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Lesson 15 — Non-Profit Organisations

Receipts and Payments Account · Income and Expenditure Account · Accumulated Fund · Subscriptions · Life Membership · Trading Activities | Cambridge A Level Accounting 9706

📘 Lesson 15 of 20
75% complete Paper 1 Paper 3
📌 Prerequisites: A solid understanding of Income Statements and Statements of Financial Position from earlier lessons. You also need to be comfortable with the accruals concept — the conversion from Receipts and Payments to Income and Expenditure is essentially the application of accruals to a cash-based record.

1. What is a Non-Profit Organisation? 9706 / 2.2

A non-profit organisation (NPO) — also called a not-for-profit organisation — exists to serve its members or the community rather than to generate profit for owners. Examples include sports clubs, charities, professional associations, religious organisations and social clubs.

Key Difference from Profit-Making Businesses:
An NPO does not have owners or shareholders seeking a financial return. Any surplus of income over expenditure is retained by the organisation to fund its activities — it is not distributed. Instead of capital, the net assets are represented by the Accumulated Fund. Instead of profit, an NPO reports a surplus (income exceeds expenditure) or deficit (expenditure exceeds income).

Key Terminology Differences

Profit-Making Business Non-Profit Organisation Reason for Difference
Capital Accumulated Fund No owner — net assets belong to the organisation
Profit / Loss Surplus / Deficit Purpose is not profit — terminology reflects mission
Income Statement Income and Expenditure Account Focuses on income vs expenditure, not revenue vs costs
Sales Revenue Subscriptions, donations, grants Main income sources are member fees not trading
Cash Book summary Receipts and Payments Account Simple cash record of actual money received and paid

2. Receipts and Payments Account 9706 / 2.2

The Receipts and Payments Account is a summary of all cash and bank transactions during the year — it is simply a summary of the cash book. It is prepared on a cash basis — only actual cash received and paid is recorded, with no adjustments for accruals or prepayments.

Receipts and Payments Account

  • Cash basis — actual receipts and payments only
  • Includes capital items (equipment purchases)
  • Includes prior year and next year amounts if received/paid this year
  • No depreciation — it is non-cash
  • Starts with opening cash balance
  • Ends with closing cash balance
  • Useful for showing liquidity position

Income and Expenditure Account

  • Accruals basis — income earned and expenses incurred
  • Excludes capital items (shown in SFP instead)
  • Adjusted for accruals, prepayments and subscriptions in arrears/advance
  • Includes depreciation on assets
  • No opening/closing cash balance
  • Results in surplus or deficit
  • More useful for assessing financial performance
📌 Cambridge Exam Point: The conversion from Receipts and Payments to Income and Expenditure is one of the most frequently examined skills in NPO questions. Master the six adjustments: accruals, prepayments, subscriptions in arrears and advance, depreciation, capital items excluded, and trading account items separated.

3. Subscriptions — The Most Examined Area Core Topic

Annual membership subscriptions are the main income of most clubs and NPOs. Because subscriptions may be received in advance (next year's fee paid early) or in arrears (last year's fee still owed), the cash received in any year differs from the income that belongs to that year.

Subscriptions — Finding Income for the Year

Subscriptions Income = Cash received + Closing arrears − Opening arrears − Closing advance + Opening advance Alternatively: Reconstruct the Subscriptions Account as a T-account

📋 Example 1 — Subscriptions Account Reconstruction

Lahore Sports Club 2026 subscription data:
Subscriptions received (cash): $28,500
Subscriptions in arrears at 1 Jan 2026: $800
Subscriptions in advance at 1 Jan 2026: $600
Subscriptions in arrears at 31 Dec 2026: $1,100
Subscriptions in advance at 31 Dec 2026: $500
Annual subscription: $150 per member

⚠️ Check totals: DR total ($30,000) ≠ CR total ($30,200) in this example — this means the I&E income figure needs adjustment. Let me recalculate correctly using the formula:
Subscriptions income = $28,500 + $1,100 − $800 − $500 + $600 = $28,900
💡 T-account rules for subscriptions:
DR side: Opening arrears (b/d) | I&E income | Closing advance (c/d)
CR side: Opening advance (b/d) | Cash received | Closing arrears (c/d)
The I&E income is always the balancing figure on the DR side.

Subscriptions in the Statement of Financial Position

Item SFP Position Reason
Subscriptions in arrears (closing) Current Asset — Receivable Members owe money to the club for this year's subscription not yet paid
Subscriptions in advance (closing) Current Liability — Deferred Income Club owes members next year's membership — received but not yet earned

4. The Accumulated Fund

The Accumulated Fund is the NPO equivalent of capital — it represents the net assets of the organisation accumulated over its lifetime. It is increased by surpluses and reduced by deficits.

Accumulated Fund

Opening Accumulated Fund = Opening Assets − Opening Liabilities Closing Accumulated Fund = Opening Accumulated Fund + Surplus (or − Deficit) Closing Accumulated Fund = Closing Assets − Closing Liabilities (verification)
💡 Finding Opening Accumulated Fund: If no opening balance is given, prepare an opening Statement of Affairs — list all opening assets and liabilities. The difference is the opening Accumulated Fund. This is exactly the same technique as for incomplete records (Lesson 14).

5. Life Membership Exam Focus

Some clubs offer life membership — a single lump sum payment that entitles the member to lifetime membership without further annual subscriptions. The accounting treatment must reflect the accruals concept — the income cannot all be recognised in the year of receipt.

Treatment of Life Membership Fees:
The lump sum received is credited to a Life Membership Fund (a liability/deferred income account). A portion is transferred to the Income and Expenditure Account each year — either:
(a) An equal amount each year over the expected membership period, or
(b) In full immediately, or
(c) Transferred to the Accumulated Fund directly (if the question states this).
📌 Cambridge Treatment: Cambridge 9706 typically requires life membership fees to be credited to a Life Membership Fund (shown as a liability or separately within the Accumulated Fund) and transferred to Income and Expenditure in equal annual instalments over the expected life of membership. The question will specify the treatment — read carefully.

6. Trading Activities — Bar, Canteen and Sales

Many clubs run a bar, canteen, shop or similar trading activity alongside their main purpose. These activities generate their own revenue and costs — they are accounted for separately using a Trading Account, and only the net profit or loss from trading is transferred to the Income and Expenditure Account.

📋 Example 2 — Bar Trading Account

Karachi Cricket Club bar results for 2026:
Bar sales: $18,500 | Opening bar inventory: $1,200
Bar purchases: $11,000 | Closing bar inventory: $900
Bar wages: $3,600 | Bar expenses: $800

Bar Trading Account — Karachi Cricket Club (Year ended 31 Dec 2026)
Bar Sales18,500
Cost of Bar Sales$
Opening inventory1,200
Add: Purchases11,000
Less: Closing inventory(900)
Cost of bar sales(11,300)
Gross Profit on Bar7,200
Bar wages(3,600)
Bar expenses(800)
Net Profit from Bar → transferred to I&E2,800
The net bar profit of $2,800 is shown as an income item in the main Income and Expenditure Account — not the full sales figure. This keeps the I&E Account clean and shows the true contribution of the bar activity to the club's finances.

7. Full Worked Example — Income and Expenditure Account Cambridge Style

📋 Example 3 — Lahore Sports Club: Full I&E Account

The following Receipts and Payments Account has been prepared for Lahore Sports Club for the year ended 31 December 2026:

Receipts and Payments Account — 2026
RECEIPTS$
Opening balance b/d3,400
Subscriptions received28,500
Bar receipts18,500
Donations received2,000
Competition entrance fees1,800
Total Receipts54,200
PAYMENTS$
Bar purchases(11,000)
Bar wages(3,600)
Bar expenses(800)
Groundsman's wages(8,400)
Rent and rates(4,200)
Equipment purchased(6,000)
General expenses(3,100)
Total Payments(37,100)
Closing balance c/d17,100

Additional information:

Item1 Jan 2026 ($)31 Dec 2026 ($)
Subscriptions in arrears8001,100
Subscriptions in advance600500
Bar inventory1,200900
Rent prepaid350420
Groundsman wages accrued700800
Equipment (NBV)12,000—
Depreciation on equipment: 20% straight line on all equipment20% SLM

Workings:

Subscriptions income: $28,500 + $1,100 − $800 − $500 + $600 = $28,900
Rent expense: $4,200 + $420 − $350 = $4,270
Groundsman wages: $8,400 + $800 − $700 = $8,500
Equipment at year end: $12,000 + $6,000 = $18,000. Depreciation: $18,000 × 20% = $3,600. NBV = $14,400
Bar net profit: (from Example 2) = $2,800

Income and Expenditure Account — Lahore Sports Club (Year ended 31 Dec 2026)
INCOME$
Subscriptions (adjusted)28,900
Net profit from bar2,800
Donations2,000
Competition entrance fees1,800
Total Income35,500
EXPENDITURE$
Groundsman's wages (adjusted)(8,500)
Rent and rates (adjusted)(4,270)
General expenses(3,100)
Depreciation on equipment(3,600)
Total Expenditure(19,470)
Surplus for the year16,030
Key observations:
① Bar receipts and payments are removed from the I&E Account — only the net bar profit ($2,800) is shown as income.
② Equipment purchase ($6,000) does not appear in I&E — it is a capital item, shown in the SFP. Only depreciation ($3,600) appears.
③ All income and expense items are adjusted for accruals and prepayments.
④ Donations are treated as income in the year received (unless stated otherwise).

8. Statement of Financial Position for an NPO

The SFP for an NPO follows the same structure as a sole trader — with one key difference: instead of Capital, the equity section shows the Accumulated Fund.

Statement of Financial Position — Lahore Sports Club (31 Dec 2026)
NON-CURRENT ASSETS$
Equipment (NBV: 12,000 + 6,000 − 3,600 dep)14,400
CURRENT ASSETS$
Bar inventory900
Subscriptions in arrears1,100
Rent prepaid420
Bank balance17,100
Total Current Assets19,520
CURRENT LIABILITIES$
Subscriptions in advance(500)
Groundsman wages accrued(800)
Net Current Assets18,220
NET ASSETS32,620
ACCUMULATED FUND$
Opening Accumulated Fund16,590
Surplus for year16,030
Closing Accumulated Fund32,620
💡 Opening Accumulated Fund: This is found from the opening Statement of Affairs. Opening assets − Opening liabilities = Opening Accumulated Fund. Always prepare the opening Statement of Affairs first if it is not given.

9. Memory Aids & Common Mistakes

🧠 Memory Aid — Subscriptions Adjustment

I&E Income = Cash received + Closing arrears − Opening arrears − Closing advance + Opening advance

Think: arrears owed TO the club = asset = add to income earned. Advance held FOR members = liability = deduct from income earned.

🧠 Memory Aid — What Goes in I&E vs SFP

In I&E (revenue items): Adjusted subscriptions · Bar net profit · Donations · Entrance fees · Adjusted wages · Adjusted rent · Depreciation

NOT in I&E (capital items → SFP): Equipment purchases · Loan receipts · Life membership received (unless specifically transferred this year)

⚠️ Mistake 1 — Including equipment purchase in I&E: Equipment purchases are capital expenditure — they appear in the SFP as non-current assets. Only the depreciation on equipment appears in the I&E Account. This is the most common error in NPO questions.
⚠️ Mistake 2 — Including bar sales in I&E instead of net profit: Bar receipts appear in the Receipts and Payments Account but are excluded from the I&E Account. Only the net profit from the bar (after deducting bar costs) is shown as income in the I&E Account.
⚠️ Mistake 3 — Putting subscriptions in arrears as a liability: Subscriptions in arrears (members owe the club) are a current asset — they are money owed TO the club. Subscriptions in advance (club owes members next year's membership) are a current liability. Students frequently confuse these two.
⚠️ Mistake 4 — Using "profit" and "loss" for NPOs: Non-profit organisations report a surplus or deficit — never profit or loss. Using the wrong terminology in an exam answer loses presentation marks and signals a misunderstanding of the organisation's nature.
⚠️ Mistake 5 — Forgetting to adjust for opening accruals/prepayments: When converting cash payments to I&E expenses, always adjust for both opening AND closing accruals and prepayments. Students often adjust for closing balances only, forgetting to reverse the opening balances — which were already included in last year's I&E.

📝 Exam Practice Questions

Question 1 Knowledge — 3 marks Paper 1

State three differences between a Receipts and Payments Account and an Income and Expenditure Account.

Any three of the following (1 mark each):

  • The Receipts and Payments Account is prepared on a cash basis; the Income and Expenditure Account is prepared on an accruals basis.
  • The Receipts and Payments Account includes capital receipts and payments (e.g. equipment purchased, loans received); the I&E Account excludes capital items.
  • The Receipts and Payments Account does not include depreciation (non-cash); the I&E Account includes depreciation as an expense.
  • The Receipts and Payments Account starts and ends with opening and closing cash balances; the I&E Account has no cash balance — it produces a surplus or deficit.
  • The Receipts and Payments Account includes subscriptions actually received in the year; the I&E Account shows subscriptions earned in the year (adjusted for arrears and advances).

Question 2 Application — 5 marks Paper 3

Punjab Athletic Club has the following subscription information for the year ended 31 March 2026:

Item$
Subscriptions received (cash)42,000
Subscriptions in arrears at 1 April 20251,800
Subscriptions in arrears at 31 March 20262,400
Subscriptions in advance at 1 April 2025900
Subscriptions in advance at 31 March 20261,200

(a) Calculate the subscription income for the I&E Account.
(b) State how subscriptions in arrears and advance appear in the SFP.

(a) Subscription income:
= Cash received + Closing arrears − Opening arrears − Closing advance + Opening advance
= $42,000 + $2,400 − $1,800 − $1,200 + $900
= $42,300 (3 marks)

(b) SFP treatment:
Subscriptions in arrears ($2,400) → Current Asset (members owe the club) (1 mark)
Subscriptions in advance ($1,200) → Current Liability (club owes members next year's services) (1 mark)

Question 3 Application — 6 marks Paper 3

Sindh Tennis Club's canteen results for 2026:

Item$
Canteen sales22,400
Opening canteen inventory1,500
Canteen purchases14,200
Closing canteen inventory1,800
Canteen staff wages4,100
Canteen expenses600

Prepare the Canteen Trading Account showing the amount to be transferred to the I&E Account.

Canteen Trading Account — Sindh Tennis Club 2026

Canteen sales                                    22,400
Opening inventory                             1,500
Add: Purchases                                 14,200
Less: Closing inventory                        (1,800)
Cost of canteen sales                          (13,900)
Gross profit                                     8,500
Canteen staff wages                            (4,100)
Canteen expenses                              (600)
Net profit transferred to I&E                3,800
(6 marks — 1 per correct line)

Question 4 Analysis — 3 marks Paper 1

Explain the accounting treatment of life membership fees received by a sports club, applying the accruals concept.

Life membership fees represent payment received in advance for services that will be provided over the member's lifetime. The full amount cannot be recognised as income in the year of receipt because the club has not yet provided the services — this would violate the accruals concept. (1 mark)

The fee received is initially credited to a Life Membership Fund account — shown as a liability (deferred income) or separately within the Accumulated Fund in the SFP. (1 mark)

Each year, an appropriate portion is transferred from the Life Membership Fund to the Income and Expenditure Account as income — recognising the portion of the service provided in that year. The method of annual transfer (equal instalments or full transfer to Accumulated Fund) depends on the club's policy or the instructions given in the question. (1 mark)

Question 5 Analysis — 3 marks Paper 3

A sports club has an Accumulated Fund of $45,000 at the start of the year. During the year, the club reported a surplus of $8,200 and received a life membership fee of $3,000 which was credited directly to the Accumulated Fund as per club policy.

Calculate the closing Accumulated Fund and show it as it would appear in the Statement of Financial Position.

Accumulated Fund — Statement of Financial Position extract

Opening Accumulated Fund                       45,000
Add: Surplus for the year                        8,200
Add: Life membership fee                         3,000
Closing Accumulated Fund                      56,200
(3 marks — 1 per correct line)
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