refunds, accrued income for next year, income received in advance, transfers to Income and Expenditure

Trading accounts for stock items

Many NPOs sell items to members, such as club uniforms, tracksuits, or branded merchandise. These trading activities need special accounting treatment because they involve buying and selling goods.

Athletic vests example

A trading account tracks all transactions related to a specific item. For the Apex Athletic Club's vests:

Key information:

Cost price per vest: R105 (remained constant for three years)
Selling price per vest: R140
Purchased from Vestco
Some vests were defective and returned
Some vests were stolen (burglary)
Closing stock: 46 vests on hand

Components of a trading account

The trading account must show:

Opening stock: Value of vests at the beginning of the year (quantity × cost price)
Purchases: All vests bought during the year (from receipts and payments)
Sales: Vests sold during the year (at cost price, not selling price)
Closing stock: Value of vests on hand at year-end (quantity × cost price)
Adjustments: Returns, defective items, theft/shortages
Profit or loss: Calculated as the balancing figure

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Formula for trading account:

\text{Opening Stock} + \text{Purchases} - \text{Closing Stock} = \text{Cost of Sales} \\ \text{Sales (at selling price)} - \text{Cost of Sales} = \text{Gross Profit}

The profit or loss from trading is then transferred to the Statement of Income and Expenditure.

Handling stock problems

Defective items returned: When 10 defective vests are returned to Vestco for R1,050, this creates:

A reduction in stock (credit Athletic Vests account)
A debtor/receivable (debit Vestco or Debtors)
The refund amount goes to bank when received

Theft/shortage: If stock goes missing, you need to:

Calculate expected stock using the formula: $\text{Opening stock} + \text{Purchases} - \text{Sales}$
Compare with actual physical count
Write off the shortage as a loss (debit Shortage account, credit Stock account)

Accounting for tracksuits

Similar to athletic vests, tracksuits require a trading account. Key considerations:

Mark-up and margin: NPOs often sell items at cost price plus a percentage mark-up to cover costs or generate funds.

Cost price plus 40% mark-up means: $\text{Selling price} = \text{Cost} \times 1.40$
Cost price plus 45% mark-up means: $\text{Selling price} = \text{Cost} \times 1.45$

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Credit sales: When tracksuits are sold on credit, you must:

Record the sale at selling price in the Receipts and Payments when cash is received
Record the sale at cost price in the Trading Account
Show debtors for amounts not yet collected

Donations: Sometimes stock items are donated (given free) to management or for fundraising:

Remove from stock at cost price
Do not show as a sale
Record as a donation expense or reduction in stock

Honorariums

An honorarium is a payment made to volunteers who provide services to the NPO. Common positions receiving honorariums include:

Treasurer
Secretary
Chairperson
Coach or trainer

Accounting for honorariums

Honorariums are treated as expenses of the organisation. They may involve:

Accrued expense: If an honorarium is owed but not yet paid:

Show as accrued expense in Balance Sheet
Include full amount in Statement of Income and Expenditure

Offsetting membership fees: Sometimes the treasurer or secretary's membership fee is waived by offsetting it against their honorarium:

Reduces the honorarium expense
Reduces the membership fee income
Shows as a contra entry in both accounts

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Worked Example: Honorarium Calculation

Treasurer's honorarium for the year: R1,800
Membership fee: R600

If offset is applied:

Honorarium expense: $R1,800 - R600 = R1,200$ (amount paid)
Membership fee income: Reduced by R600
Net effect: Club pays R1,200 cash, treasurer doesn't pay membership fee

Accruals and prepayments

Like profit-making businesses, NPOs must apply the accrual concept to match income and expenses to the correct period.

Accrued expenses

Definition: Expenses incurred (used/consumed) during the current period but not yet paid for.

Examples in NPOs:

Honorariums owed to committee members
Utility bills (electricity, water) used but not yet invoiced
Services received but not yet paid

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Accounting treatment:

Add to expenses in Statement of Income and Expenditure
Show as current liability in Balance Sheet

Accrued income

Definition: Income earned during the current period but not yet received.

Examples in NPOs:

Membership fees owing from current year members
Donations promised but not yet received

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Accounting treatment:

Add to income in Statement of Income and Expenditure
Show as current asset in Balance Sheet

Income received in advance

Definition: Money received for services to be provided in the next period.

Examples in NPOs:

Membership fees paid early for next year
Deposits for future events

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Accounting treatment:

Deduct from income in Statement of Income and Expenditure
Show as current liability in Balance Sheet

Stock and inventory management

NPOs that sell goods must properly account for their stock. This includes consumables (items used up) and trading stock (items sold to members).

Consumable stores

Example: Stationery for administration office

Accounting treatment:

Opening stock: Value at beginning of year
Add: Purchases during the year
Subtract: Closing stock (physical count)
Result: Stationery expense for the year

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Trade discounts: When purchasing on credit, deduct trade discount:

\begin{array}{lr} \text{Gross amount:} & R2,000 \\ \text{Less 5\% trade discount:} & R100 \\ \hline \text{Net amount owing:} & R1,900 \\ \end{array}

Physical stock counts

NPOs should regularly perform physical stock counts to:

Verify actual quantities on hand
Identify theft or losses
Ensure accurate records

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Discrepancies: If physical count differs from records:

Investigate the difference
Adjust records to match actual count
Write off shortages as losses
Record surpluses as income (if found extra stock)

Recording NPO transactions

NPOs use the same recording system as businesses but with some special features.

General Ledger accounts

Each type of transaction has its own General Ledger account. Common accounts include:

Membership Fees Account:

Debits: Bank (cash received), Accrued income brought forward
Credits: Refunds, Income received in advance, Accrued income carried forward, Transfer to Income and Expenditure

Trading Accounts (for vests, tracksuits, etc.):

Debits: Opening stock, Purchases (bank/creditors)
Credits: Sales (at cost), Returns, Closing stock, Profit to Income and Expenditure

Honorarium Account:

Debits: Bank (payments made), Accrued expense carried forward
Credits: Accrued expense brought forward, Transfer to Income and Expenditure

Receipts and Payments vs Income and Expenditure

NPOs prepare two main financial statements:

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Statement of Receipts and Payments:

Shows all cash received and paid during the year
Similar to a cash book summary
Does not include accruals or prepayments
Used for controlling cash

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Statement of Income and Expenditure:

Shows income earned and expenses incurred (including accruals)
Similar to an Income Statement for businesses
Includes adjustments for accruals, prepayments, and non-cash items
Shows the surplus (profit) or deficit (loss) for the year

Practical example: Complete accounting process

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Worked Example: Complete Accounting Process

Let's work through a comprehensive example for the Langa Youth Club:

Given information:

12 new members joined, paying R250 entrance fee each
Membership fees for 20.4: R600 was received during 20.3 (in advance)
Outstanding fees for 20.3: R300 received in March 20.4
Current year fees for 20.4: R2,400 received
One member deposited R125 directly in bank account
One member still owes R125

Recording process:

Entrance fees: $12 \times R250 = R3,000$ (income for the year)
Membership fees for 20.4:
- Received in advance (20.3): R600 (liability at start, now income)
- Received during 20.4: R2,400
- Received directly in bank: R125
- Still owing: R125 (accrued income)
- Received for 20.3 (not income for 20.4): R300
Adjustments needed:
- Income received in advance brought forward: R600 (add to income)
- Cash received during 20.4: $R2,400 + R125 = R2,525$
- Accrued income (still owing): R125 (add to income)
- Total membership fee income for 20.4: $R600 + R2,525 + R125 = R3,250$

In the Receipts and Payments:

Show $R300 + R2,525 = R2,825$ (actual cash received)

In Income and Expenditure:

Show R3,250 (income earned for the period)

Special considerations for NPOs

Write-offs and bad debts

When members are expelled or fees become uncollectible:

Remove the amount from Membership Fees (or Debtors)
Write off as an expense or reduction in income
Update membership register to remove these members

Equipment purchases on credit

When NPOs buy equipment using instalment payments:

Full cost is recorded as an asset immediately
Deposit paid reduces creditors
Balance owing shows as creditor (current and non-current portions)

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Worked Example: Equipment Purchase

Three computers at R3,500 each

Total cost: R10,500 (record as asset)
10% deposit paid: R1,050 (reduce creditor)
Balance owing: R9,450 (creditor, payable over 12 months)

Control of assets

NPOs must maintain proper control over their assets:

Keep detailed asset registers
Perform regular physical counts
Investigate discrepancies
Update insurance coverage
Ensure security measures are in place

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Key Points to Remember:

NPOs exist to provide services, not to make profits, but they still follow proper accounting principles and must manage resources responsibly.
Membership fees require careful adjustments for accrued income, income received in advance, refunds, and write-offs to show the correct income for the period.
Trading accounts track buying and selling activities for items like uniforms or merchandise, showing opening stock, purchases, sales (at cost price), and closing stock to calculate profit or loss.
Accruals and prepayments ensure accurate reporting by matching income and expenses to the correct period, regardless of when cash changes hands.
Stock management requires regular physical counts to identify discrepancies, theft, or shortages, and trading stock must be valued at cost price in the Balance Sheet.

Accounting for NPOs and Clubs (Grade 11 NSC Matric Accounting): Revision Notes