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.

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