Book-Keeping and Accountancy · Ch 2 — Accounts of 'Not for Profit' Concerns
Income and Expenditure Account — Meaning, Features and Distinction from Receipts and Payments Account
Income and Expenditure Account — Meaning, Features and Distinction from Receipts and Payments Account
The Receipts and Payments Account tells us how much cash moved during the year, but a Not for Profit concern's members are really interested in a different question: did the organisation's activities for the year result in a surplus or a deficit? Answering that question needs a second, quite different account — the Income and Expenditure Account.
Income and Expenditure Account
A nominal account, equivalent to the Profit and Loss Account of a trading concern, prepared on the accrual basis to show only the revenue income earned and revenue expenditure incurred during the current accounting year, the balancing figure being a Surplus or a Deficit.
Nature
The Income and Expenditure Account is a Nominal Account, so it follows the ordinary nominal-account rule — debit all expenses and losses, credit all incomes and gains. Unlike the Receipts and Payments Account, it is prepared strictly on the accrual (mercantile) basis.
Features
- It records only revenue items of income and expenditure — capital receipts (a loan, a specific donation meant to be capitalised, sale/purchase proceeds of a fixed asset) and capital payments never appear in it.
- It records only items relating to the current year — every revenue item is adjusted for whatever portion is outstanding, prepaid, or received/paid in advance, so that exactly one year's worth of income and expense is reflected, no more and no less.
- It has no opening or closing cash balance — it is prepared afresh for the period, exactly like a Profit and Loss Account, and carries no balance forward from one year to the next.
- Items that never involve cash at all, such as depreciation on fixed assets and a provision for doubtful debts, ARE included in it, even though they never appear in the Receipts and Payments Account.
- Its balancing figure is called Surplus (when income exceeds expenditure) or Deficit (when expenditure exceeds income) — never "Net Profit" or "Net Loss", since the organisation is not a trading concern.
- The Surplus or Deficit is transferred to the Capital Fund in the Balance Sheet — added if a Surplus, deducted if a Deficit — exactly as Net Profit/Loss is added to or deducted from Capital in a trading concern.
Receipts and Payments Account vs. Income and Expenditure Account
Although the Income and Expenditure Account is built FROM the Receipts and Payments Account, the two are fundamentally different accounts.
| Basis | Receipts and Payments Account | Income and Expenditure Account |
|---|---|---|
| Type of account | Real Account (a summarised Cash Book) | Nominal Account (like a Profit and Loss Account) |
| Basis of accounting | Cash basis | Accrual (mercantile) basis |
| Items recorded | All cash receipts and payments — capital and revenue alike | Only revenue income and revenue expenditure |
| Period covered | May include amounts relating to the past year or the next year, if cash actually moved this year | Strictly the current year only, after adjustment |
| Opening/closing balance | Opens with, and balances off to, the cash/bank balance | Has no opening balance; is a fresh nominal account each year |
A nominal account, equivalent to a Profit and Loss Account, prepared on the accrual basis to show only the current year's revenue income and revenue expenditure, its balancing figu …