COOPERATIVES

A cooperative business (or co-op) is a type of organization that is owned, controlled,

and operated by its members for their mutual benefit. Members can be consumers,
workers, producers, or businesses that share in the profits and decision-making. Co-ops
are based on principles of democratic governance, meaning each member typically
has one vote regardless of their investment.

Key Features of a Cooperative Business:

1. Member-Owned – The business is collectively owned by its members.

2. Democratic Control – Members participate in decision-making, often on a one-
member, one-vote basis.
3. Profit Sharing – Profits (or surplus) are distributed among members or
reinvested into the co-op.
4. Community-Oriented – Co-ops often aim to benefit their members and the
community rather than just maximizing profit.
5. Types of Cooperatives – Includes consumer co-ops, worker co-ops, producer
co-ops, and purchasing co-ops.

Examples include credit unions, agricultural co-ops, food co-ops, and housing
cooperatives

7 Cooperative Principles

1. Voluntary and Open Membership

o Cooperatives are open to all individuals who are willing to accept the
responsibilities of membership, without discrimination.
2. Democratic Member Control
o Co-ops are governed by their members, who actively participate in
decision-making. Each member typically has one vote, regardless of their
financial contribution.
3. Member Economic Participation
o Members contribute equally to the capital of the co-op and control how
profits (or surplus) are used, often reinvesting them for mutual benefit.
4. Autonomy and Independence
o Cooperatives are self-governing organizations. If they enter agreements
with other organizations, they do so in a way that preserves member
control and cooperative values.
5. Education, Training, and Information
o Co-ops provide education and training to members, employees, and the
public to ensure informed participation and awareness of cooperative
benefits.
6. Cooperation Among Cooperatives
o Co-ops work together at local, national, and international levels to
strengthen the cooperative movement.
7. Concern for Community
o Cooperatives strive for sustainable development and the well-being of
the communities they serve.
These principles set cooperatives apart from traditional businesses, focusing on people
over profit and fostering long-term community benefits.

Advantages and Disadvantages of Cooperative Businesses

Advantages of Cooperatives:

1. Democratic Control – Members have an equal say in decision-making (one

member, one vote), ensuring fairness.
2. Member-Owned and Beneficial – Profits (or surplus) are shared among
members or reinvested for mutual benefit.
3. Lower Costs and Shared Resources – Co-ops can pool resources, leading to
reduced costs and better services.
4. Economic Stability – Less profit-driven than traditional businesses, co-ops tend
to focus on long-term sustainability.
5. Community Development – They often prioritize local needs, social
responsibility, and sustainable development.
6. Easier Access to Credit – Credit unions and financial cooperatives provide fair
loan opportunities to members.
7. Job Security and Fair Wages – Worker cooperatives ensure fair treatment and
equitable income distribution.

Disadvantages of Cooperatives:

1. Limited Capital and Funding – Raising capital can be challenging as co-ops rely
mostly on member contributions.
2. Slow Decision-Making – Since decisions are made democratically, reaching
agreements can take time.
3. Inefficiency – Without strong leadership, a co-op may struggle with
management and operational efficiency.
4. Limited Expansion Potential – Co-ops may find it harder to grow quickly
compared to investor-driven businesses.
5. Free-Rider Problem – Some members may not contribute equally but still
benefit from the cooperative.
6. Lack of Professional Management – Some co-ops rely on members without
professional expertise, affecting efficiency.
7. Conflict Among Members – Differences in opinions and goals can lead to
internal disagreements
Methods of Raising Capital for Cooperatives

Cooperatives need capital to start, operate, and expand their businesses. However, since
they are member-owned and not profit-driven like traditional businesses, they have
unique ways of raising funds. Here are the main methods:

1. Member Contributions

 Members contribute capital when joining the cooperative, either as membership

fees or shares.
 Additional capital can be raised through periodic member contributions.

2. Retained Earnings (Surplus Reinvestment)

 Instead of distributing all profits, cooperatives can reinvest a portion to fund

future growth.
 Helps maintain financial stability while benefiting members in the long run.

3. Loans from Financial Institutions

 Co-ops can borrow from banks, credit unions, or cooperative banks.

 Some financial institutions offer low-interest loans specifically for cooperatives.

4. Government Grants and Subsidies

 Many governments support cooperatives through funding programs, grants, or

tax incentives.
 These funds are often targeted at sectors like agriculture, housing, and finance.

5. Issuing Cooperative Shares

 Some co-ops allow members to buy additional shares, increasing the capital
base.
 Unlike regular businesses, these shares often have limits on dividends to
maintain fairness.

6. Donations and Crowdfunding

 Some cooperatives raise funds through community donations or crowdfunding

campaigns.
 Especially useful for social enterprises, housing co-ops, and community-driven
projects.

7. Partnerships and Joint Ventures

 Cooperatives can collaborate with other businesses, organizations, or

government agencies.
  Joint ventures can bring in additional funding and expertise while maintaining
cooperative values.

8. Cooperative Development Funds

 Some cooperatives contribute to sector-wide development funds, which are used

to support growth initiatives.
 These funds may provide loans or grants to co-op members in need.

The journal entries for issuing capital and debentures are the same for both
companies and cooperatives.

The calculation of dividends is the same for both companies and cooperatives.

Declaration of dividends (proposed dividends) journal entry

DR. Retained earnings

CR. Dividends payable

Payment of dividends journal entry

DR. Dividends payable

CR. Cash

Final accounts of Cooperatives

1. Trading account – a inancial statement prepared to determine the gross pro it or

gross loss for a given inancial period. It focuses on the results of buying and
selling goods.

Name of cooperative
Income statement for the year ended dd/mm/yyyy
$ $
Revenue x
Less: Cost of goods sold
Opening inventory x
Purchases x
Cost of goods available for sale x
Less: Closing inventory (x)
Cost of goods sold (x)
Gross pro it on trading operations x
 2. Income and expenditure account - a key inancial statement used to determine
the annual surplus or de icit. It serves a similar role to a Pro it & Loss Account
but focuses on cooperative principles rather than pro it maximization.

Name of Cooperative
Income & expenditure a/c for the year ended dd/mm/yyyy
$ $
INCOME
Gross pro it on trading activities x
Membership fees x
Interest received on investments x
xx

EXPENDITURE
Of ice/administration expenses x
Bank charges & interest x
Depreciation x
Transportation costs x
Honoraria x
Wages & salaries x
Annual general meeting costs x
Auditors' remuneration x
(xx)
Surplus for the year xx

De inition of Honoraria

An honorarium (plural: honoraria) is a voluntary payment made to a person for services

rendered, where no of icial fee is required or expected. It is often given as a token of
appreciation rather than as a contractual payment for work.

Key Features of Honoraria:

✔ Not a Salary or Wage – It is a one-time payment, not a regular income.

✔ Given for Special Services – Typically awarded for lectures, speeches, advisory roles,
or voluntary contributions.

✔ No Legal Obligation – The recipient is not contractually entitled to it.

Example: A cooperative board member being given a small honorarium for advisory
services.
Honoraria appear in the Income and Expenditure Account of a cooperative, but the
classi ication depends on whether the cooperative is paying or receiving the honoraria.

1. If the Cooperative PAYS Honoraria

It is recorded as an expense in the Expenditure section of the Income and Expenditure

Account.

Example: If a cooperative pays an honorarium to its board members for voluntary

services, it will be recorded as:

Dr. Income & Expenditure Account

➝ To Honoraria Expense (XXX)

2. If the Cooperative RECEIVES Honoraria

It is recorded as income in the Income section of the Income and Expenditure Account.

Example: If a cooperative receives an honorarium for providing expert advice or

services, it will be recorded as:

Cr. Income & Expenditure Account

➝ By Honoraria Income (XXX)

Summary

✔ Honoraria Paid → Recorded as an expense

✔ Honoraria Received → Recorded as income

3. Appropriation Account of a Cooperative

The Appropriation Account in a cooperative is a inancial statement that shows how the
surplus (or pro it) from the Income and Expenditure Account is distributed among
different funds and to the members. Unlike traditional businesses, cooperatives aim to
bene it members and the community, not maximize pro its for external shareholders.
The Appropriation Account helps to re lect the cooperative's commitment to this goal.
Components of the Appropriation Account:

 Transfer to Reserve Fund: A certain percentage of the surplus is transferred to

the reserve fund, which is used to ensure the long-term stability of the
cooperative.
 Dividend to Members: In many cooperatives, dividends (or patronage refunds)
are paid to members based on their contribution or participation.
 Bonus to Employees: Some cooperatives distribute bonuses to their employees as
part of the surplus sharing.
 Welfare and Education Fund: Part of the surplus may be allocated to a welfare
fund or for education and training purposes for members.
 Community Development Fund: Co-ops often allocate a portion of their surplus
to support community projects or other social initiatives.
 General Reserves: A portion of the surplus may also be kept in general reserves
for any future contingencies or business expansion.
 A patronage refund typically goes in the Appropriation Account of a
cooperative, not the Income and Expenditure Account. A patronage refund is a
distribution of surplus or profits by a cooperative to its members based on their
level of participation or patronage (i.e., how much they have bought from or used
the services of the cooperative). Instead of paying dividends to external
shareholders, cooperatives share their profits with members who actively
engage with the cooperative's business.

Name of Cooperative
Appropriation a/c for the year ended dd/mm/yyyy
$ $
Surplus for the year x
Add: Undistributed surplus b/f x
xx
Less: Transfer to statutory reserve x
Patronage refund x
Transfer to education reserve x
Proposed dividends x
(x)
Undistributed surplus c/f xx

4. Balance Sheet of a Cooperative

The Balance Sheet of a cooperative is a financial statement that shows the
financial position of the cooperative at a specific point in time. It lists the
cooperative's assets, liabilities, and members' equity (capital), which gives an
overview of its financial health.
 Name of Cooperative
Statement of financial position as at dd/mm/yyyy
$ $ $
NON-CURRENT ASSETS Cost Acc. Dep. NBV
Land and buildings x x x
Premises x x x
Motor vehicles x x x
Long-term investments x
x x x

CURRENT ASSETS
Inventory x
Accounts receivables x
Short-term investments x
Investment interest due x
Prepayments (prepaid expenses) x
Bank x
Cash x
x

Less: CURRENT LIABILITIES

Member deposits x
Accounts payables x
Accrued expense x
Membership fees received in advance x
(x)
Working capital/Net current assets x
Total net assets xx

CAPITAL AND RESERVES

Member share capital x
Statutory reserve x
Education fund x
Undistributed surplus x
xx

NON-CURRENT LIABILITIES
Loan x
xx
Total equity and non-current liabilities xx