Life Memberships & Donations (Cambridge (CIE) A Level Accounting): Revision Note

Life memberships

What are life memberships?

• A life membership is where a member makes a one-off payment to become a member for life

  • The member no longer needs to pay the annual subscription fee

• Entry fees are similar to life memberships as they are one-off payments

What is the accounting treatment for life memberships?

• The full amount received from life memberships does not contribute to that year's surplus calculated in the income and expenditure account

• This complies with the accounting concepts

  • Prudence

    • Taking the full amount as income in the year received would overstate that year's income

  • Accruals

    • The club provides services to life members over many years

• The correct accounting treatment is for a proportion of the amount received from life memberships to contribute to income for a specified number of years

• The remaining balance of the life membership fund is a non-current liability

  • It is similar to income received in advance

  • Except, the income is received years in advance

What are the journal entries for life memberships?

• When the club receives payment for a life membership

  • Enter the full amount into the accounts

  • Debit the bank account

  • Credit the life membership fund account

• At the end of the financial year

  • Enter the specified proportion of the life membership fund as income

  • Debit the life membership fund account

  • Credit the income and expenditure account

Donations

What are donations?

• Donations are given to clubs and societies from members, other businesses and the government

• The table describes the different types of donations:

What is the accounting treatment for donations?

• The accounting treatment is very similar to life memberships

• For a general donation

  • The full amount is included in the income and expenditure account

• For a restricted donation

  • Amounts are only included in the income and expenditure account when they are used

  • Parts of the donation might be used each year over several years

  • The remaining balance of the donation is a current or non-current liability

• For a grant covering multiple years

  • An amount of the grant that is proportional to the year is included in the income and expenditure account

    • For example, if a grant of $3 000 is given at the start of the year and is intended to last for 3 years, then $1 000 is included as income for the year

  • The remaining balance of the grant is a current or non-current liability

What are the journal entries for donations?

General donations

• When the club receives the donation

  • Enter the full amount into the accounts

  • Debit the bank account

  • Credit the donations account

• At the end of the financial year

  • Enter the full amount of the general donations

  • Debit the donations account

  • Credit the income and expenditure account

Grants covering multiple years

• When the club receives the grant

  • Enter the full amount into the accounts

  • Debit the bank account

  • Credit the donations account

• At the end of the financial year

  • Enter the proportion relating to the current year

  • Debit the donations account

  • Credit the income and expenditure account

Restricted donations

• When the club receives the donation for a specific purpose

  • Open a new bank account for the amount and create a trust fund in the books of account

  • Enter the full amount

  • Debit the special bank account

  • Credit the trust fund account

• When money is used from the trust fund to cover the cost of an activity

  • Enter the specific amount paid into the accounts

  • Debit the relevant account

    • E.g. non-current asset

  • Credit the special bank account

• At the end of the financial year

  • Enter the total amount used from the trust fund that year into the accounts

  • Debit the trust fund account

  • Credit the income and expenditure account