Prepare an income and expenditure account for Smallville Sports and Social Club
Activity 1 output . A Word document containing an income and expenditure account and comments on accruals accounting
Activity 1 Allow 2 hours for this activity. This activity requires you to apply the accruals accounting approach (that is, using the ‘matching’ concept) to prepare an income statement for a not-forprofit organisation. This will illustrate the application of certain important accounting principles (in particular the matching principle) and demonstrate how accruals accounting differs from cash accounting in the not-for-profit sector. Smallville Sports and Social Club Shown below as Table 16.1, is the receipts and payments account for Smallville Sports and Social Club. Table 16.1 Receipts and payments account for year ended 31 December 20XX
Subscriptions from members £24,000
Net income from snack bar* £9,000
Total receipts £33,000
Rent of clubhouse £15,000
Fundraising and publicity £5,000
Travel expenses £3,000
Total payments £29,000
Excess of receipts over payments £4,000
* Snack bar receipts £25,000; payments for bar stock £16,000.
Now consider the additional information below.
1 Subscriptions due but unpaid at 31 December 20XX were £5,000.
2 Of the subscriptions received during 20XX, £3,000 related to the previous year.
3 All snack bar receipts were in cash, but bar stock was purchased on credit terms. At the beginning of 20XX, £1,500 was owed to suppliers and this was paid during 20XX. At the end of 20XX, £2,000 was still owed to suppliers for goods purchased and consumed during 20XX.
4 At the beginning of 20XX, snack bar stock (valued at cost) was £7,000; at the end of 20XX it was £8,500.
5 All other expenses were paid for in cash during the year.
6 The payment for furnishings was made on the last day of the year and the club has decided not to provide for depreciation on these assets this year. You can therefore ignore depreciation in constructing your income and expenditure account.
Module Activities Task. From the information given above, and the extra details provided below, prepare an income and expenditure account for Smallville Sports and Social Club. . After you have prepared this financial statement, explain the arguments for preparing an income and expenditure account (using accruals accounting) rather than a receipts and payments account (using cash accounting). . Record your results and comments in a Word document with the title: Week 16 Activity 1 – Smallville accounts.
Additional guidance .
The information you have been given above means that the receipts or payments figures need to be adjusted to derive the income and expenditure figures. Point 5 suggests that no adjustment is necessary for other expenses. Try, first, to make the adjustments necessary to transform ‘receipts’ into ‘income’. Then try to make the adjustments necessary to transform ‘payments’ into ‘expenditure’. You will find the following extra information is needed to complete this task. .
Income adjustments. Points 1 and 2 mean that the subscriptions figure needs adjustment in order to derive the income figure from the receipts figure. Point 1 will have the effect of making income earned greater than cash received; point 2 will have the opposite effect. . Expenditure adjustments. Point 3 means that the amount paid in cash for stock in the year is not the same as the value of stock purchased (consequently, to calculate cost of goods sold, for the income and expenditure account, you will need to adjust the cash paid figure to derive the purchases figure). . Point 4 means that the value of stock sold to customers is not the same as the value purchased (look at Reading 3 again for an explanation of how the cost of goods sold should be calculated).
If you have been able to prepare the income and expenditure account, you have gained a good understanding of how accruals accounting differs from cash accounting! Accruals accounting is being increasingly adopted across all sectors to provide a ‘true and fair view’ of an organisation’s financial performance, for which cash accounting is considered inadequate. You should have noticed that the surplus of income over expenditure figure (income and expenditure account) is not the same as the net cash flow figure (receipts and payments account) and this has important implications, as you will see in Week 17 when cash flow management is considered.
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