The Fund based accounting basically focuses on how to manage these specific funds. Over the years, NPOs maintains these funds in the bank account and earn interest on these funds. Similarly, it receives donations or income by using these funds. On the other hand, there are various expenses that are incurred in order to maintain these funds.
Now, as per the Fund-based accounting, any donation and income that is attributable to a particular fund are added to that particular fund. On the other hand, any expenses and payments relating to the fund are subtracted from that particular fund. After making these adjustments, the final balance is calculated. If the final balance is positive, then it implies that there is an excess amount in the fund over the expenses and this is shown on the Liabilities side of the Closing Balance Sheet. On the other hand, if there exists a negative balance, then it implies that the amount in the fund falls short of the expenses and this balance is shown on the debit side (or Expenditure) side of the Income and Expenditure Account.
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Interest on Capital
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.
Interest on Drawings
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.
What is Operating Profit?
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.
Balance Sheet
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
Profit and Loss Account
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.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.