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Preparation of Income and Expenditure Accounts

This document discusses the preparation of income and expenditure accounts for non-trading organizations. It explains that income and expenditure accounts summarize revenue earned and expenses incurred to determine any surplus or deficit. Only revenue items are included, while capital items are excluded. Depreciation on fixed assets is also included. The document provides an illustration of preparing an income and expenditure account from a receipts and payments account for a sports club for the year ended December 31, 2019, showing a surplus of Rs. 17,500. It also briefly outlines the key differences between receipts and payments accounts and income and expenditure accounts.

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0% found this document useful (0 votes)
684 views10 pages

Preparation of Income and Expenditure Accounts

This document discusses the preparation of income and expenditure accounts for non-trading organizations. It explains that income and expenditure accounts summarize revenue earned and expenses incurred to determine any surplus or deficit. Only revenue items are included, while capital items are excluded. Depreciation on fixed assets is also included. The document provides an illustration of preparing an income and expenditure account from a receipts and payments account for a sports club for the year ended December 31, 2019, showing a surplus of Rs. 17,500. It also briefly outlines the key differences between receipts and payments accounts and income and expenditure accounts.

Uploaded by

Ankita Bal
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PREPARATION OF INCOME AND EXPENDITURE ACCOUNTS

Submitted by
ANKITA BAL
PRN: 21010224203, Division: A, Batch: 2021-26, Programme: BBA LLB,
Academic Year 2021-22
Symbiosis Law School, NOIDA
Symbiosis International (Deemed University), PUNE
In
November, 2021
Under The guidance of
Dr. Meenakshi Kaul
Professor
SYMBIOSIS LAW SCHOOL, NOIDA
Sec-62, Block-A, 47 & 48, NOIDA-201301 (U.P.)- India
CERTIFICATE
The Project Titled “Preparation of Income and Expenditure Accounts” submitted to
the Symbiosis Law School, NOIDA for Corporate Accounting as part of Internal
Continuous Evaluation is based on my original work carried out under the
guidance of Dr. Meenakshi Kaul, Professor, SLS Noida from 5 th Mar, 2021 to 1st
Apr. 2022. The research work has not been submitted elsewhere for award of any
degree.
The material borrowed from other sources and incorporated in the research paper
has been duly acknowledged.
I understand that I myself would be held responsible and accountable for
plagiarism, if any, detected later on.

ANKITA BAL
Date: 1 Apr. 2022
ACKNOWLEDGEMENT
First and foremost, I'd want to express my sincere thanks to Dr. Meenakshi Kaul
for assisting me and serving as my guiding light throughout this effort. They gave
me with excellent knowledge that enabled me in grasping all of the fundamentals
of this project, as well as resolving any concerns I had about the project. I would
also want to appreciate the library department and academic support of Symbiosis
Law School, Noida for providing me with various research sources and resources
to assist me create the most unique project possible. I'd also want to thank
Symbiosis Law School in Noida for giving me this project. so that I could learn the
essential knowledge about Corporate Accounting simply, competently, and
completely.
INTRODUCTION

Non-trading or non profit organizations center themselves around the cause of providing services
to those in need of the same. However, to be able to do so, such an organization needs to incur
expenses as well as earn the requisite amount of revenue to deal with the same. Keeping a record
of these incurred expenditure and revenue helps such organizations to understand the deficit or
surplus created.

Thus, income and expenditure accounts summarize the income earned and the expenditure
occurred with the objective of determining a value of surplus or deficit arising out of the value of
income over expenditure for a particular time-frame for the non-trading firm concerned.

It is notably quite similar to the creation of Trading and Profit and Loss Account of a trading
concern and is prepared with a manner of income representing the credit side and expenditures
representing the debit side.

Income and expenditure accounts are prepared on an accrual basis where all revenue or expenses
are taken into consideration, regardless of whether they are actually paid or received or not.

Income and expenditure account is a nominal account and therefore, the rule applies that all
expenses must be debited and revenue items must be credited. While preparing such an account,
all items of capital nature are ignored in favour of revenue items being taken into consideration.
Therefore, a furniture being an asset, the amount received from the sale of such furniture will not
be recorded, however, the profit or loss occurred from the sale of such items will be recorded.

The deficit or surplus recorded in the closing balance of this account is added or subtracted on
the basis of its nature from/to the Capital Fund.1

1
https://www.toppr.com/guides/accountancy/accounting-for-not-for-profit-organisations/income-and-
expenditure-account/?cv=1
PREPARATION OF INCOME AND EXPENDITURE ACCOUNTS

For the preparation of income and expenditure accounts, we must note that –

 All items of revenue receipts and expenses are registered on the respective side of the
account.
 No items of capital nature are included in this account.
 Adjustment made for prepaid and outstanding amounts must be made appropriately with
respect to each item
 Include depreciation on all fixed assets of the non-trading entity.

ILLUSTRATION

The following receipts and payments account was created by Sharma Sports Club for the
year ended December 31, 2019 –

SHARMA SPORTS CLUB


RECEIPTS AND PAYMENTS ACCOUNT
For the year ended December 31, 2019

Receipts Amt Payments Amt


Balance b/d 7,600 Supports equipment 20,000
(Purchased on Oct. 1, 2019)
Subscriptions:
Tournament expenses 4,000
2018 4,000 Electricity 1,000
2019 37,000 Printing 600
2020 1,800 Salaries and wages 6,800
Exhibition expenses 4,200
Entrance fees 1,600
Balance c/d 18,400
Interest on investment 3,000
TOTAL 55,000 TOTAL 55,000

Additional information –

1. Subscription for 2019 received in 2018 – Rs. 1000


2. Unpaid subscription for 2019 – Rs. 600
3. Fixed assets of the club on January 1st, 2019 includes: Club ground – Rs. 45,000;
Supports equipment – Rs. 30000; Furniture – Rs. 5000
4. Depreciation to be charged at 10% p.a. on furniture and 20% p.a. on supports equipment

REQUIRED – Using the provided information, prepare an income and expenditure account
for Sharma Sports Club for the year ended December 31st, 2019
SOLUTION

SHARMA SPORTS CLUB


INCOME AND EXPENDITURE ACCOUNT
For the year ended December 31, 2019

Income Amt Expenditure Amt


Tournament expenses 4,000 Subscription 37,000
Electricity 1,000 Add: Received in 2018 1,000
Printing 600
Salaries and wages 6,800 38,000
Exhibition expenses 4,200 38,600
Add: Subscription in arrear 600
Depreciation on –
Supports equipment 7,000 38,600
Furniture 500
Interest on investment 3,000
Excess of income over 17,500
expenditure

41,600 41,600

WORKING NOTE –

Depreciation on supports equipment: 20% on Rs. 30,000 for one year + 20% on Rs. 20,000 for 3
months
= (0.2 x 30,000) + {(0.2 x 20,000) x 3/12}
= 6000 + (4000 x 3/12)
= 6000 + 1000
= 7,000

Depreciation on furniture: 10% on Rs. 5000 for an year


= 0.1 x 5000
= 500

ANALYSIS –

 Entrance fees is a capital receipt and has therefore not been included in the income and
expenditure account.
 The subscription only related to the year of 2019 has been included.

The income and expenditure account of Sharma Sports Club shows a surplus balance of Rs.
17,500 which has been written as excess of income over expenditure.

DIFFERENCE BETWEEN RECEIPTS AND PAYMENT ACCOUNT AND


INCOME AND EXPENDITURE ACCOUNT

Basis of Difference Receipts and Payments Income and Expenditure


Account Account
Nature It is a summary of cash and It is a summary of current year
bank transactions. income and expenses.

Revenue and Capital It records transactions related It records transactions related


to both revenue and capital to revenue nature only.
nature.
Debit side Debit side of this account Debit side of this account
records cash and bank receipts records expenses and losses
during an accounting period. incurred in the current
accounting period.
Credit side Credit side of this account Credit side of this account
records payments in cash and records income and gains
through cheques earned in the current
accounting period.
Type of Account It is a real account. It is a nominal account.

Period It records receipts and It only records income and


payments made during the expenditure made during the
year that may be related to the current accounting period.
current accounting period or
the preceding period and the
succeeding accounting period.
Object This account depicts the cash This account shows the net
position of an NPO. result in terms of surplus or
deficits due to the business
activities during the year.
Depreciation It does not include non-cash It includes non-cash items like
items like depreciation, depreciation, provisions etc. in
provisions etc. order to ascertain the actual
net
profit or net loss.
Opening Balance This account begins with the Usually, it has no opening
opening balance of cash in balance but sometimes surplus
hand and cash at bank or or deficits forwarded from the
overdraft. last accounting period (if not
added to the capital fund) can
be shown as the opening
balance of this account.
Closing Balance The balancing figure of this The balancing figure of this
account is expressed in terms account is expressed in terms
of the closing balance of cash of either surplus or deficit.
in hand and cash at bank or
overdraft.
Basis of Preparation It is prepared on cash basis of It is prepared on accrual basis
accounting. of accounting.

CONCLUSION

2
https://byjus.com/question-answer/distinguish-between-receipt-and-payment-account-ana-income-and-
expenditure-account/
3
https://www.meritnation.com/cbse-class-12-commerce/accountancy/partnership-accounts-ncert-solutions-
(2018)/accounting-for-not-for-profit-organisation/ncert-solutions/59_17_1379_2758?cv=1
Thus, we have effectively explored the subject of income and expenditure accounts, its
definitions and features and understood the difference between receipts and payments account.
We have established that income and expenditure accounts are a nominal account prepared on an
accrual basis and understand their objective is to establish a value of surplus/deficit created on
the basis of the value of income over expenditure. This is an accounting method used by non
profit organisations to establish expenses incurred and revenue received without the involvement
of items capital in nature.

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