Which one of the following concerns prepares Receipts and Payments Account ?

Correct — B, (b) Non-trading concerns. A non-trading concern is an organisation that does not exist to earn profit — a club, a society, a charitable trust, a hospital, a school, a professional association — and its final accounts are built differently from a business's for that reason. Where a trading business prepares a Trading Account, a Profit and Loss Account and a Balance Sheet, a non-trading concern prepares a Receipts and Payments Account, an Income and Expenditure Account and a Balance Sheet. The first of those three is the one this question names, and it is simply the cash book of the period summarised into one statement: it opens with the cash and bank balance brought forward, shows every receipt on the debit side and every payment on the credit side, and closes with the balance carried forward. Because it is a record of cash movement and nothing else, it takes in capital and revenue items alike — a subscription for the year and the purchase of a projector sit side by side — and it takes in amounts relating to the last period, this period and the next without distinction, since an arrear subscription and an advance subscription are both cash received. It is a real account, and non-cash items such as depreciation, outstanding expenses and accrued income never enter it. That is exactly why the second statement is needed: the Income and Expenditure Account strips out the capital items and the amounts belonging to other periods and reports the surplus or deficit of this period alone. The two are prepared together, by the same class of organisation, and the pairing is the point of this question and of the one that follows it on the paper.

Why the others are wrong

• (a)Trading concerns — A trading concern buys and sells goods to earn profit, and it reports through a Trading Account, a Profit and Loss Account and a Balance Sheet. It certainly keeps a cash book, but it does not present a summary of that cash book as one of its final accounts; the closest equivalent in a company's published statements is the Cash Flow Statement, which is a differently constructed document classifying flows into operating, investing and financing activities. The Receipts and Payments Account belongs to organisations whose members want to know what was received and what was spent, which is a not-for-profit question rather than a trading one.
• (c)Manufacturing concerns — A manufacturing concern is a species of profit-seeking business, not a separate answer to this question. It prepares one statement more than a trading concern, not one instead: a Manufacturing Account that gathers raw material consumed, direct wages and factory overheads to arrive at the cost of production, which is then carried into the Trading Account. Nothing in that sequence is a Receipts and Payments Account. If the option were right, option (a) would have to be right as well, and the stem asks for one.
• (d)Companies registered under Companies Act — This option classifies by legal form while the question classifies by purpose, which is why it cannot be the answer even though it is not a foolish choice. A company's financial statements are the ones the Companies Act, 2013 prescribes, and a Receipts and Payments Account is not among them. And a company formed for charitable objects under section 8 of that Act is registered under the Companies Act and is at the same time a non-trading concern — so the option overlaps the keyed answer at one edge instead of competing with it. What decides the accounting treatment is whether the organisation trades for profit, not the statute it is registered under.

Accounting for non-trading concerns is built around three statements and the relationship between them. The Receipts and Payments Account is a summarised cash book: real account, opening and closing cash and bank balances, all receipts on the debit side and all payments on the credit side, capital and revenue items together, and amounts belonging to any period whatever. The Income and Expenditure Account is the not-for-profit equivalent of the Profit and Loss Account: a nominal account prepared on the accrual basis, containing only the revenue items of the current period, with the balancing figure described as a surplus — an excess of income over expenditure — or a deficit, which is transferred to the Capital Fund rather than to a proprietor's account. The Balance Sheet then shows the Capital Fund or General Fund in place of capital, along with the concern's assets and liabilities. The bridge between the first two statements is the standard examination exercise: start from the Receipts and Payments Account, remove the capital receipts and payments, remove the amounts relating to the previous and the following periods, add the income earned but not received and the expenses incurred but not paid, add the non-cash charges such as depreciation, and what remains is the Income and Expenditure Account. Special items have their own conventions — subscriptions in arrear and in advance, life membership fees, entrance fees, donations distinguished as general or specific, legacies, and the sale of old sports material — and each of those is a place where a receipt of cash and an income of the period part company.

Key facts

• A Receipts and Payments Account is a summary of the cash book for the period, prepared by non-trading or not-for-profit concerns such as clubs, societies, trusts, hospitals and schools.
• It is a real account; it begins with the opening cash and bank balance and ends with the closing balance.
• Receipts appear on the debit side and payments on the credit side, following the form of the cash book.
• It includes both capital and revenue items, and amounts relating to the previous, current and succeeding periods alike.
• Non-cash items such as depreciation, outstanding expenses and accrued income never appear in it.
• The three final accounts of a non-trading concern are the Receipts and Payments Account, the Income and Expenditure Account and the Balance Sheet.
• The balancing figure of the Income and Expenditure Account is a surplus or a deficit, and it is transferred to the Capital Fund.
• A trading concern's equivalent statements are the Trading Account, the Profit and Loss Account and the Balance Sheet; a manufacturing concern adds a Manufacturing Account ahead of the Trading Account.

Common traps

• Assuming any statement about cash belongs to any organisation. The Receipts and Payments Account is a non-trading concern's final account; a trading business summarises cash through a Cash Flow Statement instead.
• Treating manufacturing concerns as a separate category here. They are profit-seeking businesses that add a Manufacturing Account, not organisations that prepare a Receipts and Payments Account.
• Answering by legal form rather than by purpose. A section 8 company is registered under the Companies Act and is still a non-trading concern.
• Expecting the Receipts and Payments Account to show only the current year's items. It shows every rupee received and paid, whichever period it relates to.
• Looking for depreciation or outstanding expenses in it. Nothing that is not a cash movement can appear.

• practice — not a real PYQ

  The Receipts and Payments Account of a non-trading concern is essentially a summary of :

  • (a)The cash book for the period
  • (b)The trial balance for the period
  • (c)The Income and Expenditure Account for the period
  • (d)The Balance Sheet at the end of the period

  Answer(a) The cash book for the period

• practice — not a real PYQ

  Which one of the following items would appear in the Receipts and Payments Account of a club but not in its Income and Expenditure Account for the same year ?

  • (a)Salaries paid for the current year
  • (b)Purchase of a computer for the club office
  • (c)Rent for the current year still outstanding
  • (d)Depreciation on the club's furniture

  Answer(b) Purchase of a computer for the club office