Income and Expenditure Account: Income and Expenditure Account is a nominal account. It is prepared to depict the result of not for profit organisation during an accounting period. The principles of preparation of profit and loss account applies for the preparation of income and expenditure account as well. It is prepared on accrual basis of accounting based on principle of matching concept i.e., adjustments relating to outstanding expenses, prepaid expenses, accrued income, income received in advance and depreciation are made. Incomes are shown on the credit side while expenses are shown on the debit side. There is no opening balance in income and expenditure account but the closing balance reveals surplus if there is an excess of income over expenditure and reveals deficit if there is an excess of expenditure over income.
Thus, it can be said that income and expenditure account serves the same purpose for a not for profit organisation which is served by profit and loss account for a profit earning organisation.
Steps in the Preparation of Income and Expenditure Account
Following steps may by helpful in preparing an income and expenditure account from a given receipts and payments account:
- Pursue the receipts and payments account thoroughly.
- Exclude the opening and closing balances of cash and bank as they are not an income.
- Exclude the capital receipts and capital payments as these are to be shown in the balance sheet.
- Consider only the revenue receipts to be shown on the income side of income and expenditure account. Some of these needs to be adjusted by excluding the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet received.
- Take the revenue expenses to the expenditure side of the income and expenditure account with due adjustments as per the additional information provided relating to the amounts received in advance and these not yet received.
- Consider the following items not appearing in the receipts and payments account that need to be taken into account for determining the surplus/deficit for the current year.
(a) Depreciation on fixed assets
(b) Provision for doubtful debts if required
(c) Profit or loss on sale of fixed assets.
