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Covers income and expenditure accounts, receipts and payments, and accumulated funds.
Not-for-Profit Making Organisations (Forms 2–4) is a crucial topic in Principles of Accounting that covers income and expenditure accounts, receipts and payments, and accumulated funds. This study guide aims to provide a comprehensive understanding of the subject by breaking it down into manageable chunks.
Form 2–4 is a financial reporting framework specifically designed for not-for-profit making organisations. It provides a structured approach to recording and presenting income, expenditure, receipts, and payments. The form is commonly used by charities, community groups, and other non-commercial entities. Form 2–4 is based on the accrual accounting method, which recognises revenue when earned and expenses when incurred.
Income accounts in Form 2–4 record the various sources of income for a not-for-profit organisation. These may include donations, grants, membership fees, and investment income. Income is recorded at the time it is received or earned, regardless of when the cash is actually received. For example, a donation received in December but not banked until January would still be recorded as income in December.
Expenditure accounts in Form 2–4 record the various expenses incurred by a not-for-profit organisation. These may include salaries, rent, utilities, and program expenses. Expenditures are recorded when they are incurred, regardless of when the cash is actually paid. For example, if an organisation pays for a program expense in December but the service is received in January, the expenditure would still be recorded as incurred in December.
Receipts and payments accounts in Form 2–4 record the cash transactions of a not-for-profit organisation. Receipts include all cash received from various sources, such as donations or membership fees. Payments include all cash paid out for expenses, such as salaries or rent. The receipts and payments account provides a summary of the organisation's cash inflows and outflows.
Accumulated funds in Form 2–4 represent the total amount of income received by a not-for-profit organisation, minus the total amount of expenses incurred. This account provides a snapshot of the organisation's financial position at a particular point in time. Accumulated funds can be used to fund future programs or activities.
When preparing Form 2–4, not-for-profit organisations should avoid common mistakes such as failing to record income and expenses correctly, neglecting to account for accrued income or expenses, and incorrectly calculating accumulated funds. Accurate preparation of Form 2–4 is essential for effective financial management and decision-making.
The XYZ Charity received a donation of $10,000 in December. The charity also incurred an expense of $5,000 in December for a program it ran. In January, the charity paid out $3,000 for rent and received another $8,000 in donations. Using Form 2–4, the charity would record the income and expenses as follows: Income – Donations ($10,000 + $8,000 = $18,000), Expenses – Program expense ($5,000). The accumulated funds account would show a balance of $13,000 ($18,000 - $5,000).
What is the primary purpose of Form 2–4?
Which of the following is NOT a type of transaction recorded in Form 2–4?
When should income be recorded in Form 2–4?
What is the purpose of the Receipts and Payments Account in Form 2–4?
What is the term for a type of organisation that operates without seeking personal financial gain?
When should expenditure be recorded in Form 2–4?
What is the purpose of the Accumulated Funds Account in Form 2–4?
What is Form 2–4 based on?
Which of the following is a common mistake to avoid when preparing Form 2–4?
Discuss the importance of accurate financial reporting for not-for-profit organisations. (20 marks) (20 marks)
Explain how Form 2–4 can be used to track the financial activities of a not-for-profit organisation. (20 marks) (20 marks)