Financial Accounting (561)

Assignment 2
(Accounting for Non-Profit Organizations)
Name: Asifa Nazir
Roll Number: W-583956
Submitted to: Mr. Anwar Hussain

Allama Iqbal Open University Islamabad

(Department of Business Administration)

Acknowledgment

This assignment would not be possible (nor very useful) if library of Apna TV did not
exist. For that, I would like to thank Mr. Syed Nabeel Hassan Tirmazi, head of Production
department and Mr. Ameen, office coordinator for cooperating with me in collecting data
for this assignment. [1]
Thanks to Mr. Brig.(R)M. Zubair Siddique and my tutor Mr. Anwar Hussain for giving
me confidence in the subject and to apply it on real time scenarios.

Asifa Nazir
Roll No. W583956

Introduction to the Topic

Acconting for Non-Profit Organizations
The brain starts working the moment you are born and
never stops until you stand up and speak in public.
(Anonymous)

Definition of Non-Profit Organization:

Non-profit making organization are those which do not buy or
manufacture and sell goods and whose primary object is not to earn
profit.

The object of Non-profit organization is to good to the society through

welfare activities for example clubs, schools, colleges, hospitals,
libraries etc. Their income, which is derived from donations,
subscriptions, entrance fees etc ., is spend in achieving the objects for
which they are started. From the book-keeping point of view the aim of
non-profit organization is the pursuit of some interest other than
financial benefits. Although these organization are not meant for profit
earning, yet organization of this sort must have funds to promote their
activates, and these funds must be honestly accounted for.

Definition of Fund:
A fund is a segregation of resources established to control and monitor
resources and to help ensure and demonstrate compliance with
legal/administrative requirements.
Definition of Fund Accounting:

A method of segregating resources into categories, (i.e., funds) to

identify both the source of funds and the use of funds is referred as
fund accounting.

Objectives of Fund Accounting:

Following are the objectives of fund accounting:

Demonstrating accountability and stewardship

Determining financial condition

Planning and budgeting

Evaluating organizational and managerial performance

Determining/forecasting cash flow

Communication

Fund Balance: Equity within a fund.

Assets = Liabilities + Fund Equity
Fund Assets
_

Assets
_

Fund Liabilities

Claims Against Assets

= Fund Balance

= Fund Balance

The fund balance is also known as Net Assets, or Capital, or Net Worth.

Review of Literature
Profit Organization Vs. Non-Profit Organization:
In order to understand the working of accounts in non-profit
organizations, we must have clear understanding nature of profit
organization and non-profit organization.
Profit Organizations: Accounting emphasis is on profit
determination.
Non-Profit Organizations: Accounting emphasis is on controlling
funds and showing the sources and uses of funds.
Following are the comparisons between non-profit and profit
organizations:
Profit Organization

Non-Profit Organization

Generally have only one

accounting/ business
entity.

Have a multitude of
accounting/ business
entities (various funds).

Encumbrances are not

used.

Encumbrances are used.

Accounting information is
segregated and can be
difficult to aggregate.

Basic Financial
Statements:

Statement of Net Assets

Accounting information on
costs and revenues can
usually be readily
aggregated.
Basic Financial
Statements:

Statement of

 Balance Sheet
Income
Statement
Statement of
Cash Flows
Statement of
Stockholders
Equity

Net Assets
Statement of
revenues,
Expenses, and
change in net
assets.
Statement of
Cash Flows

Managing Accounts in Non-profit Organization:

Final Accounts:
Non-Trading concerns usually maintain their accounts by the Double
Entry system and periodically prepare their Final Accounts for the
submission of their members and subscribers. The method of preparing
final accounts by Non-Trading concern is different than trading
concerns. As this concern dont deal in any goods like trading concerns,
so they cannot prepare Trading and Profit and Loss accounts. At the
end of the year they make out an account called an income and
expenditure account and balance sheet. Usually the Non-Profit
organization doesnt maintain a full set of books but merely a Cash
Book in which all receipts and payments are entered.
Receipts and Final Accounts:
It is a summary of Cash Book for a year. Similarly to cash account,
receipts are shown on the debit side while payments on the
credit side, without any distinction between the capital and revenue.
Moreover it does not include any unpaid expenditure or any unrealized
income.
Income and Expenditure Account:

It is the name of profit and loss account. Such type of profit and loss
account is generally adopted by Non-trading concern. This Account is
credit with all expenses.

Income and expenditure account and Receipts & Payments

account
The following table clearly shows the difference between a Receipts &
Payment and Income & Expenditure Account:
Receipts & Payments Account
It is a summary of the Cash
Book.

It begins with an opening

and ends with a closing
balance of cash.
It records all sums received
and paid whether they
related to revenue or capital

Income & Expenditure Account

It takes the place of Profit
and Loss Account in nontrading concerns.
Doesnt commence with any
balance.
It includes revenue items
only

items.
It includes all sums actually
received and paid during the
year whether they related to
the past, the current of the
next year.

The receipts are shown on

the debit side and payments
on the credit side.

It simply ends with a closing

balance of cash and deos not
show the result of the
business.

It is not accompanied by a
Balance Sheet.

It includes the items relating

only to the year for which it
is prepared. Provision is
made for all outstanding
expenses and the accrued
income.
Income is shown on the
credit and expenses on the
debit.

It definitely shows whether

there has been as excess of
income over expenditure or
vice versa.

It is always accompanied by
a Balance Sheet.

Treatment of Peculiar Items

Generally in the exercises the instructions are given as to the
treatment of special items. Such instructions are based on the rules of
the concern. In case where no specific instructions are given the
following guidelines may be considered.
Legacy: It is the amount received by the
concerned as per the will of the donor. It appears
in the receipts side of receipt & payment
account. It should not be considered as income but
should be treated as capital receipt i.e. credited to
the capital fund account.

 Donations: Amount received from any source by

way of gift is described as donations. It appears on
the receipts side of receipt & 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.
Subscriptions: The members of the association, as
per rules, all generally required making annual
subscription to a neighbor it to serve the purpose
for which it was created. It appears on the receipts
side of receipt & payment account, and is
usually credited to income.
Life membership fee: As life member ship fee
is a substitute for annual membership fee.
Therefore, it is desirable that life membership fee
should be credited to a separate fund and fair
proportion be credited to the income in subsequent
years.
Entrance fees: This is also an item to be found on
the receipt sides of receipt & payment
account. There are arguments that it should be
treated as capital receipt because entrance fees are
to be paid by every member only once (when
enrolled as member).
Sales of Newspaper, Periodical etc.: As the old
newspapers, magazines and periodical etc. are to
be disposed off every year, the receipts on account
of such sale should be treated as income and
therefore, to be credited to income and
expenditure account.
Capital Fund: Any concern whether profit seeking
or non-profit seeking requires money for convicting
day to day functions in the case of profit seeking
concerns such money is called capital, while in

case of non-profit seeking concerns it is called

capital fund. Capital fund is created with surplus
revenue and capital receipts and income. It is
shown on liabilities side of a balance sheet.

Practical Study of Organization

Kashf Foundation
Introduction

Kashf Foundation is a specialized microfinance institution (MFI)

providing credit, savings, micro-insurance and social advocacy
support to households that have no prior access to formal
financial services. The Kashf model is predicated on reaching out
to households below or at the poverty line, through women
focused and women friendly financial products in both urban and
semi rural communities. In other words, the centerpiece of Kashfs
methodology is the alleviation of poverty by greater investment in
gender empowerment. Currently, Kashf is one of the few
microfinance institutions in Pakistan that exclusively focuses on
women.
Kashf began as an action research programme in 1996 with
support from the prestigious Grameen Bank. The initial two years
were spent in understanding the market and the needs of clients
in peri-urban and urban settings. The importance of standardized
products, systems and policies, the simplification of procedures
and reporting requirements, along with the significance of
focusing on client satisfaction and developing clear cut financial
performance indicators was highlighted.

Mission Statement

..is to alleviate poverty by providing quality and cost

effective microfinance services to low income
households, especially women in order to enhance their
economic role and decision-making capacity.

A study was conducted to determine the effect of microfinance on

the productivity of the businesses of Kashfs clients and their
ability to service their loans. The study showed that not only does
microfinance increase the productivity of the businesses in the
short run it also enhances business sustainability in the medium
run by helping generate higher returns. The table below shows
the eight most popular businesses of Kashf clients and their net
profit margins, excluding all loan payments.

Table 1
Kashf clients 8 most popular Businesses.
Sr.No

Type of Business

Net Profit Margin

1 Plastic Molding

51%

2 Running Grocery Shop

48%

3 Vegetable and Fruit selling

45%

4 Shoe Making

41%

5 Tailoring

35%

6 Hand Embroidery

22%

7 Running Beauty Parlors

13%

8 Artificial Jewelry Making

11%

Kashfs Methodology

Like other Grameen-style replications, Kashf Foundation offers

collateral-free loans and strives toward the empowerment of
women through the creation of peer groups. The process of
selecting beneficiaries at the grassroots level is done by the
clients who are assisted by loan officers, after a process of door to
door mobilization has been completed.
Once members are selected according to strict poverty criteria,
centers of 20-25 members are formed. The members are given a
loan on the basis of their absorptive capacity. In the absence of
any physical collateral, the recovery is based on the premise that
each member will be responsible for the other in case of
emergency or non-payment. Repayment installments, their
amounts and dates of recovery are pre-ascertained and group
members are informed of all relevant details at the beginning of
the loan disbursement. In addition, 1 centre manager and 4-5
group leaders within each centre ensure discipline and
information dissemination by forming a credit committee.

Kashfs Services
Table 2
Product

Purpose

Range

Terms

Loans
Rs 10,000
General Loan

Income
Generation

to
35,000

Emergency
Loan

Business
Surmaya Loan

Consumption
or for any
other
emergency
including
payment of
school fees or
utility bills

Service
charge:20% Loan
Term: 1 year
Repaid: Bi-monthly
Service
charge:20%

Rs 4,000

Loan Term: 6
months
Repaid: Bi-monthly
Service Charge:
18%

Entrepreneurial Rs 40,000
Activities
to 100,000 Loan tem: 1 year
Repaid: Monthly
Savings

Voluntary
Savings

Voluntary

Voluntary

Voluntary deposit

Insurance
Life Insurance

Compulsory
with the
General Loan

Covers
1.5% of the Loan
outstandin amount
g amount

of loans
and a
funeral
payout
Kashfs clients
The bulk of Kashfs clients are women from low income households
with an average per capita disposable income varying from US$0.55
toUS$0.9 per day, as can be seen in Figure 4. They manage 2-3 simple
meals everyday for a family of seven people, comprising of five
children. Most of the clients live in their own houses with a land area
varying between 50 to 125 square yards.

Income distribution of Kashf Clients

The above income distribution of clients reveals that the

percentage of the clientele fall in the Rs. 5,000-9,000 income
i.e. US $ 83 to US $ 150 per month. In other words, 40% of
clientele are spending $ 0.55 per day per head while 14% of

largest
bracket
Kashfs
Kashfs

clientele spend $0.3 per day per head for daily family needs 1.
Furthermore, 35% of the clientele are spending US $ 0.9 per day per
head, and only 11% spend more than US$ 1 per day per head, implying
89% of Kashfs households are within the $1/day poverty level. It must
also be mentioned that these statistics fail to reflect the seasonality
and vulnerability of these income sources, which further exacerbates
the economic insecurity of such households.

Education level of Clients

Additionally, only 38% of the clients are literate as can be seen in

the figure above. Their houses are sparsely furnished while
electricity and piped, potable water are available in most cases.
Most of the urban clients live in homes with closed sewerage
systems inside the house and open drains outside, amplifying
environmental health related factors. Almost all of the clients
suffer from back aches, blood pressure and, in older women,
diabetes. Health service facilities near the homes only provide
relief from minor ailments such as cold, cough and fever, whilst
1

Formula: Average of the two income level divided by 30 (days) further divided by 7(number of stove sharers) to
give an income equivalent of per day per head.

treatments for major diseases such as hepatitis, gastroentitis,

typhoid are expensive and out of reach.

Case Study:
Mr. Shahbar, a customer applied for a loan of Rs. 100,000. After
scrutinized the document, the management decided to grant
loan. The current market rate at that time (in 1996) was 14.77%
but loan was provided at 7% P.A in the following manner. If I was
working
as assistant account
I will mange the matter
as:
01-01-1996
Mr. shaban
100,000
I shall first find total amount receivable
by using Annually
Formula
Bank
10,000
which is:
Loan issue to Mr. Shabar & Payment made by bank.
31-12-1996
Bank

14,237.75
Mr.Shaban

7237.75

Interest Income

70,000

1st installment received

31-12-1996
Interst income

7000

P/L A/C

7,000

Intrest charged to P/L and A/C

31-12-1997
Bank

14237.75

So he will have to pay Rs. 14237.75 per annum to wave off the
loan.
So total amount receivable is w-2
Out intrest income over ten year is 42377.5 which is computed as
follows
w-3
I segregate the intrest income and repayment of load with the
help of schedule (w-4) and pan the entries with necessary
accounts alongwith slected figures in P/L S/c and Balance Sheet
as

Conclusions & Recommendations

SWOT Analysis of Kashf
Strengths:

Apna TV is Pakistans first Punjabi infotainment Channel.

Strong Representative of Punjab and Punjabi Culture.
Emphasize on development of Punjabi Language.
High viewer ship in inner Punjab.

Weakness:
Due to Punjabi Language their viewer ship is limited.

Opportunities:
Being First Punjabi Infotainment channel, they can create more
loyal viewers.
The problems of various inner Punjab cities and villages can be
highlighted to media.

Threats:
In, near future, there will be a strong competition among Punjabi
channels as new Punjabi channels are being launched.

 Due to new channels, the expertise of Apna TV is continuously

transferring in other channels.

Recommendations for Kashf

It should produce more programs on social awareness
It must introduce the programs for children.
It must increase its investing capacity and cash financing.

Conclusion:
No doubt Apna TV is a leading channel of Pakistan. It has no
major competitor among regional channels. It maintains its
leadership position in the market as far as advertisements are
concerned. But stile it is on alarming thing. That is has to
compete in the international media. Where bulk of competition
among channels are available at every step. Thus is has to cover
its weakness and gets the maximum benefits from its available
opportunities.