Income and Expenditure Account – a Track Record of Income and Expenses in a Business
In our daily life, we do calculate and keep track of the record of our monthly income against all the expenses. Similarly, business individuals follow this task of calculating and keeping track of their income and expenditure. This income and expenditure account is prepared for tracking the income and expenses of the business to know the surplus earned and deficit incurred in a period. Without this account, it would be havoc knowing where the money flowed at the end of the business cycle.
In this context, we are going to take up the discussion of what exactly an income and expenditure account is, what item comes in this account, and other such important aspects that will be dealt with here.
What is an Income and Expenditure Account?
An Income and Expenditure Account is the detailed summary of every income and expense incurred by an organization in a specific financial year. Prepared on an accrual basis, this account records every income and expense in a particular year, irrespective of whether they are clear or not. Outlined by non-trading entities, this account distinguishes capital from revenue and takes only the latter into account.
Typically, these are nominal accounts, which outline an organization’s final accounts and are similar to that of profit and loss accounting by a business entity. These accounts primarily serve to find the surplus or deficit balance of an organization, taking both current income and expenses into account.
Surplus and Deficit Balance of an Income and Expenditure Account
When the revenue generated by a non-trading or non-profitable organization exceeds the total expenditure incurred in a financial year, the Income & Expenditure account shows a surplus balance. It is usually termed as excess income over expenditure. Contrastingly, if the revenue generated by an organization falls short of its annual expenditure, the format of the Income and Expenditure account shows a deficit balance. Be its surplus or deficit, only its closing balance is taken into consideration.
Format of an Income and Expenditure Account
Like any accounting method, an Income and Expenditure account has its specific format accompanied by its formula. This format has the following features:
The name of this institution is mentioned at the top, followed by its heading of Income and Expenditure account.
The financial year for which this account has been created must be mentioned too.
Typically, these have 4 columns with 2 on the left for expenditure, while those on its right for income.
The first column contains expenditure details while the following column notes these expense amounts.
The third column lists every income along with its following column mentioning income amounts
These second and fourth columns mention total expenditure and income in a financial year.
This format is vital since it effectively ensures that the Income and Expenditure formula is utilized in the simplest ways to calculate results. Total expenditure is subtracted from total income to find out surplus or deficit. In the event of a negative answer, it indicates a deficit while it is vice versa if there is a profit. The following table illustrates an Income and Expenditure account format.
Following is a Model of Income and Expenditure Account
Income and Expenditure Account for the Year Ended……….
Basic Features of an Income and Expenditure Account
Vital features of an Income and Expenditure Account are as follows:
Similar to profit and loss accounts maintained by business entities, an Income & Expenditure account helps non-trading organizations to keep a note of their generated revenue.
These accounts typically outline one year and are taken into account when the fiscal year concludes.
This accounting method is primarily based on a double-entry system of accounting that records both outgoing expenses and incoming revenues.
These accounts are used to deduce the surplus or deficit incurred by an organization at the end of a certain period.
The surplus or deficit recorded in an Income and Expenditure account is moved to a Capital fund account when this account is closed.
An Income & Expenditure account only takes into consideration revenues and expenses. Such an account does not record any capital-based income or expenditure of an organization.
While these accounts are generally prepared by internal accountants of a non-trading organization, these are audited independently by external auditors.
Such an account does not begin with its opening balance. Usually, they follow back every income with expenditure through a concerned financial year.
As a nominal account, the Income and Expenditure account format debits all expenses and losses, while crediting every income. Prepared on an accrual basis, this includes every paid and received amount along with those that await clearance.
How to prepare an Income and Expenditure Account?
Understanding the format for an Income & Expenditure account along with its formula is not adequate to prepare them. These steps below detail an outline on how to create such an account:
Collection of receipts and payment accounts of a non-trading enterprise whose Income and Expenditure account is to be created.
Opening and closing balances about this receipt and payment account should be ignored. Additionally, every payment of previous years’ expenses, as well as that of the future, should also be ignored. Capital payments of this current year are also omitted.
Every receipt about the previous year’s revenue along with that of the upcoming years should be omitted from the listing. Additionally, capital revenue for this current year is also ignored.
The current year’s revenues should be listed, including both expenditures and incomes. Depreciation of fixed assets related to revenue should also be taken into consideration. Additionally, profit or loss on sales of assets is also taken into account as long as they are not a part of this organization’s capital revenue.
Both the total expenditure and total income should be calculated. Net differences between these 2 suggest if a non-trading enterprise has a surplus or deficit balance.
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FAQs on Income and Expenditure Account: Explained
1. What is an Income and Expenditure Account?
An Income and Expenditure account records every revenue and expenditure of a non-trading organisation in a specific financial year. Vitally, it restricts operational revenues and does not take into account capital based incomes and expenses. Furthermore, these are nominal accounts maintained on an accrual basis, thereby considering every income and expenditure irrespective of whether they receive clearance or not.
2. What is the basic difference between Income and Expenditure?
Income is the revenue generated by a non-trading institution in a financial year, while expenditure denotes outgoing expenses incurred. These are the basis of an Income & Expenditure account, and their net balance calculated after a financial year-end indicates if there is surplus or deficit.
3. What are the limitations of an Income and Expenditure Account?
The limitation of Income and Expenditure Account is that there can be ‘misrepresentation of data and figures’. This means, there can be existing false data or entries in the income and expenditure statement which will manipulate the accounts and thereby give a misrepresented image to the readers of that account.
