Income and Expenditure Account:
All
transactions relating to non-profit-seeking concerns
like Club, Library etc. are recorded in the books of
account strictly according to
Double Entry System. At the year-end result is
determined through Final Accounts. Final Accounts
consist of two stages:
-
Income and Expenditure Account
-
Balance Sheet
Here we
are going to discuss income and expenditure account.
Definition
and Explanation:
The
account through which surplus or deficit of a
non-profit-seeking concern is ascertained, is called
Income and Expenditure Account.
All the
information necessary for preparation of this account
will be available from ledger accounts. Its left-hand
(i.e. Debit) side records all revenue expenditure, while
the right-hand (i.e. Credit) side records all revenues
relating to the current year. The balance of the
account, if credit, indicates surplus, i.e. excess of
income over expenditure. Conversely, the balance of the
account, if debit, indicates deficit, i.e. excess of
expenditure over income.
Characteristics:
The
following are the characteristics of Income and
Expenditure Account:
-
It is
in fact like a Profit and Loss Account of a
profit-seeking concern.
-
All
expenses are recorded on Debit side and all revenues on
Credit side.
-
Only
revenue transactions are included in it. No capital
items is taken into account.
-
All the items
of income/revenue concerning current year — whether received
in cash or not—and all items of expense —whether paid in
cash or not—are taken into account. But no item of income or
expense concerning last year or next year is included in it.
-
Surplus or
deficit of a concern is ascertained through this account.
Credit balance "indicates surplus, while debit balance
indicates deficit.
-
Its balance is
transferred to Capital Fund Account.
-
It is prepared on
the last day of an accounting year.
-
It does not start with
any opening balance.
Method of Preparation:
The following points are
to be noted, while preparing the above account:
-
Surplus or
deficit of a fixed, period of time is ascertained through this
account. So it's heading will be:
Income and Expenditure Account for the year
ended 31.12.2005.
-
Income and Expenditure
Account is a Nominal Account. Hence, only revenue (no capital) items
will find place in it.
-
All items of revenue
income and expenditure relating to the current year will appear in it.
In other words, all items of income relating to the current year -
whether received in cash or not - and all items of expenditure relating
to the current year - whether paid in cash or not - will find place in
this account. No items of income or expenditure relating to last year or
next year will be included in this account.
Method of Conversion of Receipts
and Payments Accounting into Income and Expenditure
Account:
At
first,
Receipts and Payments Account is prepared by
analyzing the Cash Book—subsequently, Income and
Expenditure Account is prepared in the following
manner:
-
Exclude the opening and closing balance of
receipt and payment account.
-
Exclude all the payment items.
-
Exclude all revenue items relating to last or
next year.
-
Include all items of income or expenditure
relating to the current year, if they are not
received or paid in the current year.
-
Charge depreciation on all wasting assets.
Hints:
While
preparing income and expenditure account
from receipts and payments account,
apply the following rules:
-
Exclude all capital items.
-
Adjust all revenue items with
outstanding and advance items in the
following manner:
(i) If relates to current year: Add
(ii) If relates to last or next
year: Deduct
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Example:
The
following is the receipt and payment account of a
club for the year ended 31.12.2005
Receipt and Payment Account
For the Year Ended 31.12.2005
Receipts |
$ |
|
Payments |
$ |
Balance b/d |
5,000 |
|
Supports
equipment |
7,000 |
Subscription: |
|
|
Salaries &
wages |
3,000 |
2004 |
2,000 |
|
Office
expenses |
400 |
2005 |
10,000 |
|
Electric
charges |
600 |
Donation |
1,000 |
|
Telephone
charges |
600 |
Entrance fees
(To be capitalized) |
2,000 |
|
Balanced c/d |
8,400 |
|
|
|
|
|
|
20,000 |
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
- In 2004
subscription for 2005 was received $1,000.
- Outstanding
subscription $1,500
- Outstanding
salaries & wages $ 1,000.
- Depreciation
to be charged @ 20% on sports equipments.
Required:
Prepare from the above particulars the income
and expenditure account of the club.
Income and
Expenditure Account
For the Year Ended 31.12.2005
Receipts |
|
$ |
|
Income |
|
$ |
Salaries &
wages |
3,000 |
|
|
Subscription |
10,000 |
|
Add
outstanding |
1,000 |
4,000 |
|
Add
received in 2004 |
1,000 |
|
|
|
|
|
Add
accrued |
1,500 |
12,500 |
Office
expenses |
|
|
|
|
|
|
Electric
charges |
|
|
|
Donation |
|
1,000 |
Telephone
charges |
|
|
|
|
|
|
Depreciation on sports equip. |
|
|
|
|
|
|
20% of
7,000 |
|
1,400 |
|
|
|
|
Surplus
i.e. excess of income over expenditures |
|
6,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500 |
|
|
|
13,500 |
|
|
|
|
|
|
|
Note:
Rate of
depreciation on sports equipment is 20% (not 20%
p.a). so the amount of depreciation will be
$1,400 (20 % of 7,000). The date of purchase is
immaterial here.
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