Chapter 2 — Accounts of Not-For-Profit Organisation: Exercise Solutions Guide
How to Use This Page
Read your Samacheer Kalvi textbook chapter first and attempt all exercise questions. Then use this guide to check your answers and understand the reasoning. For NPO accounts, focus on: (1) the distinction between Receipts & Payments and Income & Expenditure, (2) subscription adjustments, and (3) treatment of special items like donations, entrance fees, and legacy. These are the most frequently tested areas in board exams.
Key Concepts (Quick Recap)
- Not-For-Profit Organisation (NPO): Organisations that exist for service (schools, hospitals, clubs) and not for profit. They maintain accounts under the system of double entry.
- Receipts & Payments Account: A summary of all cash transactions — both capital and revenue, current year and past/future years. It starts with an opening cash/bank balance and ends with a closing balance.
- Income & Expenditure Account: A nominal account recording only current-year revenue items. Like a P&L account for NPOs. Credit side = income, debit side = expenditure. Surplus if credit > debit; deficit if debit > credit.
- Capital Fund: The equivalent of capital in a trading concern. It is the accumulated surplus/deficit over the years, shown on the liabilities side of the Balance Sheet.
- Subscription: Membership fees. Only the amount pertaining to the current year is taken to Income & Expenditure. Advance = liability; outstanding = asset.
- Donation: If for a specific purpose (building fund), treat as capital receipt. If general, treat as revenue income.
- Entrance Fee: Generally treated as capital receipt if non-recurring; revenue income if recurring.
- Legacy: A gift received under a will — always a capital receipt.
- Surplus/Deficit: Surplus is added to Capital Fund; deficit is deducted.
I. Choose the Best Answer (MCQs)
1. The Receipts and Payments Account is a: (a) Personal account (b) Real account ✓ (c) Nominal account (d) None of the above
ExplanationIt is a summary of all cash receipts and payments — real in nature because it records only cash transactions (like a cash book summary).
2. The Income and Expenditure Account is a: (a) Personal account (b) Real account (c) Nominal account ✓ (d) None of the above
ExplanationIt records revenue items of the current year, debiting expenses and crediting incomes — hence a nominal account.
3. Subscription received during the year is ₹60,000. Subscription outstanding at the end is ₹5,000 and at the beginning is ₹3,000. Subscription in advance at the end is ₹4,000. Income from subscription for the year is: (a) ₹58,000 ✓ (b) ₹62,000 (c) ₹56,000 (d) ₹64,000
ExplanationSubscription Income = 60,000 − 4,000 (advance at end) + 5,000 (outstanding at end) − 3,000 (outstanding at beginning already received this year) = ₹58,000. Alternatively: Current year subscription = Received − Advance at end + Outstanding at end − Outstanding at beginning that was received this year. But the standard formula: Income = Received + Outstanding at end − Outstanding at beginning − Advance at end = 60,000 + 5,000 − 3,000 − 4,000 = ₹58,000.
4. A donation for a specific purpose (e.g., building fund) is treated as: (a) Revenue income (b) Capital receipt ✓ (c) Deferred revenue (d) Contingent liability
ExplanationDonations for a specific purpose are capital receipts because they are not available for general use and are shown on the liabilities side of the Balance Sheet.
5. Surplus in the Income and Expenditure Account is: (a) Debited to Capital Fund (b) Credited to Capital Fund ✓ (c) Shown as an asset (d) Shown as a liability
ExplanationSurplus increases the Capital Fund, so it is credited (added) to the Capital Fund in the Balance Sheet.
6. Which of the following is NOT shown in the Income and Expenditure Account? (a) Salary (b) Subscription (c) Purchase of furniture ✓ (d) Rent
ExplanationPurchase of furniture is a capital expenditure and appears only in the Receipts & Payments Account and the Balance Sheet, not in the Income & Expenditure Account.
7. Legacy received by an NPO is a: (a) Revenue receipt (b) Capital receipt ✓ (c) Contingent liability (d) Deferred income
ExplanationA legacy is a gift received under a will and is always treated as a capital receipt, added to the Capital Fund.
8. Opening balance of the Receipts and Payments Account represents: (a) Capital fund (b) Cash and bank balances ✓ (c) Surplus (d) Deficit
ExplanationThe Receipts & Payments Account starts with the opening cash and bank balance (like a cash book).
9. Entrance fee is treated as revenue income when: (a) It is a large amount (b) It is recurring in nature ✓ (c) It is received once (d) It is received from life members
ExplanationIf entrance fees are received regularly every year from new members, they are treated as revenue income. If it is a one-time fee, it is a capital receipt.
10. Which account reveals the financial position of an NPO? (a) Receipts and Payments Account (b) Income and Expenditure Account (c) Balance Sheet ✓ (d) None of the above
ExplanationThe Balance Sheet shows assets and liabilities and reveals the financial position. The other two accounts show cash flow and surplus/deficit respectively.
II. Fill in the Blanks
1. The Receipts and Payments Account records both capital and revenue items. 2. The Income and Expenditure Account records only current year revenue items. 3. Excess of income over expenditure is called surplus. 4. Excess of expenditure over income is called deficit. 5. The Capital Fund is the equivalent of capital in a trading concern's balance sheet. 6. Subscription in advance is shown on the liabilities side of the Balance Sheet. 7. Subscription outstanding is shown on the assets side of the Balance Sheet. 8. The Receipts and Payments Account starts with an opening cash and bank balance. 9. Donations for a specific purpose are treated as capital receipts. 10. Legacy is a gift received under a will and is a capital receipt.
III. True or False
1. The Receipts and Payments Account is similar to a cash book. ✓ True — It is a summary of all cash and bank transactions, just like a cash book.
2. The Income and Expenditure Account includes capital items. ✗ False — It records only revenue items of the current year. Capital items like purchase of assets are excluded.
3. Subscription received in advance is an income of the current year. ✗ False — Advance subscription relates to the next year and is shown as a liability, not current-year income.
4. A deficit is added to the Capital Fund. ✗ False — A deficit is deducted from the Capital Fund.
5. Depreciation on assets is shown in the Income and Expenditure Account. ✓ True — Depreciation is a revenue expense and is debited to the Income & Expenditure Account.
6. Sale of old newspapers is a capital receipt. ✗ False — It is a revenue income and is credited to the Income & Expenditure Account.
7. Life membership fee is generally treated as a capital receipt. ✓ True — It is a one-time payment and is capitalised, added to the Capital Fund.
IV. Match the Following
| Column A | Column B |
|---|
| 1. Receipts & Payments A/c | (d) Cash summary |
| 2. Income & Expenditure A/c | (f) Like P&L Account |
| 3. Capital Fund | (a) Like Capital in trading concern |
| 4. Donation for building | (c) Capital receipt |
| 5. Subscription in advance | (b) Current liability |
| 6. Legacy | (e) Capital receipt from a will |
V. Answer Briefly
1. What is a Not-For-Profit Organisation?
Answer
A Not-For-Profit Organisation (NPO) is an organisation formed for providing service to the public or a group, such as schools, hospitals, clubs, and charitable trusts. Their main objective is service, not profit. Any surplus generated is used to further the organisation's objectives, not distributed to members.
2. Distinguish between Receipts & Payments Account and Income & Expenditure Account.
Answer
| Basis | Receipts & Payments A/c | Income & Expenditure A/c | |---|---|---| | Nature | Real account | Nominal account | | Items | All cash receipts and payments (capital and revenue) | Only current-year revenue items | | Period | Current year and past/future years | Only current year | | Balance | Cash/bank balance (debit if positive) | Surplus (credit) or deficit (debit) | | Depreciation | Not recorded | Recorded | | Opening balance | Yes (cash/bank) | No opening balance | | Similar to | Cash book | Profit & Loss Account |
3. How is subscription income calculated for the current year?
FormulaSubscription Income = Subscription received during the year + Outstanding at end − Outstanding at beginning − Advance at end + Advance at beginning - Outstanding at end: subscription due but not received — added (asset) - Outstanding at beginning: received this year but pertains to last year — subtracted - Advance at end: received this year but pertains to next year — subtracted (liability) - Advance at beginning: received last year but pertains to current year — added
4. State the treatment of donation in NPO accounts.
Answer
- General donation (no specific purpose): Treated as revenue income and credited to Income & Expenditure Account. - Specific donation (e.g., for building, for prizes): Treated as capital receipt. Shown on the liabilities side of the Balance Sheet and used only for the specified purpose. - If a specific donation is partly used during the year, the used portion is debited from the fund and the unused portion remains as a liability.
5. How is the Capital Fund calculated?
Answer
The Capital Fund is the equivalent of capital in a trading concern. It is calculated as: Capital Fund = Total Assets − Total Liabilities (at the beginning of the year). It includes the accumulated surplus from previous years. At the end of the year, the current year's surplus is added (or deficit is deducted) to arrive at the closing Capital Fund.
6. What is the treatment of entrance fee in NPO accounts?
Answer
- If the entrance fee is recurring (received every year from new members), it is treated as revenue income and credited to the Income & Expenditure Account. - If it is non-recurring (a one-time fee for life membership), it is treated as a capital receipt and added to the Capital Fund. - In the absence of specific information, it is generally treated as a capital receipt.
7. Write a note on Life Membership Fee.
Answer
Life Membership Fee is a one-time payment made by a member to become a life member of the organisation. Since it is non-recurring in nature, it is treated as a capital receipt and added to the Capital Fund on the liabilities side of the Balance Sheet. It is not credited to the Income & Expenditure Account because it is not a regular annual income.
8. How are outstanding expenses and prepaid expenses treated in NPO accounts?
Answer
- Outstanding expenses (expenses incurred but not yet paid): Added to the relevant expense on the debit side of the Income & Expenditure Account and shown as a liability in the Balance Sheet. - Prepaid expenses (expenses paid in advance): Deducted from the relevant expense on the debit side of the Income & Expenditure Account and shown as an asset in the Balance Sheet.
VI. Answer in Detail
1. Prepare an Income & Expenditure Account and Balance Sheet from the Receipts & Payments Account with adjustments.
GivenReceipts & Payments Account of Chennai Sports Club for the year ended 31.3.2026 | Dr. (Receipts) | ₹ | Cr. (Payments) | ₹ | |---|---|---|---| | Balance b/d (Cash 5,000, Bank 20,000) | 25,000 | Salary | 40,000 | | Subscription | 1,00,000 | Rent | 24,000 | | Entrance fee | 10,000 | Electricity | 8,000 | | Donation (building fund) | 50,000 | Purchase of furniture | 30,000 | | Sale of old newspapers | 2,000 | Investment | 20,000 | | Interest on investment | 5,000 | Printing | 6,000 | | | | Balance c/d (Cash 4,000, Bank 64,000) | 68,000 | | Total | 1,92,000 | Total | 1,92,000 | Adjustments: 1. Subscription outstanding at end: ₹8,000; at beginning: ₹5,000 2. Subscription in advance at end: ₹3,000; at beginning: ₹2,000 3. Salary outstanding: ₹4,000; Rent prepaid: ₹2,000 4. Entrance fee is non-recurring 5. Depreciation on furniture: ₹3,000 6. Capital Fund on 1.4.2025: ₹1,50,000 Income & Expenditure Account for the year ended 31.3.2026 | Dr. (Expenditure) | ₹ | Cr. (Income) | ₹ | |---|---|---|---| | Salary (40,000 + 4,000 outstanding) | 44,000 | Subscription (1,00,000 + 8,000 − 5,000 − 3,000 + 2,000) | 1,02,000 | | Rent (24,000 − 2,000 prepaid) | 22,000 | Sale of old newspapers | 2,000 | | Electricity | 8,000 | Interest on investment | 5,000 | | Printing | 6,000 | | | | Depreciation on furniture | 3,000 | | | | Surplus (transferred to Capital Fund) | 26,000 | | | | Total | 1,09,000 | Total | 1,09,000 | (Note: Entrance fee ₹10,000 and donation for building ₹50,000 are capital items — not taken to Income & Expenditure.) Balance Sheet as at 31.3.2026 | Liabilities | ₹ | Assets | ₹ | |---|---|---|---| | Capital Fund (1,50,000 + 26,000 surplus) | 1,76,000 | Cash | 4,000 | | Add: Entrance fee | 10,000 | Bank | 64,000 | | Add: Donation (building fund) | 50,000 | Outstanding subscription | 8,000 | | Salary outstanding | 4,000 | Furniture (30,000 − 3,000 dep) | 27,000 | | Subscription in advance | 3,000 | Investment | 20,000 | | | | Prepaid rent | 2,000 | | Total | 2,43,000 | Total | 2,43,000 |
2. Explain the treatment of subscription with a worked example.
Answer
Subscription is the most commonly tested item in NPO accounts. The key is to calculate the amount pertaining to the current year only. Worked Example: Tamil Nadu Music Club provides the following subscription data: - Subscription received during 2025-26: ₹80,000 - Subscription outstanding on 31.3.2026: ₹7,000 - Subscription outstanding on 1.4.2025: ₹4,000 - Subscription in advance on 31.3.2026: ₹3,000 - Subscription in advance on 1.4.2025: ₹2,000 Calculation of subscription income for 2025-26: `` Subscription received during the year ₹80,000 Add: Outstanding at end (due this year) ₹7,000 Add: Advance at beginning (received last year, pertains to this year) ₹2,000 --------- Less: Outstanding at beginning (received this year, but pertains to last year) ₹4,000 Less: Advance at end (received this year, pertains to next year) ₹3,000 --------- Subscription income for the year ₹82,000 `` In the Receipts & Payments Account: ₹80,000 (as received) In the Income & Expenditure Account: ₹82,000 (as income for the year) In the Balance Sheet (Assets): Outstanding subscription ₹7,000 In the Balance Sheet (Liabilities): Advance subscription ₹3,000
3. Explain the preparation of a Receipts & Payments Account with a comprehensive example.
Answer
The Receipts & Payments Account is prepared from the cash book. It records ALL cash transactions — capital and revenue, past and future. It starts with the opening cash/bank balance and ends with the closing balance. Worked Example: From the following information of Coimbatore Charity Trust, prepare the Receipts & Payments Account for the year ended 31.3.2026: Opening balances: Cash ₹3,000, Bank ₹25,000 - Subscriptions received: ₹1,20,000 - Donations (general): ₹30,000 - Donation (specific — for building): ₹60,000 - Sale of old furniture: ₹5,000 (book value ₹8,000) - Interest on fixed deposit: ₹6,000 - Entrance fee: ₹10,000 - Life membership fee: ₹15,000 Payments: - Rent: ₹18,000 - Salary: ₹48,000 - Purchase of sports equipment: ₹35,000 - Charity given: ₹25,000 - Postage: ₹3,000 - Printing: ₹5,000 - Investment in fixed deposit: ₹40,000 Closing balances: Cash ₹2,000, Bank ₹38,000 Receipts & Payments Account | Dr. (Receipts) | ₹ | Cr. (Payments) | ₹ | |---|---|---|---| | Balance b/d: Cash | 3,000 | Rent | 18,000 | | Balance b/d: Bank | 25,000 | Salary | 48,000 | | Subscription | 1,20,000 | Sports equipment | 35,000 | | Donation (general) | 30,000 | Charity | 25,000 | | Donation (building) | 60,000 | Postage | 3,000 | | Sale of old furniture | 5,000 | Printing | 5,000 | | Interest on fixed deposit | 6,000 | Investment in FD | 40,000 | | Entrance fee | 10,000 | Balance c/d: Cash | 2,000 | | Life membership fee | 15,000 | Balance c/d: Bank | 38,000 | | Total | 2,74,000 | Total | 2,74,000 | (Note: ALL items are recorded — both capital and revenue, regardless of period. No adjustments are made in this account.)
4. Distinguish between Capital Fund and Surplus.
Answer
| Basis | Capital Fund | Surplus | |---|---|---| | Meaning | Accumulated fund of an NPO over the years | Excess of income over expenditure for a specific year | | Nature | A liability (belongs to members) | Added to Capital Fund | | Where shown | Liabilities side of Balance Sheet | Credited to Income & Expenditure, then transferred to Capital Fund | | Changes | Increases by surplus, decreases by deficit | Calculated annually | | Similar to | Capital in a trading concern | Net profit in a trading concern | | Calculation | Opening assets − Opening liabilities | Income − Expenditure for the current year |
5. Explain the treatment of special items in NPO accounts: donation, entrance fee, legacy, and life membership fee.
Answer
1. Donation: - General donation (no specific purpose) → Revenue income → Credited to Income & Expenditure Account. - Specific donation (e.g., building fund, sports fund) → Capital receipt → Shown on liabilities side of Balance Sheet under the specific fund. 2. Entrance Fee: - Recurring (every year from new members) → Revenue income → Credited to Income & Expenditure Account. - Non-recurring (one-time) → Capital receipt → Added to Capital Fund. - In exam, if not specified, treat as capital receipt. 3. Legacy: - Always a capital receipt → Added to Capital Fund → Shown on liabilities side of Balance Sheet. - It is a gift received under a will and is non-recurring. 4. Life Membership Fee: - Capital receipt → Added to Capital Fund → Shown on liabilities side of Balance Sheet. - Not credited to Income & Expenditure Account because it is a one-time, non-recurring receipt. Worked Example: Madurai Cultural Society received the following: - General donation: ₹25,000 → Income & Expenditure (credit) - Donation for auditorium: ₹80,000 → Balance Sheet (liability — Auditorium Fund) - Entrance fee: ₹10,000 (non-recurring) → Capital Fund (added) - Legacy: ₹50,000 → Capital Fund (added) - Life membership fee: ₹20,000 → Capital Fund (added) In the Income & Expenditure Account, only ₹25,000 (general donation) appears on the credit side as income. The rest are capital items shown on the liabilities side of the Balance Sheet.
6. From the following data, prepare the Income & Expenditure Account and Balance Sheet.
Answer
Receipts & Payments Account of Salem Educational Trust for year ended 31.3.2026 | Receipts | ₹ | Payments | ₹ | |---|---|---|---| | Balance b/d (Cash 2,000, Bank 18,000) | 20,000 | Salary | 55,000 | | Subscription | 90,000 | Rent | 30,000 | | Donation (general) | 20,000 | Stationery | 8,000 | | Sale of old newspapers | 1,500 | Purchase of books | 25,000 | | Interest on investments | 4,000 | Investment | 30,000 | | Tournament fund receipt | 15,000 | Tournament expenses | 10,000 | | | | Balance c/d (Cash 1,500, Bank 68,000) | 69,500 | | Total | 1,50,500 | Total | 1,50,500 | Additional Information: 1. Subscription outstanding at end: ₹6,000; at beginning: ₹3,000 2. Advance subscription at end: ₹2,000 3. Salary outstanding: ₹5,000; Rent prepaid: ₹3,000 4. Depreciation on books: ₹2,000 5. Capital Fund on 1.4.2025: ₹1,20,000 6. Tournament fund: Opening balance ₹5,000; expenses ₹10,000; specific donation ₹15,000 Income & Expenditure Account for year ended 31.3.2026 | Expenditure | ₹ | Income | ₹ | |---|---|---|---| | Salary (55,000 + 5,000) | 60,000 | Subscription (90,000 + 6,000 − 3,000 − 2,000) | 91,000 | | Rent (30,000 − 3,000) | 27,000 | Donation (general) | 20,000 | | Stationery | 8,000 | Sale of old newspapers | 1,500 | | Depreciation on books | 2,000 | Interest on investments | 4,000 | | Surplus | 19,500 | | | | Total | 1,16,500 | Total | 1,16,500 | (Tournament fund items are capital — not taken to I&E. Tournament fund: Opening 5,000 + Receipt 15,000 − Expenses 10,000 = 10,000 shown as liability.) Balance Sheet as at 31.3.2026 | Liabilities | ₹ | Assets | ₹ | |---|---|---|---| | Capital Fund (1,20,000 + 19,500) | 1,39,500 | Cash | 1,500 | | Tournament Fund (5,000 + 15,000 − 10,000) | 10,000 | Bank | 68,000 | | Salary outstanding | 5,000 | Outstanding subscription | 6,000 | | Advance subscription | 2,000 | Books (25,000 − 2,000) | 23,000 | | | | Investment | 30,000 | | | | Prepaid rent | 3,000 | | Total | 1,56,500 | Total | 1,56,500 |
Common Mistakes to Avoid
1. Treating all donations as revenue income — Specific-purpose donations are capital receipts and go to the Balance Sheet, not the Income & Expenditure Account. 2. Including capital items in the Income & Expenditure Account — Purchase of assets, life membership fees, and specific donations are capital items and should NOT appear in the I&E Account. 3. Not adjusting subscription properly — Always add outstanding at end, subtract outstanding at beginning, subtract advance at end, and add advance at beginning. 4. Treating surplus like profit — NPOs have "surplus/deficit," not "profit/loss." Terminology matters in board exams. 5. Forgetting depreciation on assets — Even though cash is not paid, depreciation is an expense and must be debited to the I&E Account. 6. Ignoring the opening Capital Fund — The opening Capital Fund must be calculated (Opening Assets − Opening Liabilities) and shown on the liabilities side before adding surplus.
Exam Checklist
- [ ] I can prepare a Receipts & Payments Account from cash book data
- [ ] I can prepare an Income & Expenditure Account with adjustments
- [ ] I can calculate subscription income with all four adjustments
- [ ] I know the treatment of donation (general vs. specific), entrance fee, legacy, and life membership fee
- [ ] I can prepare a Balance Sheet for an NPO with all adjustments
- [ ] I can distinguish between capital and revenue items in NPO accounts
- [ ] I can handle tournament fund, prize fund, and other specific funds
- [ ] I know the difference between Receipts & Payments and Income & Expenditure accounts
