(a) Explain some of the terms used in the accounts for not-for-profit making organizations (b) Distinguish between shares and debentures.

Answer Details

(a) Terms used in the accounts of not-for-profit making organisations

• Accumulated fund: the capital of the organisation - the excess of its assets over its liabilities.
• Receipts and Payments Account: a summary of all cash and bank receipts and payments for the period, similar to a cash book, with opening and closing balances.
• Income and Expenditure Account: the equivalent of a profit and loss account; it records incomes and expenses on the accruals basis to show a surplus or deficit.
• Subscriptions: the periodic dues paid by members; the main source of income.
• Entrance (admission) fees: fees paid by new members on joining.
• Life membership: a lump sum paid for membership that lasts a member's lifetime.
• Surplus/Deficit: the excess of income over expenditure (surplus) or of expenditure over income (deficit).
• Honorarium: a token payment made to an officer for voluntary services rendered.

(b) Distinction between shares and debentures

• A share is a unit of the ownership capital of a company; a shareholder is a part-owner/member. A debenture is a loan to the company; a debenture holder is a creditor.
• Shares earn a dividend, which depends on profits and is an appropriation of profit. Debentures earn a fixed rate of interest, which is a charge/expense payable whether or not profit is made.
• Shareholders have voting rights; debenture holders do not.
• Debentures are usually secured and are repaid before shareholders on winding up; ordinary shareholders are paid last.