A Life Membership Fund is established by non-trading organizations, such as clubs, societies, or charities, to account for the one-time fees collected from life members. This fund is either treated as a capital receipt or amortized over a specific period. The fund supports the organization’s long-term financial stability and ensures that the income is appropriately recognized over time.
1. Scenario Overview
Let’s consider the case of the Sunrise Social Club for the year ending December 31, 2024. The club offers life membership for a one-time fee of $1,200 and has multiple life members contributing to the Life Membership Fund.
A. Financial Information
- Life Membership Fee per Member: $1,200
- New Life Members in 2024: 5 members
- Total Life Membership Fees Collected in 2024: $1,200 x 5 = $6,000
- Amortization Period: 10 years (income recognized evenly over 10 years)
2. Accounting Treatment of Life Membership Fund
The Sunrise Social Club decides to amortize the Life Membership Fees over 10 years, recognizing $120 per member annually as income.
A. Annual Income Recognition
Annual Income Recognized = Total Life Membership Fees ÷ Amortization Period
Annual Income Recognized = $6,000 ÷ 10 = $600 per year
3. Accounting Entries for Life Membership Fund
A. When Life Membership Fees Are Received
- Debit: Bank Account $6,000
- Credit: Life Membership Fund (Deferred Income) $6,000
B. At the End of Each Year (for 10 Years)
- Debit: Life Membership Fund $600
- Credit: Life Membership Income (Income and Expenditure Account) $600
4. Presentation in Financial Statements
A. Income and Expenditure Account (for 2024)
| Sunrise Social Club | |
|---|---|
| Income and Expenditure Account for the Year Ending 31/12/2024 | |
| Income | Amount ($) |
| Life Membership Income (Amortized) | 600 |
B. Balance Sheet (as at 31/12/2024)
The remaining balance of the Life Membership Fund, which has not yet been recognized as income, is shown as a liability in the balance sheet.
| Sunrise Social Club | |
|---|---|
| Extract from the Balance Sheet as at 31/12/2024 | |
| Liabilities | Amount ($) |
| Life Membership Fund (Deferred Income) | 5,400 |
5. Detailed Explanation of the Life Membership Fund Example
A. Life Membership Fee Recognition
- The total $6,000 collected from five life members is initially recorded as deferred income (Life Membership Fund) because the benefits to members extend over several years.
- Each year, $600 is recognized as income in the Income and Expenditure Account, reflecting the services provided during that year.
B. Balance Sheet Treatment
- At the end of the first year, $5,400 remains in the Life Membership Fund as deferred income, representing the obligation to provide membership services in future years.
6. Importance of Properly Managing the Life Membership Fund
A. Ensures Accurate Financial Reporting
- Spreading the recognition of life membership fees over time ensures that income is matched with the period during which services are provided, giving a true and fair view of the organization’s financial performance.
B. Promotes Financial Stability
- Life membership fees provide upfront cash, which can be used for long-term projects or investments, supporting the organization’s sustainability.
C. Enhances Transparency and Accountability
- Accurate accounting for life membership fees demonstrates transparency to members and stakeholders, ensuring that funds are managed responsibly.
7. Common Challenges in Managing Life Membership Funds
A. Determining the Amortization Period
- It can be challenging to decide over how many years the life membership fee should be amortized, especially if member retention varies significantly.
B. Balancing Cash Flow and Income Recognition
- While life membership fees provide immediate cash inflow, recognizing the income over multiple years ensures that the organization does not overstate its short-term financial performance.
The Role of the Life Membership Fund in Non-Trading Organizations
A Life Membership Fund provides non-trading organizations with a reliable source of long-term funding while fostering strong, lasting relationships with members. Proper accounting ensures that life membership fees are recognized over time, reflecting the ongoing obligation to provide services. This approach promotes financial sustainability, enhances transparency, and supports the organization’s long-term growth and success.