Income and Expenditure Account

27/12/2020 0 By indiafreenotes

Income and Expenditure Account is a nominal account and includes only those items which are revenue in nature. Items which are revenue in nature (nominal accounts) and pertaining to the present accounting period are recorded in this account. On the basis of accrual concept, revenue and expenditure should be recognized and shown in this account. Items of incomes and gains are shown on its credit side, known as ‘Income’ side and items of expenses and losses should be shown on its debit side known as ‘Expenditure’ side.

Generally, Income and Expenditure Account is prepared from the information contained in the Receipts and Payments Account along with the additional information. Items appearing on the debit side of the Receipts and Payments Account, after making necessary adjustments related to prepaid and outstanding items, are to be recorded on the credit side of this account.

The Income and Expenditure Account is a summary of all items of incomes and expenses which relate to the ongoing accounting year. It is prepared with the objective of finding out the surplus or deficit arising out of current incomes over current expenses. It is quite similar to the Trading and Profit and Loss Account of a trading concern and is prepared in an exact manner.

Income and Expenditure Account is prepared on an accrual basis. All incomes and expenses relating to the accounting year, whether they are actually received and paid or not, are taken into consideration. Expenditure is recorded on the debit side and income is recorded on the credit side. A distinction is made between capital and revenue items and only revenue items are included in this account.

Income and Expenditure Account is a nominal account. Therefore, the rule of nominal account (debit all expenses and losses and credit all incomes and gains) is followed while preparing it. While preparing the account, only items of revenue nature are recorded and all items of capital nature are ignored. For example, the profit earned or loss suffered on the sale of an asset will be recorded in it but the amount received from the sale of an asset will not be recorded in it.

The closing balance of this account shows a surplus or deficit for the year. If the credit side exceeds the debit side, there is surplus. On the other hand, if the debit side exceeds the credit side, there is a deficit. The surplus is added to the Capital Fund while the deficit is deducted from the Capital Fund.

Features of Income and Expenditure Account:

(i) It is a nominal account and summarizes all expenditures and incomes of a non-profit organization.

(ii) Based on accrual concept, all items of revenue and expenditure are matched and recorded in this account.

(iii) Incomes and expenditures of the current year are to be shown in this account.

(iv) Items of capital in nature can not find place in this account. For example, furniture purchased, a receipt for a particular purpose received during the year etc.

(v) It does not have any opening balance. However, the closing balance is either surplus (if there is an excess of income over expenditure) or deficit (if there is an excess of expenditure over income).

Preparation of Income and Expenditure Account

  • Include all items of revenue receipts and expenses, on the respective side of the account.
  • Ensure that no items of capital incomes and expenses are included in this account.
  • Also, adjustment for amounts prepaid and outstanding, with respect to each item will have to be made.
  • 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 then reveal the surplus or deficit for the period.