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Question

Difficulty: HardIncome and Expenditure Account

Match each non-profit organization financial item with its appropriate accounting treatment in relation to the Income and Expenditure Account.

  • Subscriptions received in advance for the upcoming financial periodExcluded from the Income and Expenditure Account and treated as a current liability
  • Surplus of income over expenditure generated during the current periodCredited to the Accumulated Fund in the Statement of Financial Position at year-end
  • Honorarium paid to a guest facilitator by a professional bodyDebited as a recurrent operational expenditure in the Income and Expenditure Account
  • Donation received specifically for constructing a sports pavilionCapitalized directly to a special fund on the Balance Sheet, bypassing the Income and Expenditure Account

Answer

Subscriptions received in advance match with current liability classification; Surplus matches with credit transfer to Accumulated Fund; Honorarium matches with debit to Income and Expenditure Account; Specific donation matches with direct capital fund treatment.
The Income and Expenditure Account operates on the accrual basis of accounting, matching revenue income earned against revenue expenditure incurred for the financial period. Capital receipts such as specific donations bypass this account, while unearned income is carried forward as a liability.

Step-by-Step Solution

1
Differentiate between capital receipts and revenue receipts for non-profit entities.
Specific-purpose donations are capital receipts, while general subscriptions earned and honoraria are revenue items.
The Income and Expenditure Account records only revenue items belonging strictly to the current accounting period.
2
Apply accrual adjustments to revenue receipts.
Unearned income such as prepaid subscriptions must be excluded from the Income and Expenditure Account and recognized as a liability.
Revenue must be matched to the accounting period in which it is earned.
3
Determine the accounting treatment of operational expenses and final net balance.
Revenue expenses like honoraria are debited to the Income and Expenditure Account, and the resulting surplus is added to the Accumulated Fund.
Operational costs reduce current period surplus, and accumulated surplus increases organizational equity/capital.

Key Concept

Classification of revenue versus capital items and accrual concepts in the Income and Expenditure Account
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Topics

Income and Expenditure Account

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