(200)-INCOME AND EXPENDITURE ACCOUNTS

Income and Expenditure Accounts

An income and expenditure account is the profit and loss account of a non-trading concern. It contains only revenue items, being debited with all expenditure, and credited with all income of a period, weather or not it has actually being paid or received within that period. The final balance of and income and expenditure account represents the excess of income over expenditure, or the excess of expenditure over income, as the case may be, for then period. This balance is similar to the net profit or loss of a trading concern.

Receipts and payments accounts and income and expenditure accounts are used commonly by such non-trading concerns as social clubs, societies for the purpose presenting their financial position to their members. A receipts and payments account is no substitute for an income and expenditure account as the letter is prepared on an accruals basis.

Contrast with receipts and payments accounts

The main differences between the two accounts are:

Receipts and payments cash transactions only, indicates capital payments, balance represents cash in hand, bank balance, or bank overdraft. Income and expenditure includes accruals and prepayments, excludes capital receipts and capital payments, balance represents surplus/deficiency of income over expenditure for a given period.

Basis of preparation

In order to prepare an income and expenditure account Receipts and payments accounts, post all revenue items appearing in the Receipts and payments accounts to the opposite sides of the income and expenditure account, and make adjustments for accruals and prepayments at the beginning and the end of the period.

Such items as subscriptions, entrance fees, income from investments like that. Which have been received in cash and debited to the receipts and payments account, must be credited to the income and expenditure account, whilst expenditure such as rent, wages, repairs like that appearing on the credit side of the receipts and payments account must be debited to the income and expenditure account. Capital items appearing in the receipts and payments account will be posted to the debit or credit, as the case may be, of the relevant asset or liability accounts, and will not affect the income and expenditure account.

The balance sheet of a non-trading concern is prepared in the usual way, and contains particulars of all the assets and liabilities at the date as at which it is made up. The excess of the assets over the liabilities is similar to the capital of a trader, but is usually called the accumulated fund, or generally fund since it is normally made up of the excess of income over expenditure which has been accumulated within the concern.

Separate accounts should be kept for funds raised for special purposes, for example building appeal funds and election funds.

Two problems on the solutions of which accountants are divided are:

1. Should club entrance fees be credited in the income and expenditure account or be shown on the balance sheet of the club as an addition to the accumulated fund? Provided entrance fees are consistently treated, either method is correct; although it can be argued that revenue might be destroyed if there were a large number of entrance fees in any one period, the benefit of which is to be spread over a number of accounting periods.
2. Should club subscriptions in arrears be shown as debtors at the balance sheet date? A large number of club subscriptions in arrears are never received and the balance sheet could be destroyed by a fictitious asset of debtors should club subscriptions in arrears be included on the balance sheet and never received. In practice, subscriptions in arrears are often excluded from the balance sheet on prudence grounds.