Enforcement Officer / Accounts Officer (EO/AO) 2017 recruitment test. Transcribed from the Commission's own booklet (series A, GRS-A-TNS); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

Legacies are generally

(a)capitalized and taken to Balance Sheet
(b)treated as income
(c)treated as expenditure
(d)capitalized and taken to Suspense Account

Answer

Why

Correct — A, (a) capitalized and taken to Balance Sheet. A legacy is an amount or an asset that a club, society, trust or other not-for-profit organisation receives under the will of a person who has died. It is a bequest, and the defining thing about a bequest is that it cannot recur: the donor is dead, and the institution has no expectation of a second one from the same source.

That single characteristic decides the accounting. A receipt of a non-recurring nature is a capital receipt, and a capital receipt is not income of the year. So a legacy is capitalised — added to the Capital Fund on the liabilities side of the Balance Sheet — rather than credited to the Income and Expenditure Account. Doing anything else would overstate the year's surplus and would tell the members that the institution's ordinary activities produced money they in fact received from a will.

The stem's word 'generally' is doing real work and should not be read past. Two situations depart from the general rule. Where the will attaches a purpose to the bequest — a legacy for a library wing, or for a prize in a named person's memory — the amount is credited to a specific fund of that name, shown separately on the liabilities side, and spent only on that purpose; any income earned on its investment goes to the same fund. And where the legacy is of a small amount, so that treating it as ordinary income neither distorts the surplus nor misleads anybody, textbooks permit it to be credited to the Income and Expenditure Account. Neither situation displaces the general rule the question is asking about; both are worth knowing because they are what the word 'generally' is there to accommodate.

The same logic governs the other receipts that look like income and are not. Life membership fees buy a right that will be enjoyed for years, so they are capitalised. Entrance or admission fees are treated as capital receipts where the institution's practice is to build them into the fund. A donation for a stated purpose goes to a specific fund; a small general donation may be taken as income. In every case the question to ask is whether the receipt belongs to this year's ordinary working or to the permanent resources of the institution.

Why the others are wrong

(b)treated as income — Treating a legacy as income is the recognised exception rather than the general rule, and the stem asks what is generally done. Where the amount is small, crediting it to the Income and Expenditure Account is accepted, because it neither distorts the year's surplus nor misleads a reader about the sources of the institution's money. But a legacy is by nature a single, non-recurring receipt arising out of a will, so as a general treatment income is wrong: it would inflate the surplus of one year with money that has nothing to do with that year's activities and would leave the Capital Fund understated for every year afterwards.
(c)treated as expenditure — A legacy is money coming in, not money going out, so it cannot be an expenditure on any reading. The option is here to catch a candidate who reads the word 'legacy' as something the institution pays under somebody's will rather than something it receives. If a trust were itself obliged to pay a legacy out, that payment would be a disbursement of the estate it administers, and it still would not appear as expenditure in the Income and Expenditure Account of a non-trading concern.
(d)capitalized and taken to Suspense Account — A Suspense Account is a temporary holding account, opened when a trial balance will not agree or when a receipt or payment cannot yet be posted to its proper account because the necessary information is missing. It is cleared as soon as the doubt is resolved and it should never appear in a final Balance Sheet that has been properly prepared. A legacy raises no such doubt — its treatment is settled — so there is nothing to suspend. The option also contradicts itself: to capitalise an amount is to add it to the Capital Fund, which is the opposite of parking it in a suspense account.

Concept

Not-for-profit organisations must separate capital receipts from revenue receipts, because only revenue receipts belong in the Income and Expenditure Account and only they affect the surplus of the year. The recurring test does most of the work. Subscriptions recur annually and are revenue. Legacies arise once, under a will, and are capital: they are added to the Capital Fund, which is a non-trading concern's equivalent of capital, built up out of accumulated surpluses together with capitalised legacies, life membership fees and capital donations. Life membership fees are capital because the payer buys a right extending over many years. Donations split by their purpose: a specific donation is credited to a fund bearing that purpose and may be spent on nothing else, while a general donation of modest size may be taken to income. Sale proceeds of an old asset are capital, and only the profit or loss on the sale touches the Income and Expenditure Account. The Capital Fund appears on the liabilities side of the Balance Sheet, and the surplus or deficit of the year is added to or deducted from it.

This item and the one immediately before it in the paper are two halves of the same idea. The earlier item establishes that the Income and Expenditure Account is a nominal account holding revenue items of the current year; this one asks what to do with a receipt that fails that test. Examiners like legacies because the word sounds like income to anybody who has not been taught the recurring test, and because the correct answer requires the candidate to say where in the final accounts the amount goes rather than merely to classify it. The habit worth building is to run every receipt in a non-trading concern's books past two questions — will it recur, and has the donor tied it to a purpose — before deciding which statement it belongs in.

Key facts

A legacy is an amount or asset received by a non-trading concern under the will of a deceased person.
Being non-recurring, it is generally a capital receipt: capitalised by adding it to the Capital Fund on the liabilities side of the Balance Sheet.
A legacy received for a stated purpose is credited to a specific fund of that name and spent only on that purpose.
A legacy of a small amount may, by accepted practice, be credited to the Income and Expenditure Account.
Life membership fees are likewise capitalised, because the payer acquires a right extending over many years.
A specific donation goes to a specific fund; a small general donation may be treated as income.
The Capital Fund of a non-trading concern is built from accumulated surpluses plus capitalised legacies, life membership fees and capital donations.
Only the profit or loss on the sale of an old asset reaches the Income and Expenditure Account; the sale proceeds themselves are a capital receipt.

The recurring test does the work, and the word 'generally' covers two departures

(a) Capitalised and taken to Balance Sheet→A legacy is an amount or an asset received under the will of a person who has died, and the defining thing about a bequest is that it cannot recur — the donor is dead, and the institution has no expectation of a second one from that source. A non-recurring receipt is a capital receipt, so it is added to the Capital Fund on the liabilities side.

Why not income→Crediting it to the Income and Expenditure Account would overstate the year's surplus, and would tell the members that the institution's ordinary activities produced money it in fact received from a will.

What 'generally' accommodates→Where the will attaches a purpose — a legacy for a library wing, or for a prize in a named person's memory — the amount is credited to a specific fund of that name, shown separately, and spent only on that purpose. And a legacy of a small amount may by accepted practice be credited to income, since it distorts nothing and misleads nobody.

(c) Treated as expenditure→A legacy is money coming in, not money going out, so it cannot be an expenditure on any reading. The option is there to catch a candidate who reads the word as something the institution pays under somebody's will rather than something it receives.

(d) Capitalised and taken to Suspense Account→A Suspense Account is a temporary holding account, opened when a trial balance will not agree or a posting cannot yet be made, and cleared as soon as the doubt is resolved. A legacy raises no such doubt. The option also contradicts itself: to capitalise an amount is to add it to the Capital Fund, which is the opposite of parking it in suspense.

The same test on neighbouring receipts→Life membership fees buy a right enjoyed for years, so they are capitalised. Entrance fees are capital where the institution's practice is to build them into the fund. A specific donation goes to a specific fund and a small general donation may be income. Sale proceeds of an old asset are capital, and only the profit or loss on the sale touches the Income and Expenditure Account.

Study next

Capital and revenue receipts, and capital and revenue expenditure, with deferred revenue expenditure as the intermediate caseSpecific funds — tournament, prize, building — and the treatment of the income earned on their investmentsSubscriptions: arrears at both ends of the year, advances, and subscriptions written offPreparing the Balance Sheet of a club, including where honorarium, entrance fees and donations sitConversion of a Receipts and Payments Account into an Income and Expenditure Account

Common traps

Reading 'legacy' as ordinary income because it arrives as money. The test is whether the receipt can recur.
Ignoring the word 'generally' and arguing for the small-amount exception as though it were the rule.
Crediting a legacy tied to a purpose to the general Capital Fund instead of opening a specific fund for it.
Confusing capitalisation with suspension: capitalising means adding to the Capital Fund, and a Suspense Account is a temporary device for unresolved items.
Taking the whole sale proceeds of an old asset into the Income and Expenditure Account instead of only the profit or loss on sale.

Non-trading concern accounting supplies EPFO papers with a reliable pair of one-line items: classify one of the two statements, and place one awkward receipt. The receipts that recur in these questions are legacies, life membership fees, entrance fees, specific donations, sale of old sports material and government grants. The answer is always determined by two questions — does it recur, and is it tied to a purpose — so a candidate who has those two tests can handle a receipt the paper has never asked about before. A harder version asks where the item appears rather than how it is classified, which is exactly what this option list does.

Related PYQs

EPFO_EOAO_2017_Q62Open & attempt →

Income and Expenditure Account is

(a) Real Account
(b) Personal Account
(c) Nominal Account
(d) Capital Account

Answer(c) Nominal Account

The preceding item in the same not-for-profit set, which establishes that the Income and Expenditure Account is a nominal account admitting only revenue items — the rule that keeps a legacy out of it.

Practice

practice — not a real PYQ
Life membership fees received by a club are generally
- (a)credited to the Income and Expenditure Account as income of the year
- (b)added to the Capital Fund in the Balance Sheet
- (c)shown as an asset in the Balance Sheet
- (d)credited to a Suspense Account until the member dies
Answer(b) added to the Capital Fund in the Balance Sheet
practice — not a real PYQ
A donation received by a hospital specifically for the construction of a new operation theatre should be
- (a)credited to the Income and Expenditure Account
- (b)credited to a separate fund shown on the liabilities side and used only for that purpose
- (c)deducted from the cost of the building in the year it is spent
- (d)shown as a contingent liability until the theatre is built
Answer(b) credited to a separate fund shown on the liabilities side and used only for that purpose

Why