(a) Give reasons for including outstanding liabilities in the Balance Sheet (b) How do you record an income generating activity of a bar in a not-for-profit...

Answer Details

(a) Reasons for including outstanding liabilities in the Balance Sheet

1. To comply with the accruals (matching) concept, so that all expenses relating to the period are charged against the income of that period, whether paid or not.
2. To give a true and fair view of the financial position by showing all amounts the business owes as at the balance sheet date.
3. To ensure the net profit is not overstated, since ignoring outstanding expenses would understate expenses and inflate profit.
4. To disclose the full extent of the organisation's obligations to third parties, which is useful to creditors and other users of the accounts.

(Any relevant reasons.)

(b) Recording an income-generating activity of a bar in a not-for-profit making organisation

Where a club or society runs a subsidiary trading activity such as a bar, a separate Bar Trading Account is prepared to find the profit or loss made by the bar. Its profit is then credited (or its loss debited) to the Income and Expenditure Account. The treatment is as follows:

1. Prepare a Bar Trading Account: credit it with bar sales/takings; debit it with the cost of bar goods sold (opening bar stock + bar purchases - closing bar stock) and any direct bar expenses (for example, barman's wages).
2. The resulting bar profit is transferred to the credit side of the Income and Expenditure Account (a bar loss is transferred to the debit side).
3. The closing bar stock is shown as a current asset, and any amount owing for bar purchases (bar creditors) as a current liability, in the Balance Sheet.