Question

(Comparing Cash versus Accrual Reports) The Professional Persons Association of Middleton is a nonprofit organization that is subject to the provisions of Audits of Certain Nonprofit Organizations. That dues for members are $40 per year; the fiscal year ends on August 31. Prior to September 1, 2015, 410 members had paid their dues for the year ended August 31, 2016. Prior to September 1, 2016, 457 members had paid their dues for the year ended August 31, 2017; one of these died suddenly on August 30, 2016, and the governing board decided to return his check to his widow. During the fiscal year ended on August 31, 2016, 36 other members died; 15 members were dropped for nonpayment of dues; and 1 member was expelled – no dues refunds were made to the estates of the 36 decedents; a $20 refund was made to the person expelled. Offsetting these membership decreases, 123 new members joined in fiscal 2016; membership as of September 1, 2015, had been 2,980 persons. (457 members are included). Members admitted during a year are charged dues for the full year.

The association has reported membership dues revenue on the cash basis in prior years. You bring to the attention of the governing board the requirement that financial statements should be on the accrual basis, unless cash basis statements are not materially different. Since you are so knowledgeable, the board asks you to compute membership dues revenue for fiscal 2016 on both the cash basis and the accrual basis and to report to them the amount on each basis and your conclusion as to whether the difference between the two is material.

Answer 1

Firstly we shall determine how many new members joined in 2016:

Determination of new admissions in fiscal year ended 2016:

As the question says "Offsetting these membership decreases, 123 new members joined in fiscal 2016" we can understand that after offsetting 123 new members joined i.e., Actual new admissions are 123+36+15+1=175

(Note: Member died on august 30,2016 cannot be considered as decrease because he was alive during the fiscal year ended 2016)

So Actual members admitted = 175.

Determination of revenue under Accrual system of accounting:

Accrual Concept: Income or Expense is recognised whenever it is accrued or incurred but does not depend whether we actually received or paid.

Members as on September 1, 2015 are 2980. The revenue from expelled person is refunded. The revenue received from newly admitted 175 members adds into this years revenue. Even though revenue is accrued from 15 dropped members we cannot show this as revenue because they actually do not part form of association.

So the revenue as per accrual sysytem:

Particulars	Amount
Revenue accrued from 2980 members as on September 1, 2015	$119200
Less: Revenue refunded to expelled person	$40
Add: Revenue accrued from 175 new admissions	$7000
Less: Revenue not received from 15 dropped members	$600
Total Revenue to be recognised	$125560

Note:

1. Revenue received from 410 members in year ended 2015 for year ended 2016 is shown as revenue received in advance in 2015 and as revenue in 2016.

2. Revenue received from 457 members for 2017 is shown as liability in 2016 and as revenue in 2017.

Determination of revenue under Cash system of accounting:

Cash system: Revenue or expense is recognised only when it is ACTUALLY received or paid.

Since 410 members paid their dues for 2016 in 2015 that revenue would have been accounted in 2015 and not in 2016 as per cash system. So only 2570 (2980-410) members are liable to pay this year. But 15 members did not pay their dues and expelled member money is refunded. 457 members advancely paid for 2017 in 2016. It will be considered as 2016 income as it is received in 2016 but one member died on august 30 and his advance amount is refunded. All the new 175 members paid their dues.

So revenue recognised under Cash system would be:

Particulars	Amount
Revenue actually received from 2555 (2980-410-15) members	$102200
Add: Advance Revenue received from 457 members	$18280
Less: Refund of money to person died on august 30	$40
Less: Refund of money to expelled person	$40
Add: Revenue received from 175 new admissions	$7000
Total revenue to be recognised	$127400

Conclusion: Revenue reported under cash system is $127400 and revenue reported under accrual system is $125560. The difference in reporting is $1840 which is not so material. This minor difference is due to advance payments received in 2015(410 members) and 2016(457 members) is almost same. But if this is not the case then there would be material difference and this leads to performance appraisal or decline even though reality is not so.

So it is recommended to follow accrual sysytem of accounting which exactly measures the performance of a company without any material differences.

PS: Please use "Thums Up" if you are contented with my solution and presentation.