Monday, October 22, 2012

Income and Expenditure account

Income and Expenditure Account
Income and Expenditure Account is a Nominal Account which is prepared at the end of the accounting period by a Not-For-Profit Organisation to ascertain the surplus, i.e., excess of income over expenditure, or the deficit, i.e.  Excess of expenditure over income.
Features of Income and Expenditure Account.
a)      It is a nominal account which reveals either surplus, i.e., excess of expenditure over income.
b)      It is prepared for an accounting period based on the accrual concept following the matching principle.
c)       Only revenue items are considered, while capital items are excluded.
d)      Both cash and non-cash items, such as depreciation, are recorded.

Difference between Receipts and Payments Account and Income and Expenditure Account
Basic
Receipt and Payment Account
Income and Expenditure Account
1. Nature
It is a Real Account
It is nominal Account.
2. Recording
It records receipt and payments of both capital and revenue nature.
It records incomes and expense of revenue nature only.
3. Opening
    Balance
Balance at the beginning represents cash and bank balance at the beginning of the year.
There is no balance at beginning.
4. Closing
    Balance
Balance at the end represents cash and bank balance at the end of the year.
Balance at the end represents either surplus or deficit.
5. Period of items
It records the items received or paid during the current year, whether relating to past, present or future periods.
It includes expenses or incomes relating to current year only.
6. Non cash items
It ignores non-cash items like depreciation, credit purchase, credit sales etc.
It records non-cash items also.
7. Balance of account
It usually shows a debit balance.
It may show a debit or a credit balance.
8. Carrying forward
Closing balance is carried forward to the next period.
Closing balance is added to the capital fund.

Difference between Income and Expenditure and Profit and Loss Account
Basis
Income and Expenditure Account
Profit and Loss Account
1. Prepared by
It is prepared by Not-For-Profit Organisation.
This account is prepared by business enterprises.
2. Object
The main object of Income and Expenditure Account is to ascertain excess of income over expenditure or excess of expenditure over income.
This account prepared by business enterprises.
3. Balance
The balance of this account is termed either as surplus or deficit.
The balance of this account is termed either as net profit or net loss.
4. Basis of Preparation
It is prepared from the receipts and payments account and additional information.
It is prepared from the trial balance and additional information.
5. Sharing of Surplus
Surplus is added in the capital fund and is not withdrawn by the members for their personal use.
Profit shown in this account is distributed among the owners and is withdrawn by them in the form of drawings.

Difference between Not – for profit organisation and Profit earning organisation
Basis
Not-For-Profit Organization
Profit Earning Organization
1.    Motive
Motive is to provide services.
Motive is to earn profits.
2.    Funds
It is represented by the general fund comprising donations, subscriptions, surplus etc.
It is represented by capital comprising contributions by proprietors and accumulated reserves.
3.    Financial Statements
Financial statements include receipts and Payments A/C and Balance sheet
Financial Statements include Manufacturing AC, Trading AC, Profit and loss AC and balance sheet.
4.    Surplus/Profit
The balance of the Income and Expenditure Account is either surplus or deficit.
The balance of the Profit and Loss AC is either Net Profit or Net loss.

Steps in Conversion of Receipts and Payments account to Income and expenditure account:
a)      Ignore opening and dosing cash and bank balances appearing in receipts and payments account.
b)      Eliminate all items of capital receipts and payments.
c)       Ascertain income of the relevant year by deducting from the total receipts the income received on account of previous and future years and by adding the income accrued due in the year but not received and income received in the previous year but relating to this year.
d)      Ascertain expenditure of the relevant period by deducting expenditure both relating to preceding period and succeeding period from the total payments and by adding the expenditure outstanding at the end and expenditure prepaid in the beginning.
e)      Make adjustments, as per additional information, such as depreciation, bad debts etc., if any.
f)       The income and expenditure account, when balanced, will disclose surplus (if the credit side is bigger) or deficit (if the debit side is bigger). If surplus i.e. excess on income over expenditure add it to the capital or accumulated fund. However, if deficit i.e., excess of expenditure over income deduct it from the capital or accumulated fund.

Accounting treatment of some important items in Income and Expenditure account:
a)      Legacy: This is the amount donated to the non-trading concern by means of a will. It is recorded in Receipts and payments account and is not considered as income because it is non-recurring in nature. However, legacy of small amount may be considered as income.
b)      Subscription: It is a major part of the income of the non-trading concern. It is recurring in nature. In non-trading concerns recurring receipts are treated as income.
c)       Donations: It is the amount received from some person, firm, company or any other body by sway of a gift. It is shown in receipts and payments accounts of the year. If a donation is received for a specific purpose (donation for building, donation for conducting specific events – sports, annual day celebration etc.) It is in the nature of a capital receipt credited to a separate Fund account and shown in the balance sheet. The non trading concern has to fulfill the purpose for which the donation is received.
If the donation is not for a specific purpose, it is known as a general donation. General donation of a big amount is capitalized and not shown as income as it is non-recurring in nature. Donations of a small amount may be expected every year. So this may be considered as income during the year.
d)      Entrance fee/Life Members fees: It is receipt and recorded in the receipts and payments account. This is paid only once by the members. It is non-recurring in nature. The recurring receipts are only treated as income. Hence the entrance fee is capitalized, similarly, life members fee are also paid only once by members, and hence not a revenue receipt.
e)      Sale of old assets: The amount realized by the sale of old asset is shown in the receipt and payments account of the year in which the assets are sold. But the profit or loss on sale of such assets is surplus and is shown in the income and expenditure account.
f)       Sale of old newspapers, journals, magazines etc: This appears in the receipts and payments account and is considered as income and recorded in the credit side of the Income and Expenditure account. Selling old newspapers is a routine one and is justified to consider it as income.
g)      Sale of sports materials: The proceeds by sale of sports materials are shown in the receipts and payments accounts. Since sale of sports materials is the regular one for any sports club, the sales proceeds is treated as income and shown in the credit side of the income and expenditure account.
h)      Payment of honorarium: It is the revenue expense and is shown in the expenditure side of the income and expenditure account. It is the amount paid t the person who is not the employed of the organization paying the amount.
i)        Special Funds in non trading concerns: In non trading concerns, specific funds are created for specific purpose (prize fund for giving prizes, tournament fund for conducting tournaments, charity fund for clarity etc.) and they are invested in specific securities. The income derived from the investment is added to that fund and is not treated as income.
Example                                                               Rs.
Prize Fund                                                           20,000
Prize fund investment                                           15,000
Interest on Prize Fund                                           2,000
Investment for the year                                        15,000       
Prize given                                                            8,000

Now the total Prize fund is Rs. 22,000 (20,000 + 2,000) the interest of Rs. 2000 is added with the Prize fund. The expenses incurred out of fund are deducted form the fund itself. In the previous example the accumulated Prize fund is Rs. 22,000. The Prize given for of Rs. 8,000 is deducted from the Prize fund and the balance fund of Rs. 14,000 will be shown in the Balance sheet.

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