Non-Trading Concerns

Accounting for Non-Trading Concerns:
Definition and Explanation of Nontrading Concerns:
Individuals or institutions with activities other than trade are known as non-trading concerns. Examples of nontrading concerns are clubs, hospitals, libraries, colleges, athletic clubs etc.
These institutions are started not for carrying on a business and making a profit but for some charitable, religious or similar purpose. Their income, which is derived from donations, subscriptions, entrances fees etc., is spent on the objects for which they are started.

Final Accounts of Non-Trading Concerns:
Non-trading concerns usually maintain their accounts by the double entry system and periodically prepare their final accounts for the submission to their members and subscribers.
The method of preparing final accounts by non trading concerns is different than trading concerns. As these concerns do not deal in any goods like trading concerns, so they cannot prepare a trading and profit and loss account. At the end of the year they make out an account called an Income and expenditure account and balance sheet. The Income and expenditure account serve the same purpose as the profit and loss account in the case of trading concerns and is made out exactly in the same manner.
Usually the non-profit making institutions do not maintain a full set of books but merely a cash book in which all receipts and payments are entered. At the end of the year the cash book is summarised under suitable heads and the summary thus prepared is called a Receipt and Payment Account.  In order to know the result of the year's working it should be converted into Income and expenditure account.
Receipt and Payment Account:
Learning Objectives:

1. Define and explain receipt and payment account.
2. Why a receipt and payment account is prepared?
3. Prepare a receipt and payment account.

Definition and Explanation:
Receipt and payment account is a mere summary of cash book for a year. It begins with the cash in hand at the commencement and ends with that at the close of the year. Similarly to cash account, in receipts and payments account receipts are shown on the debit side while payments are shown on the credit side, without any distinction between capital and revenue. Moreover, it does not include an unpaid expenditure not any unrealized income relating to the period under review and so fails to reveal the financial position on the concern.
Format of Receipt and Payment Account:

Receipts	$	Payments	$

Example:

Receipt and Payment Account

Receipts	$	Payments	$
To Balance b/d To Annual subscription To Life membership fees To Entrance fees To interest on securities To sundry receipts	1,240 1,630 250 240 180 50	By general expenses By salaries and wages By furniture By rent, rates & taxes By printing & stationary By Repairs By Balance c/d	550 550 800 500 125 150 915
	3,590		3,590

Difference Between Receipts and Payments Account and Income and Expenditure Account:

Learning Objectives:

1) What is the difference between receipt and payment account and income and expenditure account?

Receipts & Payment Account		Income & Expenditure Account
1	It is a summary of the cash book	1	It takes the place of profit and loss account in non-trading concerns.
2	It begins with an opening balance and ends with a closing balance.	2	Does not commence with any balance
3	It records all sums received and paid whether they relate to revenue or capital items	3	It includes revenue items only
4	It include all sums actually received during the year whether they relate to the past, current or next year.	4	It includes the items relating to year for which it is prepared. Provision is made for all outstanding expenses and accrued income.
5	The receipts are shown on the debit side and the payments on the credit side.	5	Income is shown on the credit side and expenses on the debit side.
6	It simply ends with a closing balance of cash and does not show the result for the period.	6	It definitely shows whether there has been an excess of income over expenditures or vice versa.
7	It is not accompanied by a balance sheet.	7	It is always accompanied by a balance sheet.

Income and Expenditure Account:

Learning Objectives:

1. Define and explain income and expenditure account.
2. What is the purpose of preparing income and expenditure account?

Definition and Explanation:

Income and expenditure account is merely another name for profit and loss account. Such type of profit and loss account is generally adopted by non trading concerns like clubs, societies, hospitals, and like etc. This account is credited with all earnings (both realized and unrealized) and debited with all expenses (both paid and unpaid) The difference represents a surplus of deficiency for a given period which is carried to the capital account. It should be noted that items of receipts or payments of capital nature such as legacies, purchases or sales of any fixed assets must not be included in this account.

How to Convert a Receipt and Payment Account into Income and Expenditure Account:

The following steps will be necessary to convert a receipt and payment accountinto an income and expenditure account:

1. Opening and closing balances of receipt and payment account should be excluded.
2. All items of capital receipts and payments should be excluded.
3. All incomes of previous years or for years to come should be excluded.
4. All expenditures of previous years and years to come should be excluded.
5. All accrued income and outstanding expenditures relating to the period should be included.
6. Item such as bad debts, depreciation, etc. will have to be provided.

Treatment of Peculiar Items:

Generally in exercises the instructions are given as to the treatment of special items. Such instructions are based on the rules of the concern. These should be followed while solving questions. Incases where no specific instructions are given the following guidelines may be considered.

Legacy:

It is the amount received by the concern as per the will of the donor. It appears in the receipt side of receipt and payment account. It should not be considered as as an income but should be treated as capital receipt i.e., credited to capital fund account.

Donation:

Amount received from any source by way of gift is described as donation. It appears on the receipts side of receipt and payment account. Donations are usually credited to income. Rules of the association may provide that a part of donations are to be treated as capital. However, if donations are received for a specific purpose viz., building, free dispensary etc., then it should require special treatment. Donations for specific purposes should not be credited to income and expenditure account. Similarly donations representing heavy amount may also be treated as capital receipts.

Subscription:

The members of the associations, as per rules, are generally required to make annual subscription to enable it to serve the purpose for which it was created. It appears on the receipts side of the receipt and payment account and is usually credited to income. Care must be exercised to take credit for only those subscriptions which are relevant.

Life Membership Fees:

Generally the members are required to make the payment in a lump sum only once which enables them the members for whole of life. Life members are not required to pay the annual membership fees. As life membership fees is substitute for annual membership fees therefore, it is desirable that life membership fees should be credited to separate fund and fair portion be credited to income in subsequent years. In the examination question if there is no instruction as to what portion be treated as income then whole of it should be treated as capital.

Entrance Fees:

Entrance fees is also an item to be found on the receipt side of receipts and payments account. There are arguments that it should be treated as capital receipt because entrance fees is to be paid by every member only once (i.e., when enrolled as member) hence it is non-recurring in nature. But another argument is that since members to be enrolled every year and receipt of entrance fees is a regular item, therefore, it should be credited to income. In the absence of the instructions any one of the above treatment may be followed but students should append a note justifying their treatment.

Sale of News Papers, Periodicals etc.

As the old newspapers, magazines, and periodicals etc. are to be disposed of every year, the receipts on account of such sales should be treated as income, and therefore to be credited to income and expenditure account.

Sales of Sports Material:

Sale of support materials (used) is also a regular feature of the clubs. Sales proceeds should be treated as income, and therefore to be credited to income and expenditure account.

Honorarium:

Persons may be invited to deliver lectures or artists may be invited to give their performance by a club (for its members). Any money so paid is termed as honorarium and not salary. Such honorarium represents expenditure and will be debited to income and expenditure account.

Special Fund:

Legacies and donations may be received for specified purchases. As discussed above these should be credited to special fund and all expenses related to such fund are shown by way of deduction from the respective fund and not as expenditure in income and expenditure account.

Capital Fund:

Any concern - whether profit seeking or non profit seeking - requires money for conducting day to day functions. In the case of profit seeking concerns such money is called "capital", while in the case of non - profit seeking concerns it is called "capital fund". The excess of total assets over total external liabilities of a concern is called capital fund. Capital fund is created with surplus revenue and capital receipts and incomes. It is shown on liabilities side of balance sheet.

Format of Income and Expenditure account:

Income and Expenditure Account

Expenditures	$	Income	$

Example:

Prepare income and expenditure account and balance sheet form the following receipt and payment account of a nursing society.

Receipt and Payment Account

Receipts	$	Payments	$
To Balance at bank - 1-7-90 To Subscriptions To Fees from non members To Municipal grant To Donation for building fund To Interest	2,010 1,115 270 1,000 1,560 38	By Salaries of nurses By Board, laundry and domestic help By Rent, rates and taxes By Cost of car By Car expenses By Drugs and incidental exp. By Balance c/d	656 380 200 2,000 840 670 1,247
	5,993		5,993

The society owns freehold land costing $8,000 on which it is proposed to build the nurse's hostel. A donation of $100 received to building fund was wrongly included in subscription account. A bill for medicine purchased during the year amounting to $128 was outstanding.

Solution:

Nursing Society
Income and Expenditure Account

Expenditures	$	Income	$
To Salaries of nurses To Board, laundry and   domestic help To Rent, rates and taxes To Cost of car To Car expenses To Drugs and incidental exp. To Outstanding expenses	656 380 200 2,000 840 670 798	By Subscriptions         1,115     Less Wrong inclusion  100 By Fees from non members By Municipal grant By Interest By Deficit	1,015 270 1,000 38 551
	2,874		2,874

Nursing Society
Balance Sheet on 31st December, 1991

Liabilities	$	Assets	$
Building fund      1,560 Add omission      100 Outstanding expenses Capital fund     10,010 Less deficiency     551	1,660 128 9,459	Cash Motor car Land	1,247 2,000 8,000
	11,247		11,247

Calculation of  Capital Fund:

Capital fund on 1st July, 1990 is ascertained as under:

Land	8,000
Cash	2,010
Capital fund	10,010

Accounting For Ventures / Joint Venture Accounts:

Learning Objectives:

1. Define and explain the terms consignment, consignor and consignee.
2. What is the difference between consignment and sale?
3. Make journal entries in the books of consignor and that of consignee.
4. Prepare consignment account and consignee's account in the books of consignor.

Definition, Explanation and Examples of Joint Venture:

Learning Objectives:

1. Define and explain the terms joint venture.
2. What the advantages or benefits of joint venture.

Definition:

A joint venture is a temporary partnership of two or more persons engaged in any particular business adventure of enterprise of short or seasonal duration.

Examples of Joint Venture:

It may be in connection with speculation in shares, underwriting of shares or debentures of new companies, or any other similar temporary or seasonal business enterprise. As the parties to a joint venture do business in union with others, they also share profit or loss between themselves in some agreed proportion.

Advantages of joint venture enterprise are that perhaps one party may buy goods at a much cheaper rate, but he has no capital; a second person may perhaps advance the requisite capital, but has no business acumen; while a third individual is a good salesman and can sell the goods readily at a good margin. In a case like this, it is advantageous for all the three to combine their energy and work for mutual gain.

Difference Between Joint Venture and Consignment:

Learning Objectives:

1.What is the difference between joint ventures and consignment?

Parties:

In joint venture, parties to the agreement are known as co-venturers while in consignment they are termed as consignor and consignee.

Compensation:

Co-venturers are the partners in the venture and share profits or losses of the venture. Where as consignee is never a partner. Consignee gets his commission for acting as an agent for consignor.

Relation:

Each co-venturer is a partner as well as the agent of other co-venturers. Where as consignee is the agent of his principle i.e., consignor.

Termination:

Relationship of co-venturers comes to an end when venture is completed. Where as relationship of consignor and consignee continues until terminated by parties.

Investment:

Co-venturers, usually, contribute towards the capital of the venture (in the form of money or materials) but consignee does not contribute towards the capital.

Rights:

Co-venturers enjoy equal rights as partners but consignee only acts as an agent.

Ownership:

Co-venturers are the owners of their venture but in consignment the consignor is the owner not the consignee.

Account Sales:

Consignee is required to send account sales to consignor. Co-venturers exchange the relevant information. No regular reports are submitted.

Advantages and Disadvantages of Joint Venture:

Learning Objectives:

1.What are the advantages and disadvantages of joint ventures?

Smart entrepreneurs and business owners know that Joint Ventures are the fastest and most effective way to radically increase sales and profits with virtually no money and no risk, as long as its done correctly.

Advantages of Joint Ventures are speed, access, sharing of resources and the leveraging of underutilized resources, high profits, back end income, low or no risk opportunities and massive leverage.

Disadvantages of Joint Ventures are the possibility of being ripped off or disappointed by unscrupulous and unprofessional JV partners, and hurting your reputation and/or customers and associates by associating with the wrong people, even unknowingly.

Joint Venture Journal Entries:

Learning Objectives:

1.What is accounting treatment of joint ventures?

2.Prepare journal entries in the books of parties doing joint venture business.

There are two methods in which joint venture accounts can be kept These are:

1.Where no separate books are kept to record joint venture transactions.

2.Where as separate set of books is kept to record the transactions.

When Separate Books Are Not Kept:

When it is not possible to maintain a separate set of books for joint venture transactions, each party will use his ordinary business books for recording such transactions. Each party will open a joint venture account and the accounts of other parties in his books. Suppose A and B enter into a joint venture. Then A will open a joint venture account and also an account of B in his books. Similarly, B will open in his books, a joint venture account and the account of A. The followingjournal entries are made:

1.	When goods are purchased and money is spent on joint venture by any partner:
	Joint venture account
	To Cash or seller's account
2.	When goods are purchased by the fellow - partners and report is received from them or money is spent by them on joint venture:
	Joint venture account
	To Partner's personal account
Thus the joint venture account in the books of one partner tallies with the same as it stands in the books of other partner:
3.	When expenses are incurred by the other party:
	Joint venture account
	To Cash account
4.	When expenses are incurred by the other party:
	Joint venture account
	To Other party's account
5.	If any advance is received by the other party, say in the form of bill of exchange:
	Bills receivable account
	To Other party's account
6.	If any advance is given to the other party, say in the form of promissory not:
	Other party's account
	To Bills payable account
7.	If the bill receivable is discounted, the usual entry for discounting the bill is passed. The discount should be transferred to the joint venture account. The entry is:
	Joint venture account
	To Discount account
8.	If the bill payable was issued in favor of the other party and that party has got it discounted, the discount will have to be debited to the joint venture account, the credit will be in the other party's account:
9.	When the goods bought on the joint venture account are old:
	Cash or purchaser's account
	To Joint venture account
10.	When the goods are sold by the co-partners and on being informed of the sale:
	Other party's account
	To Joint venture account
11.	When money is received on joint venture:
	Bank or cash
	To Joint venture account
12.	If money is received by the other party on account of joint venture:
	Other party's account
	To Joint venture account
13.	If any special commission is received on account of joint venture:
	Joint venture account
	To Commission account
14.	If any commission is payable to other party:
	Joint venture account
	To Other party's account
	(Commission may have to be paid for making sales or even for making purchase)
15.	Sometimes some goods are left unsold and one of the parties takes them. The entry is:
	Purchases account
	To Joint venture account
16.	If the goods are taken by the other party:
	Other party's account
	To Joint venture account
17.	Now the joint venture account will show a profit or loss. The profit will be divided in the agreed proportions. The entry is:
	Joint venture account
	To Other party's account
	To Profit and loss account
	(In case of loss the entry will be reversed.)

When Separate Books Are Kept:

Under this method a separate joint bank account is opened. The amount contributed by each partner as his share of investment is deposited into a joint bank account. accounts of the parties concerned are also opened. The system of accounting then is as follows:

1.     The amount contributed by each partner is debited to a joint bank account and credited to the personal account of each partner.

2.     Goods bought on joint venture as well as expenses incurred in connection with the business are debited to the joint venture account and credited to the seller's account or the joint bank account.

3.     When the goods are sold, the amount thereof is debited to the partner's account or the joint bank account and credited to the joint venture account.

4.     If the parties have taken over plant or materials etc., the value will be debited to the account of the party concerned and credited to the joint venture account.

5.     The joint venture account will now show profit or loss which will be transferred to the personal accounts of the respective parties in their profit sharing ratio.

6.     The joint bank account will then be closed by making payment to each partner of what is due to him in respect of his personal account.

For better understanding of these two methods of joint venture accountingplease visit our joint venture accounting problems and exercises page.

Joint Venture Memorandum Account -An Alternative Method:

Learning Objectives:

1. What is a memorandum joint venture account?
2. Prepare a memorandum joint venture account.

The is another method to record the transactions in the books of the various parties. Under this method the joint venture account is prepared on memorandum basis, just to find out the profit or loss but not as a part of financial books. The name of such account is memorandum joint venture account. I books only one account is opened styled as "joint venture with.....account".

Suppose A and B have entered into a joint venture. The A will open an account named, joint venture with B account. Similarly, B will open, in his books, joint venture with A account. This account is prepared in the following manner:-

1.     Goods sent or expenses incurred on joint venture are debited to the account.

2.     No account is taken of goods supplied or expenses incurred on joint venture by the other party.

3.     If any cash or acceptance is received on account of joint venture or from other party, this account is credited.

4.     The account is debited with own share of profit (ascertained by the memorandum joint venture account) the credit being given to profit and loss account. If there is a loss the profit and loss account is debited and this account is credited. The balance of this account will show either the amount owing to the other party or amount owned by the other party.

Example:

Following example will make the concept more clear:

Memorandum Joint Venture Account

Debit Side			Credit Side
		$		$
To A (Cost of goods & Exp.)		5,400,	By B - sales	12,000
To B (Cost of goods & Exp.)		4,300
To B (Commission)		600
To Profit:
A 4/5	1,360
B 1/5	340
		1,700
		12,000		12,000

In the Books of A

Joint Venture With B Account

Debit Side		Credit Side
	$		$
To Cash (goods)	5,400,	By Cash	6,760
To Cash (Expenses)	4,300
To Profit and loss (4/5 of profit)	1,360
	6,760		6,760

In the Books of B

Joint Venture With A Account

Debit Side		Credit Side
	$		$
To Cash (goods)	4,000	By Cash	12,000
To Cash (Expenses)	300
To Commission	600
To Profit and loss (1/5 of profit)	340
To Cash	6,760
	12,000		12,000

Joint Venture Accounting Exercises and Problems:

Learning Objectives:

1. Prepare journal entries and joint venture accounts in the books of parties doing joint venture business.
2. How to solve a joint venture problem.

Problem 1 - Journal Entries, Joint Venture Account Co-venturer Accounts:

A and B were partners in a joint venture sharing profits and losses in the proportion of four-fifth and one-fifth respectively. A supplies goods to the value of $5,000 and inures expenses amounting to $400. B supplies goods to the value of $4,000 and his expenses amounting to $300. B sells goods on behalf of the joint venture and realizes $12,000. B is entitled to a commission of 5 percent on sales. B settles his accounts by bank draft.

Required: Give journal entries and necessary ledger accounts in the books of both the parties.

Solution:

Books of A

Journal Entries

joint venture account	5,000
To Cash account		5,000
(Goods sent to B)
joint venture account	400
To Cash account		400
(Expenses incurred on goods sent to B)
joint venture account	4,000
To B		4,000
(Goods supplied by B)
Joint venture account	300
To To B		300
(Expenses incurred by B on joint venture)
B	12,000
To Joint venture account		12,000
(Sales proceeds received by B)
Joint venture account	600
To B		600
(Commission due to B on sales at the rate of 5%)
Joint venture account	1,700
To B		340
To Profit and loss account		1360
(Profit $1,700 divided as 1/5 to B and 4/5 to self)
Cash account	6,760
To B		6,760
(The draft received from B in settlement)

Joint Venture Account

Debit Side		Credit Side
To Cash - Goods	5,000	By B - Sales	12,000
To Cash - Expenses	400
To B - Goods	4,000
To B - Expenses	300
To B - Commission	600
To B - Share of profit	340
To Profit and loss account	1,360
	12,000		12,000

B Account

Debit Side		Credit Side
To Joint venture account	12,000	By Joint venture - Goods	4,000
		By Joint venture - Expenses	300
		By Joint venture - Commission	600
		By Joint venture - Profit	340
		By Cash	6,760
	12,000		12,000

Books of B

Journal Entries

joint venture account	4,000
To Cash account		4,000
(The value of goods supplied)
joint venture account	300
To Cash account		300
(Expenses incurred on joint venture)
joint venture account	5,000
To A		5,000
(Goods supplied by A)
Joint venture account	400
To A		400
(Expenses incurred by B on joint venture)
Cash account	12,000
To Joint venture account		12,000
(Sales proceeds received in cash)
Joint venture account	600
To Commission account		600
(Commission due on sales at the rate of 5%)
Joint venture account	1,700
To A		340
To Profit and loss account		1360
(Profit $1,700 divided as 1/5 to B and 4/5 to A)
A	6,760
To Cash account		6,760
(The draft sent to A in settlement)

Joint Venture Account

Debit Side		Credit Side
To Cash - Goods	4,000	By Cash account - Sales	12,000
To Cash - Expenses	300
To A - Goods	5,000
To A - Expenses	400
To Commission	600
To A - Share of profit	1,360
To Profit and loss account	340
	12,000		12,000

A Account

Debit Side		Credit Side
To Cash account	6,760	By Joint venture account	5,000
		By Joint venture - Expense	400
		By Joint venture - profit	1,360
	6,760		6,760

Problem 2 - Joint Venture Account and Co-venturer Accounts:

Salim & Sons bought goods of the value of $7,500 and consigned them to Tahir and Co. to be sold to them on a joint venture, profit being divided in 2/3 : 1/3. They also paid $550 for freight, insurance and cartage and drew on Tahir and Co. for $3,000 on account. The bill was discounted by Salim & Sons for $2,900. Tahir and Co. paid $300 for dock dues, storage, rent etc. The sales realised $12,500 and the sales expenses $250 were defrayed by Tahir and Co. The later forwarded a sight draft for the balance due to Salim & Sons after charging their sales commission at 5 percent on the gross proceeds.

Required: Write up the accounts in the books of both the parties. No interest need to be brought into account.

Solution:

Salim & Sons Books

Joint Venture Account

Debit Side			Credit Side
		$		$
To cash - cost of goods		7,500	By Tahir & Co.-sales proceeds	12,500
To cash - expenses		550
To Discount on bill		100
To Tahir and Co.
Dock, dues & storage	300
Sales expenses	250
Commission	625
		1,175
To Profit and loss - 2/3 share		2,116.67
To Tahir & Co. - share of profit		1,058.33
		12,500		12,500

Tahir & Co.

Debit Side		Debit Side
	$			$
To Joint venture a/c - sales1	12500	By Bill receivable account		3,000
		By Joint venture account
		Dock & Storage	300
		Sales expenses	250
		Commission	625
				1,175
		By Joint venture account		1,058.33
		By Cash - sight draft		7,266.67
	12,500			12,500

Tahir & Co. Books

Joint Venture Account

Debit Side			Credit Side
		$		$
To Salim & Co. - cost of goods		7,500	By Cash - sales proceeds	12,500
To Salim & Co. - expenses		550
To Salim & Co. - Discount on bill		100
To Cash.
Dock, dues & storage	300
Sales expenses	250
		1,175
Commission		625
To Profit and loss - 1/3 share		1,058.33
To Salim & Co. - share of profit		2,116.67
		12,500		12,500

Salim & Sons

Debit Side		Credit Side
	$		$
To Bills payable a/c	3,000	By Joint venture account	7,500
To Cash - sight draft	7,266.67	By Joint venture account	550
		By Discount account	100
		By Joint venture account - 2/3	2,116.67
	10,266.67		10,266.67

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