Income and Expenditure Account Explained for Commerce Students

Income and Expenditure Account is an important concept in accounting for not-for-profit organizations, such as clubs, societies, and charitable trusts. It serves as a detailed summary of all revenue incomes and expenses incurred by an organization during an accounting period. Unlike a traditional business, which prepares a Profit and Loss Account, non-profit entities prepare this account to determine whether they have generated a surplus (excess of income over expenditure) or a deficit (excess of expenditure over income).

This account is always prepared on an accrual basis, meaning all incomes and expenses related to the period are recorded—regardless of whether cash is actually received or paid. Only revenue items (not capital receipts or payments) are included. Items like subscriptions received, salaries paid, rent, donations (if revenue in nature), and interest are shown, while capital items such as purchase of assets or capital grants are excluded from this account.

The main objective of the Income and Expenditure Account is to find out the net result of the activities of a not-for-profit organization over a period. If the total income exceeds the total expenditure, the result is a surplus. If the expenditure exceeds the income, it's a deficit. The final balance is added to or deducted from the capital fund in the balance sheet of the organization.

Key Features and Format

The Income and Expenditure Account closely resembles the Profit and Loss Account used by business organizations but with a distinct structure suited for non-trading entities. It is a nominal account, following the rule: "Debit all expenses and losses; Credit all incomes and gains." It is generally prepared at the end of the accounting period and does not begin with any opening balance.

Steps to Prepare Income and Expenditure Account

1. Collect the Receipts and Payments Account of the non-profit organization along with relevant documents.
2. Ignore opening and closing balances. Also ignore all capital payments and receipts for the current, previous, or subsequent years.
3. Include only revenues and expenses for the accounting period. Adjust for outstanding and prepaid amounts as per accrual accounting.
4. Record all revenue incomes on the credit side and all revenue expenditures on the debit side of the account.
5. Depreciation on revenue assets and profit or loss from sale of such assets (not being capital revenue) should be included as appropriate.
6. Balance the account. The resultant figure is shown as either surplus or deficit.

Key Formula

The primary formula utilized is:
Surplus or Deficit = Total Income – Total Expenditure
If the answer is positive, there is a surplus. If negative, it indicates a deficit.

Practical Example

Suppose a club records the following for an accounting period: subscriptions received ₹70,000; salaries paid ₹30,000; rent paid ₹10,000; interest received ₹5,000; stationery purchased ₹3,000; and revenue donations ₹6,000.

Difference between Income and Expenditure Account and Profit and Loss Account

Important Points to Remember

• It is prepared mainly by internal accountants but audited by external auditors.
• Only revenue items for the current year are included; capital incomes and capital expenses are excluded.
• No opening balance is shown in the account. The result is transferred to the Capital Fund.
• Depreciation, outstanding and prepaid expenses, accrued and unaccrued incomes are adjusted as per accrual basis.

Next Steps for Practice and Learning

For further study and practice on financial statements of non-profit organizations, students can also refer to additional Vedantu concept notes and solved sample problems.