The income and expenditure account is prepared by non-trading concerns at the end of the accounting period matching revenue receipts with revenue expenses to determine surplus or deficit. It is a nominal account that states that all the expenses are debited, and all the incomes are credited. It follows the accrual basis of accounting, meaning all the revenue transactions of this year are recorded regardless of whether they are received or not. It is similar to trading and P&L accounts of a trading concern. The items which are of revenue in nature are recorded, and items of capital expenditure are ignored.

Features of Income and Expenditure Account

  1. Non-trading concerns prepare income and expenditure account, and it is similar to the profit and loss account made by the trading concerns
  2. It is usually prepared at the end of the period
  3. It is prepared on the accrual basis of accounting
  4. It records non-cash items as well
  5. Only items of revenue nature are included, and capital items are excluded
  6. The surplus or deficit balance at the end of it is then transferred to the capital fund account
  7. It doesn’t start with an opening balance
  8. It is based on the double-entry system of accounting

Surplus or Deficit Balance

For a particular year, if the revenues of a non-trading organisation surpass the expenses for the year, then the account shows a surplus balance which is also called an excess of income over expenditure. However, if the expenses are more than the income, then the account shows a deficit balance which is also known as an excess of expenditure over income.

Steps in the Preparation of Income and Expenditure Account

  1. The steps in the preparation of income and expenditure account to be followed are:
  2. To make an income and expenditure account of a non-trading concern, it is required to acquire the receipt and payment account from it
  3. The starting and ending balances of receipt and payment account must be ignored
  4. The payments related to previous years’ expenditures, future years’ expenses, as well as capital payments of the current year must be removed
  5. The current year’s income and revenue expenses must be included along with the depreciation on all the fixed assets of the entity
  6. Then find out the balance of the account, which could either be surplus or a deficit balance

Income and Expenditure Account Format

As with any other account, the income and expenditure account format also has two columns. The first column is on the debit side and is called expenditure, and the other is on the credit side and is named income. These columns are used to record all the expenses and revenues of a non-trading organisation for a specific accounting period, usually one year.

Distinction between Income and Expenditure Account and Receipt and Payment Account

There are several distinctions between an income and expenditure account and a receipt and payment account. 

  1. Nature- Receipt and payment account is a summary of cash transactions, while income and expenditure account is a detailed summary of income and expenses.
  2. Capital and revenue items- The receipt and payment account includes both capital and revenue receipts, while the other includes income and expenses of only revenue nature.
  3. Placing of items- In the Receipt and payment account, the receipts are shown on the debit side and the payments on the credit side. However, in the income and expenditure account, all income is on the credit side, and expenses are on the debit side.
  4. Balance of account- In the receipt and payment account, the difference between receipts and payments signifies the balance in cash in hand or at the bank. While in income and expenditure accounts, the difference between income and expenditure is known as the surplus or deficit.
  5. Outstanding items- The Receipt and payment account considers only cash transactions without any scope for outstanding income or expenditure. While in income and expenditure accounts, all the income and expenditure for the period are considered.
  6. Type of account- The receipt and payment account is a real account, but the income and expenditure account is a nominal account.

Conclusion

It is concluded that the income and expenditure account is an account that is prepared by non-trading organisations. The objective of making this account is to ascertain the surplus or deficit of income over expenses for a particular time period. Generally, it is prepared at the end of the period, but that is not always the case. It is a nominal account and follows the accrual concept and principles of the double-entry system of accounting. It is very much similar to the profit and loss account of trading organisations and is prepared as a part of the final accounts of non-trading organisations.