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Income and Expenditure Account

The receipts and payments account is not a good source of information for the final accounts to be drawn up. It shows all the cash received and paid out, but not the outstanding and prepaid incomes and expenses. Many entries in the receipts and payments account therefore need to be adjusted in the income and expenditure account which uses the accrual basis.

All realized and unrealized earnings are therefore credited to the income and expenditure account, and expenses incurred regardless of whether they are paid or yet to be paid are debited.  Only revenue income and revenue expenditure are recorded in this account. An example is the sale or purchase of fixed assets which is not included as this is capital income or capital expenditure.

Items in the receipts and payments account which are not included in the income and expenditure account are the opening and closing cash balances, and incomes received and expenditures paid in previous and following years. All accrual items however such as incomes and expenditure for the financial year are included, so are non-cash items such as depreciation, bad debts, etc.

The income and expenditure account produces a surplus or a deficit which either increases or decreases the capital of the organization. The surplus is the excess of income over expenditure and the deficit is the excess of expenditure over income.  In a profit making enterprise, the surplus is the net profit and the deficit is the net loss.

In preparing the Income and Expenditure Account, the following steps must be followed:

1. Exclude the opening and closing balances that appear in the receipts and payments account.

2. Include the income for the current financial year only by deducting from the total receipts the income received for the previous year (a) and the following year (b), and by accruing income due for the current year but not yet received (c), and income received in the previous year for the current year (d).

3. Include the expenditure for the financial year only by deducting from the total payments the expenditure paid for the previous year (e) and the following year (f). Add expenditure prepaid in the previous year for the current year (g) and any expenditure still not paid at the end of the financial year (h).

4. Do not include capital receipts and payments in the income and expenditure account (I).

5. Make the necessary adjustments such as depreciation (J), etc.

6. Add (credit) to the capital account the surplus in the income and expenditure account. The surplus is the excess of income over expenditure. Deduct (debit) any deficit in the income and expenditure account from the capital account. Deficit is the excess of expenditure over income.

The Goofy Golf Club

Receipts and Payments Account for the year ended 31 December 20X2

Receipts
$

Payments
$
Balance as at 1.1.20X1
810

Bar supplies
5,520
Subscriptions
1,485

Barman's wages
650
Bar sales
7,100
Bar expenses
325
Interest on fixed deposit140
Furniture
370



Golfing accessories
260



Committee expenses
80



Printing and stationery
110



Cleaner's wages
120



General expenses
230



Rent paid
600



Balance as at 31.12.20X2
1,270






9,535


9,535






Subscriptions Account

Particulars
Amount

Particulars
Amount

$


$
Balance (outstanding) b/f
130

Balance (prepaid) b/f (d)
35
Income & expenditure account
1,450

Cash - 20X1 (a)
125
Balance (prepaid) c/d
50

Cash - 20X2
1,310



Cash - 20X3 (b)
50



Balance (outstanding) c/d (c)
110






1,630


1,630






Rent Account

Particulars
Amount

Particulars
Amount

$


$
Cash (e = $50)
600

Balance b/f
50
Balance c/d (h)
50

Income & expenditure account
600






650


650






Income and Expenditure Account for the year ended 31 December 20X2


$

$

$
Income





Subscriptions for 20X2




1,450
Profit from the bar




790
Interest on Fixed Deposit




140











2,380
Less: Expenditure





Cleaner's wages


120


General expenses


230


Rent paid


600


Committee expenses


80


Printing and stationery


110











1,140


Depreciation:





Furniture
300




Equipment
180

480

1,620






Surplus of income over expenditure




760








Income and Expenditure Account for the year ended 31 December 20X2


$

$

$
Income





Subscriptions for 20X2




1,450
Interest on Fixed Deposit




140











1,590
Less: Expenditure





Cleaner's wages


120


Insurance


240


Rent paid


600


Committee expenses


80


Printing and stationery


110


Depreciation:





Furniture
150




Equipment
100

250

1,400






Surplus of income over expenditure




190






Last Updated (Tuesday, 12 October 2010 16:52)