Introduction to Clubs and Non-Profit-Making Organisations
Welcome to one of the most interesting chapters in Unit 1! While most of the accounting you have studied so far focuses on businesses like sole traders or partnerships that exist to make a profit, this chapter looks at a different world. Clubs and non-profit-making organisations (such as sports clubs, youth centres, or charity groups) exist to provide a service or benefit to their members, not to make money for owners.
Because their goals are different, their terminology and some of their accounts are a bit different too. Don't worry if this seems tricky at first—once you master the Subscription Account, the rest follows the same logic you have already learned!
Key Differences in Terminology
In this chapter, we swap some familiar "business" terms for "non-profit" terms. Using the correct IAS terminology is vital for your exam:
1. Accumulated Fund: This is the equivalent of "Capital." It represents the total "worth" of the club (Assets minus Liabilities).
2. Surplus: Instead of "Profit for the year," we use this term when income is greater than expenditure.
3. Deficit: Instead of "Loss for the year," we use this term when expenditure is greater than income.
4. Subscriptions: The "Revenue" of the club, usually paid by members annually.
Quick Review: Remember, a club doesn't have an "owner" to take drawings, so any surplus stays within the club to improve facilities.
The Three Main Financial Statements
Just like a sole trader prepares a Statement of Profit or Loss, a club prepares three main documents:
1. The Receipts and Payments Account
This is essentially a summary of the Cash Book. It shows all the money that actually came in and went out during the year.
Important Rules:
- It records both Capital and Revenue items (e.g., buying a new clubhouse AND paying the electricity bill).
- It does not include non-cash items like depreciation or irrecoverable debts.
- It does not follow the accruals concept; it only records when cash is physically moved.
2. The Income and Expenditure Account
This is the club's version of a Statement of Profit or Loss. Its purpose is to calculate the Surplus or Deficit for the year.
Important Rules:
- It only records Revenue income and Revenue expenditure.
- It must follow the accruals concept (adjusting for prepayments and accruals).
- It includes non-cash items like depreciation of non-current assets.
3. The Statement of Financial Position
This is very similar to a sole trader's balance sheet. However, instead of the "Capital" section, we have the Accumulated Fund section:
\( \text{Opening Accumulated Fund} + \text{Surplus (or } - \text{Deficit)} = \text{Closing Accumulated Fund} \)
Did you know? If a question doesn't give you the Opening Accumulated Fund, you must calculate it yourself using the formula: \( \text{Total Assets} - \text{Total Liabilities} = \text{Accumulated Fund} \).
Mastering the Subscription Account
Subscriptions are usually the main source of income. Because members pay at different times, you will often deal with Subscriptions in Arrears (Accrued Income - an Asset) and Subscriptions in Advance (Prepaid Income - a Liability).
To find the exact amount of subscription income for the Income and Expenditure Account, it is best to draw a T-account:
The Subscription Account Template
Debit Side (Dr):
- Opening Accrued (Arrears from last year)
- Income and Expenditure Account (The balancing figure!)
- Closing Prepaid (Advance for next year)
Credit Side (Cr):
- Opening Prepaid (Advance from last year)
- Bank/Cash (Total receipts during the year)
- Closing Accrued (Arrears for this year)
Common Mistake to Avoid: Students often mix up whether Arrears is a Debit or Credit. Just remember: Arrears is money owed to the club (an Asset), so an opening Asset always starts on the Debit side!
Trading Accounts within a Club
Many clubs run a bar, restaurant, or shop to raise extra funds. You must prepare a separate Trading Account for these activities to find the profit they generated.
\( \text{Revenue} - \text{Cost of Sales} = \text{Profit from Activity} \)
The Profit from Activity is then transferred as "Other Income" to the main Income and Expenditure Account. If there is a loss of inventory or cash (due to theft or fire), this must be subtracted from the inventory or cash balance and recorded as an expense.
Advanced Topics: Life Membership and Inventory Loss
Life Membership
Sometimes members pay a large one-off fee to be a member for life. The club cannot record all this money as income in one year because that would violate the accruals/matching concept. Instead, the club usually transfers a small portion to the Income and Expenditure account each year, keeping the rest as a Non-current Liability in the Statement of Financial Position.
Loss of Inventory or Cash
If the syllabus mentions a loss of inventory (e.g., through fire or theft):
1. Calculate the value of the lost inventory.
2. Subtract this from the closing inventory in the Trading Account (to ensure the Cost of Sales is accurate).
3. Record the loss as an expense in the Income and Expenditure account (unless covered by insurance).
Summary Checklist for Students
Key Takeaways:
- Receipts and Payments = Cash summary (Capital + Revenue).
- Income and Expenditure = Performance (Revenue only, adjusted for accruals).
- Accumulated Fund = The club's "Capital."
- Subscription Account = Use a T-account to find the income for the year.
- Trading Profit = Calculate separately and move the "profit" to the I&E Account.
Top Exam Tip: Always look for "hidden" opening assets and liabilities (like the clubhouse value or unpaid bills) when calculating the Opening Accumulated Fund. This is a favorite trick of examiners!