Income and Expenditure Accounts

An income and expenditure account is very similar to a profit and loss account, it is commonly prepared by some non-profit organisations like trusts, hospitals and charitable institutions for a particular period of account.

Sometimes it is also prepared for smaller businesses like sole traders. In bookkeeping terms it can be constructed like all other accounts in 'T' table format. The account is credited with ALL income both realised and unrealised on the right side, and paid and unpaid expenditure on the left side of the table. It is generally prepared to determine whether there is a surplus or deficit of funds for a particular trading period. A surplus results when income is more than expenditure and a deficit occurs when expenditure is more than income. If there is a surplus it is sometimes referred to as Net Operating Profit (NOP) and if there is a deficit it is known as a Net Operating Loss (NOL). Any surplus or deficit in the income and expenditure account is carried forward to capital account of the business.

Outlined below are details of the items that should not be included in income and expenditure account when determining a surplus or deficit of funds for a period of account.

1.   The opening and closing balance of the receipts and payments account.
2.   Items that are of capital nature like the sale and purchase of fixed assets.
3.   Any previous year's income and income received in advance should be excluded.
4.   Any expenditure incurred in the previous year and expenditure relating to the next year should not be included.

Items that should be included in the income and expenditure, in addition to the total general sales income and expenditure for the period, are:

1.      Accrued income and outstanding expenditure relevant to the current period.
2.      Provisions made for bad debt and depreciation should be included.
3.      Profit or loss from sale of fixed assets should also be included

Therefore, in summary, the main key features of an income and expenditure account are:

• It is prepared in the place of profit and loss account by non-trading concerns and small businesses to arrive at surplus or deficit for a trading period.
• It does not include any carried forward opening or closing balances from the previous year.
• It does not include any expenditure of a capital nature.
• Income is shown on the credit/right side of the account and expenditure is shown on the debit/left side of the account.

Any surplus or deficit is carried forward to the capital account that appears on the liability side of the balance sheet. 

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