The Income and Expenditure Account is a nominal account prepared by Not-for-Profit Organisations to find out the surplus or deficit for a particular accounting year. It is prepared at the end of the year by recording all expenses and losses on the debit side and all incomes and gains on the credit side. This account is prepared on the accrual basis of accounting, which means that only revenue items relating to the current year are included.
This account is similar to the Profit and Loss Account of a business organisation, but since Not-for-Profit Organisations work with a service motive, they prepare this account to know their financial result in terms of surplus or deficit instead of profit or loss. If income exceeds expenditure, it is called surplus, and if expenditure exceeds income, it is called deficit. The surplus or deficit is transferred to the Capital Fund in the Balance Sheet.
The Income and Expenditure Account also includes non-cash expenses like depreciation to show the true financial performance of the organisation. It is usually prepared from the Trial Balance when complete books are maintained or from the Receipts and Payments Account when proper accounting records are not available
Features of Income and Expenditure Account:
1.Accrual basis: It is prepared on the accrual basis of accounting, meaning incomes and expenses are recorded when they are earned or incurred, not when cash is received or paid. This shows the true financial result of the organisation.
2.Revenue items only: It records only revenue incomes and revenue expenses of the current accounting year. Capital items are excluded to ensure correct calculation of surplus or deficit.
3.No capital items: Capital receipts and capital expenditures are not recorded in this account. They are shown in the Balance Sheet as they affect the financial position, not income.
4.Adjustments included: Outstanding, prepaid expenses, accrued incomes, and income received in advance are adjusted. This ensures that only current year’s income and expenses are considered.
5.Non-cash expenses included: Non-cash expenses like depreciation are included to show the true cost of using assets and to present an accurate result.
6.Surplus or deficit: The difference between income and expenditure shows either surplus (income > expenditure) or deficit (expenditure > income).
7.Transferred to Capital Fund: The surplus increases the Capital Fund, while the deficit reduces it in the Balance Sheet.
Steps in Preparation of Income and Expenditure Accounts:
Step 1: All revenue receipts are recorded on the income side of the Income and Expenditure Account. Necessary adjustments are made so that only current year’s income is included, while income relating to previous or next year is excluded. Any income relating to the current year but not yet received is also added.
Step 2: All revenue expenses are recorded on the expenditure side of the account. Adjustments are made for outstanding expenses and prepaid expenses so that only expenses relating to the current accounting year are considered.
Step 3: Non-cash expenses and gains are also recorded to calculate the correct surplus or deficit. These include depreciation on fixed assets, provision for doubtful debts, and profit or loss on sale of fixed assets.
Step 4: If the Income and Expenditure Account is prepared from the Receipts and Payments Account, all relevant items are carefully identified and transferred after making necessary adjustments.
Step 5: Opening and closing cash balances are not recorded in this account because they do not represent income or expenditure.
Step 6: Capital nature transactions are excluded from this account. Capital receipts and capital payments are shown in the Balance Sheet, not in the Income and Expenditure Account.
Format of Income and Expenditure Account:
Name of the organisation
Income and Expenditure Account
(for the year ended .. )
* represents that the Income and Expenditure A/c will either have a Surplus or Deficit balance, i.e., when the income side is greater than the payment side, the difference is denoted as a Surplus, and when the payment side is more than the receipt side, the difference is denoted a Deficit.
Illustration:
From the following information, prepare Income and Expenditure Account of Geeks Foundation for the year ending 2021:
1. Subscriptions received during the year ₹74,000, which included ₹1,000 for the year 2020 and ₹1,200 for the year 2022.
2. Rent and Taxes paid during the year ₹5,600.
3. Outstanding subscription for the year 2021 amounts to ₹700.
4. Sundry payments include:
- Electricity charges ₹2,100
- General expenses ₹ 900
- Entertainment expenses ₹ 2,500
- Printing and Stationery ₹ 2,600
- Telegram and Telephone expenses ₹3,200
5. Sundry receipts included:
- Sale of old newspaper ₹1,900
- Hall rent received ₹4,000.
6. Donations received ₹5,500
7. Write off ₹2,300 from furniture and ₹600 from books
8. Bank interest received ₹1,000
Solution:
Geeks Foundation
Income and Expenditure Account
(for the year ended 31st March,2021)
