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.
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
- Non-trading concerns prepare this account.
- It’s nature similar to the Profit and Loss Account as made by the for-profit concerns.
- Though it is prepared at the end of the year, it does not mean that it shows a record of a whole year.
- It determines the surplus or deficit of income over expenditures
- The concern prepares this account by strictly following the Double Entry System.
- The surplus or deficit of this account is transferred to the capital fund account.
- Unlike the Receipts and Payments Account, it does not start with an opening balance and ends with a closing balance.
- It strictly follows the accrual basis of accounting.
- An independent auditor has to audit this account for the validation of the account.
Browse more Topics under Non Profit Organizations
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- Balance Sheet and Special Accounts
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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
|Salary and Wages||XXX||Entrance Fees||XXX|
|Entertainment Expenses||XXX||Interest on Deposits||XXX|
|Printing and Stationary||XXX||Dividends||XXX|
|Newspapers and Periodicals||XXX||Profit on Sale of Asset||XXX|
|Upkeeps of Lawns||XXX||Cloak Room 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|
Steps to Prepare Income and Expenditure Account
- Include all items of receipts and expenditure, on the respective side of the account
- Avoid entering capital incomes and expenses
- Make adjustments of Prepaid and Outstanding expenses and incomes
- 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
- 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.
|Balance b/d||6,000||Supports equipment||6,000|
|Subscription:||Salaries & wages||4,000|
|Entrance fees (To be capitalized)||2,000||Balanced c/d||8,200|
- Firstly, In 2017 subscription for 2018 was received 2,000
- Outstanding subscription 500
- Outstanding salaries & wages 2,000
- Lastly, Depreciation @ 10% on sports equipment
Income and Expenditure Account for the year ended 31st March 2019
|Salaries & Wages||4,000||Subscription||9,000|
|Add: Outstanding||2,000||6,000||Add received in 2017||2,000|
|Depreciation on sports equip.|
|10% of 7,000||700|
|Surplus i.e. excess of income over expenditures||5,000|