Question

Accounting method in which profit represents the excess of receipts over the expenditure

Answer 1

 

  

 

Income and Expenditure Account:

All transactions relating to non-profit-seeking concerns like Club, Library etc. are recorded in the books of account strictly according to Double Entry System. At the year-end result is determined through Final Accounts. Final Accounts consist of two stages:

Income and Expenditure Account

Balance Sheet

Here we are going to discuss income and expenditure account.

Definition and Explanation:

The account through which surplus or deficit of a non-profit-seeking concern is ascertained, is called Income and Expenditure Account.

All the information necessary for preparation of this account will be available from ledger accounts. Its left-hand (i.e. Debit) side records all revenue expenditure, while the right-hand (i.e. Credit) side records all revenues relating to the current year. The balance of the account, if credit, indicates surplus, i.e. excess of income over expenditure. Conversely, the balance of the account, if debit, indicates deficit, i.e. excess of expenditure over income.

Characteristics:

The following are the characteristics of Income and Expenditure Account:

It is in fact like a Profit and Loss Account of a profit-seeking concern.

All expenses are recorded on Debit side and all revenues on Credit side.

Only revenue transactions are included in it. No capital items is taken into account.

All the items of income/revenue concerning current year — whether received in cash or not—and all items of expense —whether paid in cash or not—are taken into account. But no item of income or expense concerning last year or next year is included in it.

Surplus or deficit of a concern is ascertained through this account. Credit balance "indicates surplus, while debit balance indicates deficit.

Its balance is transferred to Capital Fund Account.

It is prepared on the last day of an accounting year.

It does not start with any opening balance.

Method of Preparation:

The following points are to be noted, while preparing the above account:

Surplus or deficit of a fixed, period of time is ascertained through this account. So it's heading will be:

Income and Expenditure Account for the year ended 31.12.2005.
 

Income and Expenditure Account is a Nominal Account. Hence, only revenue (no capital) items will find place in it.

All items of revenue income and expenditure relating to the current year will appear in it. In other words, all items of income relating to the current year - whether received in cash or not - and all items of expenditure relating to the current year - whether paid in cash or not - will find place in this account. No items of income or expenditure relating to last year or next year will be included in this account.

Method of Conversion of Receipts and Payments Accounting into Income and Expenditure Account:

At first, Receipts and Payments Account is prepared by analyzing the Cash Book—subsequently, Income and Expenditure Account is prepared in the following manner:

Exclude the opening and closing balance of receipt and payment account.

Exclude all the payment items.

Exclude all revenue items relating to last or next year.

Include all items of income or expenditure relating to the current year, if they are not received or paid in the current year.

Charge depreciation on all wasting assets.