Legacy is a kind of donation that is received by NPOs as per the will of a deceased person. As it is a kind of donation, so the accounting treatment of legacy remains the same as that of the donations. If the donor or the deceased person has not specified any specific conditions for the use of the legacy amount, then such legacies are regarded as General Legacies (or General Donations). On the other hand, if any specific condition is attached to the legacy regarding its use, then such legacies are treated as Specific Legacies (or Specific Donations).
Accounting Treatment of Legacy
The accounting treatment of legacy depends on the type of legacy.
General Legacy: It is considered as a revenue receipt for an NPO and is shown on the credit side (i.e. Income Side) of the Income and Expenditure Account.
Specific Legacy: It is considered as a capital receipt. It can be either directly shown as an addition to the Capital Fund or can be shown separately on the Liabilities side of the Balance Sheet.
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.