prepare income and expenditure accounts and statements of financial position

5.4 Clubs and Societies – Preparing Accounts

Learning Objectives

• Explain why clubs and societies prepare a Receipts‑and‑Payments (R & P) Account, an Income‑and‑Expenditure (I & E) Account and a Statement of Financial Position (SFP).
• Distinguish clearly between an R & P account and an I & E account (cash‑basis vs accrual‑basis).
• Prepare, from a trial balance, a correct:
  • Receipts‑and‑Payments Account,
  • Income‑and‑Expenditure Account,
  • Statement of Financial Position.
• Make and post the standard adjustments (depreciation, accruals, pre‑payments, irrecoverable debts, outstanding income/expenses) and understand their effect on the three statements.
• Show the logical flow of information between the three statements and use it to check work.
• Apply exam techniques – marking‑scheme focus (AO1 ≈ 65 %, AO2 ≈ 25 %, AO3 ≈ 10 %).

Why Clubs and Societies Need Accounts

Clubs and societies are not‑for‑profit organisations. Their aim is to provide a service to members, not to generate profit for owners. Consequently the accounting focus is on:

• Cash flow – what cash has actually been received and paid (R & P Account).
• Financial performance – how much income has been earned and how much has been spent, irrespective of cash (I & E Account).
• Financial position – what the club owns and owes at a specific date (Statement of Financial Position).

Key Concepts

1. Receipts‑and‑Payments (R & P) Account – a single‑step cash‑flow statement.
   • Starts with opening bank balance, records all cash receipts and all cash payments, ends with closing bank balance.
   • Only cash movements are shown; capital purchases are treated as cash outflows.
2. Income‑and‑Expenditure (I & E) Account – a single‑step accrual statement.
   • Records all income earned (revenue‑generating and non‑revenue‑generating) and all expenses incurred, whether cash has been received/paid or not.
   • Result = Surplus (income > expenses) or Deficit (expenses > income).
3. Statement of Financial Position (SFP) – a snapshot of assets, liabilities and net assets (funds) at a specific date.
   • Assets = Cash, equipment, prepaid expenses, receivables, etc.
   • Liabilities = Accrued expenses, amounts owed to suppliers, etc.
   • Net assets (funds) = Assets – Liabilities.
4. Relationship of the three statements

   Closing cash balance (R & P)  →  Cash at bank (SFP)
   Surplus/Deficit (I & E)       →  Added to/ deducted from Net assets (SFP)
   

Cash‑Basis vs Accrual‑Basis – Quick Comparison

Standard Adjustments (after the trial balance)

Before preparing the I & E account and the SFP, make the following adjustments where applicable. Record each in the journal, post to the ledger, and update the trial balance.

Formats of the Three Statements

1. Receipts‑and‑Payments Account

2. Income‑and‑Expenditure Account

3. Statement of Financial Position

Step‑by‑Step Worked Example – “Science Club” (with adjustments)

1. Source data (transactions for the year)

2. Journal entries (including adjustments)

3. Ledger extracts (selected)

4. Adjusted Trial Balance (after posting adjustments)

5. Receipts‑and‑Payments Account

6. Income‑and‑Expenditure Account

7. Statement of Financial Position

Checklist – What to Do in the Exam

1. Read the question carefully – note the date of the year‑end, any opening balances, and which adjustments are required.
2. Prepare a **trial balance** from the given ledger balances (include opening balances if supplied).
3. Make **journal entries for each adjustment**; post them to the ledger and update the trial balance.
4. From the **adjusted trial balance**, draft the three statements in the order:
   1. Receipts‑and‑Payments Account – use cash figures only.
   2. Income‑and‑Expenditure Account – use accrual figures; remember to include the surplus/deficit line.
   3. Statement of Financial Position – list assets, liabilities, then calculate net assets. Transfer the surplus/deficit from the I & E account to the net assets line.
5. **Cross‑check**:
   • Closing cash balance from R & P = Cash at bank in SFP.
   • Opening net assets + surplus – deficit = Closing net assets.
   • All totals in the trial balance must still balance after adjustments.
6. **Presentation** – use the formats shown above, line up figures in the £ column, and label “Surplus” or “(Deficit)” clearly.
7. **Marking‑scheme focus**:
   • AO1 (knowledge & recall) – correct headings, correct classification of items, correct formulas for net assets.
   • AO2 (application) – accurate journal entries, correct posting, correct figures in each statement.
   • AO3 (analysis & evaluation) – brief comment on the effect of a major adjustment (e.g., “Depreciation reduces surplus and the net book value of equipment”).

Common Pitfalls & How to Avoid Them

• Mixing cash and accrual figures – remember that R & P uses only cash; any accrued expense or outstanding income belongs only in the I & E and SFP.
• Omitting the depreciation contra‑account – always show “Accumulated depreciation” as a credit contra‑asset; the net book value goes in the SFP.
• Forgetting to transfer the surplus/deficit – the net assets line must reflect the current year’s result.
• Double‑counting pre‑payments – they appear as an asset in the SFP; they are *not* an expense in the I & E until the period to which they relate has elapsed.
• Incorrect sign for a deficit – write “(Deficit)” or show a negative figure; do not treat it as a positive surplus.

Quick Reference – Effect of Each Adjustment

Summary

• R & P = cash flow only; I & E = accrual performance; SFP = financial position.
• All three statements are linked – the cash balance, surplus/deficit, and net assets flow from one to the next.
• Standard adjustments must be made before the I & E and SFP; they have predictable effects on each statement.
• Follow the step‑by‑step order in the exam, check totals, and comment briefly on any major adjustment to secure AO3 marks.