Income and Expenditure Account

The income and Expenditure Account is a part of final accounts for non-trading entities. It helps in determining whether an entity earned surplus or deficit for a specific period. The structure resembles that of a profit and loss statement. 

What are the features of the Income and Expenditure Account (I&E A/c)?

• Prepare the Income and Expenditures account using a double-entry accounting method
• I&E A/c has two columns. We need to record the expenses on the left side and Incomes on the right side of the account. The presentation is quite comparable to that of a Statement of Profit and Loss.
• Follow Accrual basis of accounting to prepare this account.
• Prepared towards the end of the year as part of the Final accounts
• The outcome is either surplus or deficit. If the incomes exceed the expenditure, the result will be a surplus. However, if the expenditure exceeds the income, it will be a deficit.
• Similar to the Statement of Profit and Loss, we need consider only revenue items for recording in the I&E A/c. A Recreational Club, for instance, collects Life membership fees and Annual membership payments from its members. Only annual membership costs must be recorded in the I&E Account. The Life Membership payments falls under the Capital items category
• The accounts that appear in the I&E A/c are categorised as Nominal GL Accounts. Therefore, these accounts will not have either opening or closing balances.
• We must to consider only the current period items (both Incomes and expenses). So, there shall not be any inclusion of the prior year and subsequent year items.

Understanding Questions:

1. Who prepares the Income & Expenditure Account?

Accountants prepare this I&E account based on the principles outlined above. Persons who are independent of accounting department (Auditors) will audit these records.

2. What are the applicable Golden Rules of Accounting?

All the expenses and income accounts will be part of this Income and Expenditure account. So, Nominal account rules will be applicable. 

2.1 Why?

The nominal account includes the GL account, whose balances are insignificant and do not have a running balance. So, the income and expenditure accounts fall under this category.

2.2 What’s the Rule?

• Debit all the Expenses and Losses
• Credit all the Incomes and Gains

So, following these rules, we will record the expenses on the left side and Incomes on the right side of the I&E Account.

Also Read: Outstanding Income Journal entry

3. What are the applicable Modern Rules?

There are two methods to apply for accounting – Golden Rules and Modern Rules. Given any method. the will not be any change in the Accounting treatment.

We can consider these different approaches like some mathematical formulas where there are many ways of finding a solution to a problem. Still, the concluding answer will not be different. 

Modern Rules are 

• Assets/Expenses/Losses can be increased by debiting the GL Accounts. Similarly, we need to credit these GL’s to reduce the balance.
• Liabilities/Incomes/Gains can be increased by crediting the GL Accounts. Similarly, we need to debit these GL to reduce the balance.

4. What are the different GL accounts accounted for in the income and expenditure?

Income: 

The below list gives a couple of the Credit GL items.

• Membership Fees
• Gain from Sale of Assets
• Subscription Charges
• General donations
• Grants Received (Other than Capital nature)
• Income from fixed deposits

Expenses:

The Debit GL items involve

• Office expenses
• Depreciation
• Loss from Sale of assets
• Books and Periodical expenses
• Stationery

The above items are not an exclusive list, and we are trying to provide a better understanding of these GL items.

The Incomes or expenses generally depend on the entity/organization. For example, if the entity is a sports club and the main objective is to provide a sports court (Play area) for playing indoor and outdoor games for its members. The membership fees here are the primary income, and the Coach’s payments (Salary) and Maintenance of court area are major expenditure

What is the difference between a P & L account and an income and expenditure account?

The differences between the Profit or Loss statement (P&L) and Income & Expenditure account (I&E) are

• Statement of Profit or Loss is to determine whether the business made profits or losses. However, the Income and Expenditure is to find whether there is a surplus or deficit of income over expenditure
• P&L account applies to business entities. But I&E applies to non-trading entities.
• The outcome of the P&L account and I&E is Profit or Loss and Surplus or deficit, respectively
• We need to add the Profit or Loss per P&L Account to the Capital portion on the Liabilities side of the Balance sheet. However, the surplus or deficit will be added to the capital fund balance.

Frequently Asked Questions:

Income and Expenditure Account is a Real account?

The answer is no. The GL Accounts involved here relates to the income and expenditure. So, it falls under Nominal Account.

A real Account is an account that comprises the assets. So, the income and expenditure account does not fall under the real account.

Income and Expenditure Account is a Nominal account?

Yes, it’s a Nominal account based on the nature of accounts involved here.

Which items are shown in the income and expenditure account?

The credit side of the Income and Expenditure account will comprise inflows of funds/Income and Expenses on the debit side. We need to follow the accrual basis here. So, we need to record only the transaction relating to the current period in this account.

Also Read: PV Ratio

Income and Expenditure Account is _____account.

There are three categories of accounts per the Golden rules of accounting. Those are below:

• Real Account – Asset GLs
• Nominal Account – Income/Gains and Expenses/Losses
• Personal Account – Natural, Artificial (LLP) and Representative persons (Outstanding expenses)

Refer to the Journal entries article for in-depth understanding these GL accounts in detail.

So, the Income and Expenditure account will be the Nominal Account as it includes only the Income, Expenses, Loss or Gains GL Accounts.

Which item is not recorded in income and expenditure account?

Capital items shall not be part of the Income and Expenditure Account. For example, an asset purchased by ABC non-trade organization. So, we need to record the depreciation expenses and profit/loss on the asset’s sale. But we will not record the Asset value (Capitalization) here.

We can record the Purchase of assets in the Receipt & Payments Account, and it’s similar to the Cashbook.

What is the difference between income and expenditure and receipts and payments?

The I&E Account is to record the current year’s income and expenses based on an Accrual concept. However, the Receipts and Payments record all the cash transactions in the current year, and there is no requirement to consider whether the receipt or payment pertains to the current period.

We can consider the I&E Account as a Statement of Profit and Loss and Receipts & Payments as a Cash and Bank account.

Is profit and Loss same as income and expenditure?

Those two statements are different from each other. P&L will be used by trading entities and I&E for non-trading entities.

Conclusion:

The income and Expenditure Account is prepared to determine whether the entity made a surplus or deficit. The accrual basis of accounting and the double-entry system is the basis for preparing this account. It differs slightly from the Statement of Profit and Loss as the sole purpose of the former is not to make profits. So, the entity that prepares this income and expenditure is a non-trading account.