Question

How would a non profit organization deal with life membership fee

Answer 1

Revenue sources for non-profit organizations 

There are several sources of revenue for a non-profit organization such as donations, annual subscription, member entrance fee, profit on sale of old fixed asset at scrape value etc.

Although non-profit organizations don’t exist to make profit, they incur expenses on the provision of services or goods to their members or general public. Therefore, in order to cover these expenses, non-profit organizations need some sources of revenue

Sources of revenue vary from one non-profit organization to another. However, the most common sources of revenue are listed below:

Donations

Some people would like to donate money or goods to non-profit organizations (such as a charitable school) to help continue their operations

There are two types of donations: General donations and specific donations

1. Specific donations 
Specific donations are donations for a specific purpose

For example, Mr. X donated $50,000 to a charitable school in order to help school in buying new furniture. In this case, helping school to buy new furniture is the specific purpose of donation

2. General donations
Donations without a specific purpose are general donations. Such donations can be used by non-profit organizations for any purpose

Both specific and general Donations received during an accounting period are generally considered as income/revenue for that accounting period and they are shown in an income and expenditure account

Entry fees

When a new member gets admission in a non-profit organization, the non-profit organization may require him/her to pay a certain amount of fee in order to be a member of non-profit organization

Fee received in an accounting period is generally considered as revenue/income for that accounting period. Therefore, it is reported in an income and expenditure account

Profit on sale or disposal of old fixed assets

Profit on the sale of a fixed asset is considered as revenue of a non-profit organization and thereby, it is shown in an income and expenditure account for the accounting period in which fixed asset disposal was carried out

Profit on sale of fixed asset = Market value of a fixed asset – Book value of a fixed asset 

For example, A vehicle has a book value of $1000 was sold for $500, therefore, profit on sale of vehicle should be $1000-$500=$500 or $500 is the profit on disposal of vehicle

Membership annual subscription

To be a non-profit organization's member, you need to pay a specific fee to the non-profit organization. The fee is known as membership subscription and it is generally payable annually. Because the membership subscription is received for one year, it is treated as the revenue of a non-profit organization

For example, Mr. X needs to pay $500 per year in order to remain a member of a sports club (a non-profit organization). Being a member of a sports club, Mr. X can use sports ground and sports equipments

Income and expenditure account is based on accrual concept of accounting. Therefore, subscription that is not related to current accounting period won’t get counted. In other words only earned subscription is recorded in an income and expenditure account

Let’s assume the current accounting period is 2015. Cash received as subscription during this accounting period totaling $3000. The amount $1500 out of $3000 received during 2015 was actually the subscription of previous year 2014 and $500 received in advance as the subscription of upcoming year 2016. Thereby, the remaining $1000 should be the subscription of current year or 2015.

Interest received on investments

A non-profit organization might have invested its surplus cash in different companies bonds, debentures, treasury bonds etc. Therefore, non-profit organization receives a certain amount of interest at a regular interval. The amount of interest is generally considered as the revenue of a non-profit organization and interest is shown in the income and expenditure account for the year in which it is received

Profit from bar trading

Some clubs and other non-profit organizations have a bar and/or a cafeteria. Bar and cafeteria sells its drinks, snacks or food to the members of club. The profit on these sales or trading activities is generally considered as the revenue of non-profit organization and therefore profit or loss on bar trading is shown in income and expenditure account for the year (or accounting period) during which bar tradings take place

Some non-profit organizations prepare a separate account for a bar known as bar trading account. A bar trading account includes the following:
Bar sales or takingsOpening stock, purchases and closing stockGross profitOperating expenses and other expensesAnd finally the net profit or loss

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