0452 · 5.5Clubs and societies

Club accounts and key terms

0:00A sports club can finish the year with more money in its bank account without that increase measuring its financial performance. Some members may have paid next year’s fees early, while this year’s rent remains unpaid. This video covers receipts and payments accounts, subscriptions, refreshments accounts, income and expenditure accounts, statements of financial position and the accumulated fund. Non-trading organisations exist to provide facilities for members, not to make profit.

0:25Clubs and societies may still sell refreshments or organise activities that generate income. Money left after meeting their expenses helps finance future facilities and activities. We will follow Maple Sports Club through one complete year, with every account connected to the same information. Financial statements are summaries that show a business’s profit or loss for a period and what it owns and owes at a date. For clubs, the overall result uses different terminology.

0:50A surplus is the excess of income over expenditure for a period. When expenditure exceeds income, the difference is a deficit. Expenses are the costs used up in running the business and earning revenue during a period. The matching or accruals concept means income and expenses are recorded in the period to which they relate, not when cash is received or paid. This distinction separates the club’s cash movements from its yearly result.

1:13A payment made this year can purchase benefits for a later period. A receipts and payments account is a summary of the cash book for a financial year. The cash book records receipts and payments of cash and of money through the bank. Here a receipt means money received by the business, rather than the written proof that money has been received. For our example, Maple Sports Club uses only its bank account.

1:34An income and expenditure account shows a non-trading organisation’s income and expenses for a period, and its surplus or deficit. It includes amounts belonging to that period, whether paid or unpaid. The receipts and payments account instead records money actually received or paid during the year. Rent still unpaid at the year end therefore appears in the income and expenditure account, but not in the receipts and payments account. Assets are resources owned or controlled by a business that bring future benefit, while liabilities are amounts the business owes to others.

2:04Owner’s equity, also called capital, is the owner’s investment in the business, or the amount the business owes the owner. The accumulated fund is the excess of a non-trading organisation’s total assets over its total liabilities. It represents the club’s equivalent of capital, and includes surpluses retained from earlier periods. A statement of financial position shows assets, liabilities and owner’s equity at a particular date. In a club, the accumulated fund replaces owner’s equity in that presentation.

Opening fund and cash account

2:31We begin by calculating Maple Sports Club’s opening accumulated fund from a statement of affairs. A statement of affairs lists assets and liabilities at a date to calculate the difference between them. Inventory means goods held for resale. Maple Sports Club’s opening bank amount is two thousand four hundred dollars, and its refreshments inventory is three hundred dollars. Equipment has an opening value of five thousand dollars. Members owe two hundred dollars in membership fees, and insurance paid for future benefits amounts to one hundred dollars.

3:00Subscriptions are the regular fees payable by members of a club or society. Membership fees due but not yet received are called subscriptions in arrears. Subscriptions in advance are membership fees received for a future period. Members have already paid four hundred dollars of these for the coming year, while unpaid rent amounts to seven hundred dollars. Two thousand four hundred plus three hundred plus five thousand plus two hundred plus one hundred gives total assets of eight thousand dollars.

3:25Four hundred plus seven hundred gives total liabilities of eleven hundred dollars. Eight thousand minus eleven hundred produces an opening accumulated fund of six thousand nine hundred dollars. Eight thousand dollars equals eleven hundred dollars plus six thousand nine hundred dollars. During the year, the club receives six thousand four hundred dollars in subscriptions and four thousand two hundred dollars from refreshments sales. Six thousand four hundred plus four thousand two hundred gives receipts of ten thousand six hundred dollars.

3:51The opening bank amount must also appear in the receipts and payments account. Two thousand four hundred plus ten thousand six hundred makes thirteen thousand dollars available. Refreshments payments are two thousand two hundred dollars for goods and nine hundred dollars for wages. Rent paid is two thousand six hundred dollars, and insurance paid is eleven hundred dollars. The club also buys equipment for eighteen hundred dollars. Two thousand two hundred plus nine hundred plus two thousand six hundred plus eleven hundred plus eighteen hundred equals eight thousand six hundred dollars.

4:21Thirteen thousand minus eight thousand six hundred leaves four thousand four hundred dollars in the bank on the thirty-first of December. The closing amount completes the payments side, so both sides total thirteen thousand dollars. On the first of January of the following year, the opening bank amount is four thousand four hundred dollars. That closing amount is money held, not an additional payment. Capital expenditure is spending on buying or improving non-current assets, including costs needed to bring them into use.

4:47Non-current assets are assets held for continuing use in the business rather than for resale. The equipment payment appears because money left the bank. Receipts and payments accounts include both capital and revenue items, with no adjustments for accruals or depreciation.

Calculating subscriptions income

5:02The subscriptions received include money belonging to different years. To prepare the subscriptions account, identify what was owed or received early at both the opening and closing dates. At the year end, subscriptions in arrears are five hundred dollars and subscriptions in advance are six hundred dollars. We must separate this year’s membership income from the six thousand four hundred dollars received. Subtract the opening arrears of two hundred dollars because those fees belonged to the previous year.

5:26Closing arrears of five hundred dollars are added, since this year’s membership has already been provided. The opening advance of four hundred dollars now belongs to this year, so add it. Finally, take away the closing advance of six hundred dollars, which belongs to the following year. Six thousand four hundred minus two hundred plus five hundred plus four hundred minus six hundred equals six thousand five hundred dollars. This is the subscriptions income transferred to the income and expenditure account.

5:51Each adjustment follows the year to which the membership fees belong. Receiving money and earning membership income are separate events when members pay early or late. Current assets are assets expected to be turned into cash or used up within twelve months. Subscriptions in arrears belong in this category because the club expects payment from members. Current liabilities are amounts due for payment within twelve months. Subscriptions received in advance belong here because the club still owes the related membership benefits.

6:17The same calculation can be prepared as a subscriptions account in the ledger. On the debit side, the opening arrears of two hundred dollars are balance brought down. The credit side starts with the opening advance of four hundred dollars as balance brought down, followed by bank of six thousand four hundred dollars. The six thousand five hundred dollars of income goes on the debit side, with income and expenditure in its details column.

6:39Closing arrears of five hundred dollars are balance carried down on the credit side. On the debit side, the closing advance of six hundred dollars is also balance carried down. Two hundred plus six thousand five hundred plus six hundred gives a debit total of seven thousand three hundred dollars. On the credit side, four hundred plus six thousand four hundred plus five hundred also makes seven thousand three hundred dollars.

7:00On the first of January of the following year, the five hundred dollars of arrears is brought down as a debit balance. That debit balance is a current asset. The six hundred dollars received in advance is brought down on the credit side, so it is a current liability. These two balances become the opening arrears and advance for the next year’s subscriptions account.

Refreshments and expense adjustments

7:18Revenue is the income a business earns from its main activity, such as selling goods or providing services. The refreshments activity earns revenue by selling drinks and snacks. Cost of sales is the cost of inventory sold during a period. Its separate account measures the result of that activity before transferring the result into the club’s overall account. Opening inventory is the value of goods held for resale at the start of a financial period.

7:43The goods remaining at its end are called closing inventory. Maple Sports Club begins with three hundred dollars of refreshments and buys another two thousand two hundred dollars. The closing inventory is valued at four hundred and fifty dollars. Three hundred plus two thousand two hundred gives goods available for sale of two thousand five hundred dollars. Two thousand five hundred minus four hundred and fifty gives cost of sales of two thousand and fifty dollars.

8:05Closing inventory is excluded from this year’s cost of sales because those goods remain available for future sales. Gross profit is revenue minus cost of sales. Four thousand two hundred minus two thousand and fifty gives gross profit of two thousand one hundred and fifty dollars. Profit is the amount by which revenue exceeds expenses for a period. Deduct refreshments wages of nine hundred dollars to obtain the activity’s profit of twelve hundred and fifty dollars.

8:29Only that activity result enters the club’s income and expenditure account. Its sales and related expenses have already been included in the separate refreshments account. A loss is the amount by which expenses exceed revenue for a period. If the refreshments activity made a loss, it would reduce the club’s overall surplus. An accrued expense is a cost of the current year that is still unpaid at the year end.

8:51Maple Sports Club has opening unpaid rent of seven hundred dollars and closing unpaid rent of nine hundred dollars. A prepaid expense is a cost paid in advance that belongs to a future period. Opening prepaid insurance is one hundred dollars, and closing prepaid insurance is two hundred dollars. Rent paid is two thousand six hundred dollars, but this year’s expense also includes the nine hundred dollars still unpaid. Remove the seven hundred dollars that belonged to the previous year.

9:16Two thousand six hundred plus nine hundred minus seven hundred gives rent expense of two thousand eight hundred dollars. The closing unpaid amount also appears among current liabilities. For insurance, the club paid eleven hundred dollars. Add the opening prepaid amount because those benefits are used this year, and remove the closing prepaid amount. Eleven hundred plus one hundred minus two hundred gives insurance expense of one thousand dollars. The remaining two hundred dollars represents future benefits and appears among current assets.

9:46Depreciation is the loss in value of a non-current asset over its useful life. It is an estimate that is charged as an expense in each year of use. Accumulated depreciation is the running total of depreciation charged on an asset since it was acquired, and carrying amount is the asset’s cost less its accumulated depreciation. The club’s annual depreciation of equipment is given as twelve hundred dollars. Five thousand plus eighteen hundred gives six thousand eight hundred dollars before that charge.

10:11Six thousand eight hundred minus twelve hundred leaves a closing carrying amount of five thousand six hundred dollars. The annual charge enters income and expenditure, while the equipment appears among non-current assets.

Surplus and closing financial position

10:23Subscriptions of six thousand five hundred plus refreshments profit of twelve hundred and fifty gives total income of seven thousand seven hundred and fifty dollars. Expenses are two thousand eight hundred plus one thousand plus twelve hundred dollars. Total expenditure is five thousand dollars. Seven thousand seven hundred and fifty minus five thousand gives a surplus of two thousand seven hundred and fifty dollars. Four thousand four hundred minus two thousand four hundred shows that the club’s bank amount rose by two thousand dollars.

10:49Its surplus, however, is two thousand seven hundred and fifty dollars. The bank change includes the equipment payment and fees belonging to other years, while the surplus is reduced by depreciation and by unpaid costs of this year. Other receivables are current assets, such as amounts due to the business and payments for benefits not yet used. Unpaid expenses and money received before it is earned are grouped as other payables, which are current liabilities.

11:13Our closing statement places subscriptions owed and prepaid insurance under other receivables. Rent unpaid and subscriptions received early appear under other payables. Current assets total four hundred and fifty plus four thousand four hundred plus five hundred plus two hundred dollars. This gives five thousand five hundred and fifty dollars. Add equipment of five thousand six hundred dollars to obtain total assets of eleven thousand one hundred and fifty dollars.

11:37Each amount represents a resource held at the closing date. Nine hundred plus six hundred gives total current liabilities of fifteen hundred dollars. The opening accumulated fund increases by the year’s surplus. Six thousand nine hundred plus two thousand seven hundred and fifty gives a closing fund of nine thousand six hundred and fifty dollars. Eleven thousand one hundred and fifty dollars equals fifteen hundred dollars plus nine thousand six hundred and fifty dollars.

12:02The accumulated fund can also be checked directly from the closing assets and liabilities. Eleven thousand one hundred and fifty minus fifteen hundred equals nine thousand six hundred and fifty dollars. A deficit would be deducted from the opening fund. The fund represents net assets, not just the money available in the bank.

Further adjustments and exam technique

12:19Other adjustments follow the same principles used for sole traders. Trade receivables are amounts owed by credit customers who have not yet paid for goods or services. A club can have them when it sells refreshments or services on credit. Irrecoverable debts are amounts owed by customers that the business considers uncollectable. These reduce trade receivables and appear as an expense in the income and expenditure account. An allowance for irrecoverable debts is an estimate of trade receivables that may not be paid.

12:45Any change in the allowance enters the income and expenditure account, and the closing allowance reduces trade receivables in the statement of financial position. Inventory must also use the valuation rules covered in the inventory video. All adjustments must affect both the period’s result and the relevant closing asset or liability. Common examination mistakes involve mixing cash movements with the year’s income and expenses. Put equipment purchases in receipts and payments, annual depreciation in income and expenditure, and equipment carrying amount in the statement of financial position.

13:17Transfer the refreshments result after its own expenses have been deducted. Classify subscriptions in arrears as current assets and subscriptions in advance as current liabilities. Paper One contains forty multiple-choice questions, while Paper Two contains five compulsory structured questions. You may need to select an adjustment, calculate subscriptions income or prepare connected accounts. Calculate means work out from given figures, and prepare means present information in a suitable format. Show the period clearly and label each subtotal with the correct accounting term.

13:47Explain means give reasons, why and how, supported by evidence. Subscriptions received may include fees owed from the previous year and fees paid for the following year. Current-year fees still unpaid must also be included in subscriptions income. Define means give precise meaning, so an answer must state exactly what the accumulated fund represents. The receipts and payments account summarises money movements, including capital and revenue items. Subscriptions and refreshments calculations identify the amounts belonging to the current period.

14:17The income and expenditure account then calculates a surplus or deficit after adjustments. Finally, the statement of financial position shows closing assets, liabilities and the accumulated fund supported by those accounts.