Just like a business concern prepares a Profit and Loss account at year-end to summarize the incomes and expenses, a not-for-profit organization prepares an Income and Expenditure account.
The main objective of Income and Expenditure account is to determine the surplus or deficit for a particular accounting year.
Following are the various characteristics of Income and Expenditure Account –
- Account type – It is a nominal account and therefore follows the golden rule – “debit all expenses and losses and credit all incomes and gains”.
- Revenue Nature of transactions – Income and Expenditure account is prepared by incorporating only the incomes and expenses that are of revenue nature. All transactions relating to capital nature are reflected in Balance Sheet.
- Period of Transaction recorded – The incomes and expenses recorded in this account should strictly pertain to the current accounting year.
- Accrual Concept – The Income and Expenditure account follows the concept of accrual basis of accounting, which means that all incomes and expenses that relate to the accounting year should be considered. It does not matter whether they are actually paid and received or not.
- Double entry bookkeeping system – This account follows the principles of double entry system of accounting.
- Surplus/ Deficit – If there is excess of income over the expenditure, it leads to surplus funds, whichare further credited to the capital fund. In case there is excess of expenditure of the income earned, it is a situation of deficit.
- Purpose – The members can easily evaluate with the help of Income and Expenditure account the financial position of the organization. It enables them to analyze whether the income is sufficient to meet the future expenses and whether the expenses incurred are for the objective for which the organization was established.
Steps for preparing Income and Expenditure account –
It is prepared with the help of data from the Receipt and Payment account. However, following adjustments should be made while preparing Income and Expenditure account from the Receipt and Payment Account –
- The opening and closing balance of Receipt and Payment account is to be excluded.
- Only revenue incomes and expenses are included in this account. It does not take into account the transactions which are of capital nature.
- Further, unlike Receipt and Payment account, this account includes items that relate to current period only.
- Also, adjustments for non-cash expenses (like depreciation on fixed assets), prepaid amounts and outstanding amounts will have to be made.
Thus, an Income and Expenditure account is a summarized record of all incomes earned and expenses incurred during the accounting year. It is similar to the general Trading and Profit and Loss account of a business and is prepared following the same principles.