Income and Expenditure Account:
Learning Objectives:
-
Define and explain income and expenditure
account.
-
What is the purpose of preparing income and
expenditure account?
Definition and Explanation:
Income and expenditure account is
merely another name for profit and loss account. Such type of profit and
loss account is generally adopted by non trading concerns like clubs,
societies, hospitals, and like etc. This account is credited with all
earnings (both realized and unrealized) and debited with all expenses (both
paid and unpaid) The difference represents a surplus of deficiency for a
given period which is carried to the capital account. It should be noted
that items of receipts or payments of capital nature such as legacies,
purchases or sales of any fixed assets must not be included in this account.
How to Convert a Receipt and Payment Account into Income and Expenditure
Account:
The following steps will be necessary to
convert a
receipt and payment account into an income and expenditure account:
-
Opening and closing balances of
receipt and payment account should be excluded.
-
All items of capital receipts and payments
should be excluded.
-
All incomes of previous years or for years to
come should be excluded.
-
All expenditures of previous years and years
to come should be excluded.
-
All accrued income and outstanding
expenditures relating to the period should be included.
-
Item such as bad debts, depreciation, etc.
will have to be provided.
Treatment of Peculiar Items:
Generally in exercises the instructions are
given as to the treatment of special items. Such instructions are based on
the rules of the concern. These should be followed while solving questions.
Incases where no specific instructions are given the following guidelines
may be considered.
Legacy:
It is the amount received by the concern as
per the will of the donor. It appears in the receipt side of
receipt and payment account. It should not be considered as as an income but should be
treated as capital receipt i.e., credited to capital fund account.
Donation:
Amount received from any source by way of gift
is described as donation. It appears on the receipts side of
receipt and payment account. Donations are usually credited to income. Rules of the
association may provide that a part of donations are to be treated as
capital. However, if donations are received for a specific purpose viz.,
building, free dispensary etc., then it should require special treatment.
Donations for specific purposes should not be credited to income and
expenditure account. Similarly donations representing heavy amount may also
be treated as capital receipts.
Subscription:
The members of the associations, as per rules,
are generally required to make annual subscription to enable it to serve the
purpose for which it was created. It appears on the receipts side of the
receipt and payment account and is usually credited to income. Care must
be exercised to take credit for only those subscriptions which are relevant.
Life Membership Fees:
Generally the members are required to make the
payment in a lump sum only once which enables them the members for whole of
life. Life members are not required to pay the annual membership fees. As
life membership fees is substitute for annual membership fees therefore, it
is desirable that life membership fees should be credited to separate fund
and fair portion be credited to income in subsequent years. In the
examination question if there is no instruction as to what portion be
treated as income then whole of it should be treated as capital.
Entrance Fees:
Entrance fees is also an item to be found on
the receipt side of receipts and payments account. There are arguments that
it should be treated as capital receipt because entrance fees is to be paid
by every member only once (i.e., when enrolled as member) hence it is
non-recurring in nature. But another argument is that since members to be
enrolled every year and receipt of entrance fees is a regular item,
therefore, it should be credited to income. In the absence of the
instructions any one of the above treatment may be followed but students
should append a note justifying their treatment.
Sale of News Papers, Periodicals etc.
As the old newspapers, magazines, and
periodicals etc. are to be disposed of every year, the receipts on account
of such sales should be treated as income, and therefore to be credited to
income and expenditure account.
Sales of Sports Material:
Sale of support materials (used) is also a
regular feature of the clubs. Sales proceeds should be treated as income,
and therefore to be credited to income and expenditure account.
Honorarium:
Persons may be invited to deliver lectures or
artists may be invited to give their performance by a club (for its
members). Any money so paid is termed as honorarium and not salary. Such
honorarium represents expenditure and will be debited to income and
expenditure account.
Special Fund:
Legacies and donations may be received for
specified purchases. As discussed above these should be credited to special
fund and all expenses related to such fund are shown by way of deduction
from the respective fund and not as expenditure in income and expenditure
account.
Capital Fund:
Any concern - whether profit seeking or non
profit seeking - requires money for conducting day to day functions. In the
case of profit seeking concerns such money is called "capital", while in the
case of non - profit seeking concerns it is called "capital fund". The
excess of total assets over total external liabilities of a concern is
called capital fund. Capital fund is created with surplus revenue and
capital receipts and incomes. It is shown on liabilities side of balance
sheet.
Format of Income and Expenditure account:
Income and Expenditure Account
Example:
Prepare income and expenditure account and balance sheet form the following
receipt and payment account of a nursing society.
Receipt and Payment Account
| Receipts |
$ |
Payments |
$ |
To Balance at
bank - 1-7-90
To Subscriptions
To Fees from non members
To Municipal grant
To Donation for building fund
To Interest |
2,010
1,115
270
1,000
1,560
38 |
By Salaries
of nurses
By Board, laundry and domestic help
By Rent, rates and taxes
By Cost of car
By Car expenses
By Drugs and incidental exp.
By Balance c/d |
656
380
200
2,000
840
670
1,247
|
|
5,993 |
5,993 |
The society owns freehold land costing $8,000
on which it is proposed to build the nurse's hostel. A donation of $100
received to building fund was wrongly included in subscription account. A
bill for medicine purchased during the year amounting to $128 was
outstanding.
Solution:
Nursing Society
Income and Expenditure Account
|
Expenditures |
$ |
Income |
$ |
To Salaries
of nurses
To Board, laundry and domestic help
To Rent, rates and taxes
To Cost of car
To Car expenses
To Drugs and incidental exp.
To Outstanding expenses |
656
380
200
2,000
840
670
798
|
By Subscriptions 1,115
Less Wrong inclusion 100
By Fees from non members
By Municipal grant
By Interest
By Deficit |
1,015
270
1,000
38
551
|
|
2,874 |
2,874 |
Nursing Society
Balance Sheet on 31st December, 1991
|
Liabilities |
$ |
Assets |
$ |
Building fund 1,560
Add omission 100
Outstanding expenses
Capital fund 10,010
Less deficiency 551 |
1,660
128
9,459
|
Cash
Motor car
Land |
1,247
2,000
8,000 |
|
11,247 |
11,247 |
Calculation of Capital Fund:
Capital fund on 1st July, 1990 is ascertained as under:
| Land |
8,000 |
| Cash |
2,010 |
| |
|
| Capital fund |
10,010 |
| |
|
|
