Accountancy · Ch 2 — Accounts of Not-for-Profit Organisation
Income and Expenditure Account and Its Distinction from the Receipts and Payments Account
Income and Expenditure Account and Its Distinction from the Receipts and Payments Account
The Income and Expenditure Account is the NPO's equivalent of a Profit and Loss Account. It is prepared from the Receipts and Payments Account plus additional information about outstanding and prepaid items, so that it reflects the true financial result of the year on the accrual basis.
Meaning
A nominal account prepared for the accounting period, debiting every item of revenue expenditure pertaining to the year and crediting every item of revenue income pertaining to the year — irrespective of whether the cash has actually been received or paid.
Features
- A nominal account, following 'debit all expenses and losses, credit all incomes and gains'. Expenditure is shown on the debit (left) side and income on the credit (right) side, exactly like a Profit and Loss Account.
- Accrual basis, not cash basis. An expense is recorded if it relates to the current year, whether or not it has been paid; an income is recorded if it relates to the current year, whether or not it has been received.
- Only revenue items. Capital receipts (such as a donation for a building, a legacy, or life membership fees) and capital payments (such as buying furniture or a building) are excluded entirely.
- Only items pertaining to the current year. A subscription received this year that related to last year, or that is an advance for next year, is excluded; conversely, a subscription relating to this year, even if still uncollected, is included (Section 5).
- Includes non-cash adjustments such as depreciation on fixed assets, which never appears in the Receipts and Payments Account at all.
- The balancing figure is Surplus or Deficit, never 'profit' or 'loss' — a credit (excess of income) balance is called Surplus, a debit (excess of expenditure) balance is called Deficit. This figure is transferred to the Capital Fund in the Balance Sheet (Section 4), never distributed to members.
Receipts and Payments Account vs Income and Expenditure Account
| Basis | Receipts and Payments Account | Income and Expenditure Account |
|---|---|---|
| Nature of account | Real account (summary of cash/bank) | Nominal account |
| Basis of accounting | Cash basis — only actual cash movements | Accrual basis — items pertaining to the year, received/paid or not |
| Items included | Both capital and revenue receipts/payments | Only revenue income and revenue expenditure |
| Period covered | May include amounts relating to earlier or later years, as long as cash moved this year | Strictly the current accounting year only |
| Opening balance | Opening cash/bank balance (debit side) | No opening balance — a fresh nominal account every year |
A nominal account, prepared on the accrual basis, that records only the revenue income and revenue expenditure pertaining to the current accounting year; its balance is called Surplus (income exceeds expenditure) or …
The credit balance of the Income and Expenditure Account — income for the year exceeds expenditure for the year. It is added to the Capital Fund in …