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Non-Profit Organizations

Income and Expenditure Account

Everyone knows that the Non-trading organizations prepare Receipts and Payments Account for recording cash and bank transactions. In order to record the Expenses and Incomes of the concern, the concept of ‘Income and Expenditure Account’ came into existence.

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Introduction to Income and Expenditure Account

Not-for-profit or Non-trading organizations work for the welfare of its members. They are known as not-for-profit organization as their major purpose is not profit generation or profit maximization. But it does not mean they may not collect profits at the end of the year.

They also receive a lot of donations and subscription fees. They collect various kinds of fees from its members in order to sustain their existence. If it is true that they can earn profits, then it is also true that they need to prepare certain accounts which shows their profit records.

Income and Expenditure Account

Characteristics of Income and Expenditure Account

  1. Non-trading concerns prepare this account.
  2. It’s nature similar to the Profit and Loss Account as made by the for-profit concerns.
  3. Though it is prepared at the end of the year, it does not mean that it shows a record of a whole year.
  4. It determines the surplus or deficit of income over expenditures
  5. The concern prepares this account by strictly following the Double Entry System.
  6. The surplus or deficit of this account is transferred to the capital fund account.
  7. Unlike the Receipts and Payments Account, it does not start with an opening balance and ends with a closing balance.
  8. It strictly follows the accrual basis of accounting.
  9. An independent auditor has to audit this account for the validation of the account.

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Advantages of Income and Expenditure Account

1. Revenue Information

One of the major advantage of this account that it helps the concern to know about its revenues. It gives the concern about their past records and the current trends. Moreover, it will provide the concern relevant information for their futuristic course of action.

It tells them their major source of profits and their loopholes where they are spending a lot. It helps them to control the extravagant expenditure approach.

2. Beneficial for the Investors

Investors are very much interested in the profits and losses of the concern. In the case of non-trading concerns, it is especially the government which is interested in the statements of the concern.

It is because they provide the concern with many facilities in the form of subsidies and donations. They want to analyze the working and the position of the concern. It helps them to decide the number of futuristic grants and donations.

Disadvantages of Income and Expenditure Account

Nobody can deny the fact that whenever there are advantages, there are certain disadvantages too. In the case of the Income and Expenditure Account, there is only one major disadvantage.

This disadvantage is ‘Misinterpretation of Data’. As we have seen above also that the concern is highly dependent on the government for various funds and facilities.

The government is only interested to help only those concerns which are performing well. The wellness of the concern is visible by its statements.

In order to show their competence, it is mostly seen that they end up doing window-dressing of their statements. This becomes a very major disadvantage of this account.

Format of Income and Expenditure Account

Expenditure Amount Income Amount
Consumable Materials XXX Subscriptions XXX
Honorarium XXX Grants Received XXX
Salary and Wages XXX Entrance Fees XXX
Repairs XXX General Donations XXX
Entertainment Expenses XXX Interest on Deposits XXX
Printing and Stationary XXX Dividends XXX
Newspapers and Periodicals XXX Profit on Sale of Asset XXX
Postage XXX Locker’s Rent XXX
Upkeeps of Lawns XXX Cloak Room Rent XXX
Rent XXX Hall Rent XXX
Municipal Taxes XXX Collection for Specific Show XXX
Insurance XXX Sale of newspaper and magazines XXX
Loss on Sale of Fixed Asset XXX Miscellaneous Incomes XXX
Depreciation XXX
Audit Fees XXX
Surplus XXX Deficit XXX
XXX XXX

Steps to Prepare Income and Expenditure Account

  1. Include all items of receipts and expenditure, on the respective side of the account
  2. Avoid entering capital incomes and expenses
  3. Make adjustments of Prepaid and Outstanding expenses and incomes
  4. Further, items included in receipts and payment account, depreciation, provisions, and profit or loss on sale of assets will have to be included in this account
  5. Finally, after putting down all items of revenue and expenses, you’ll get a balance. The resulting balance will reveal the surplus or deficit

Solved Question on Income and Expenditure

Question: Following is the receipt and payment account of a club for the year ended 31.12.2019. Prepare the income and expenditure account for the club.

Receipts Amount Payments Amount
Balance b/d 6,000 Supports equipment 6,000
Subscription: Salaries & wages 4,000
     2017 1,000 Office expenses 500
     2018 9,000 Electric charges 500
Donation 2,000 Telephone charges 800
Entrance fees (To be capitalized) 2,000 Balanced c/d 8,200
20,000 20,000

Additional Information

  1. Firstly, In 2017 subscription for 2018 was received 2,000
  2. Outstanding subscription 500
  3. Outstanding salaries & wages 2,000
  4. Lastly, Depreciation @ 10% on sports equipment

Solution:

 Income and Expenditure Account for the year ended 31st March 2019

Expenditure Amount Income Amount
Salaries & Wages 4,000 Subscription 9,000
Add: Outstanding 2,000 6,000 Add received in 2017 2,000
Add accrued 500 11,500
Office Expenses  500
Electric charges  500 Donation 2,000
Telephone charges  800
Depreciation on sports equip.
10% of 7,000 700
Surplus i.e. excess of income over expenditures 5,000
13,500 13,500

 

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