Q.Explain, with reasoning, how outstanding subscription and subscription received in advance — at both the beginning and the end of the year — are adjusted to arrive at the subscription income to be shown in the Income and Expenditure Account.

Subscription is almost never received in a neat, matching amount, so the cash figure collected during the year has to be converted onto the accrual basis before it can appear as income.

The Receipts and Payments Account shows only the cash actually collected as subscription during the year — a figure that mixes amounts belonging to the previous year (paid late), the current year, and the next year (paid early). The Income and Expenditure Account, being on the accrual basis, needs only the amount that genuinely belongs to the current year, so four adjustments are made to the cash figure:

1. Less: Opening outstanding subscription — this is last year's income, collected in cash only this year; it must be removed since it does not belong to the current year.
2. Add: Closing outstanding subscription — this belongs to the current year even though it has not yet been collected in cash; it must be added in.
3. Less: Closing advance subscription — cash collected this year for next year's subscription does not belong to the current year; it must be removed.
4. Add: Opening advance subscription — cash that was collected last year for this year's subscription does belong to the current year; it must be added in.

Putting these together: …

An equivalent, often faster way to reach the same figure in an examination is to prepare a memorandum Total Subscription Account in ledger form: debit the opening outstanding subscription and the closing advance subscription (as balances brought down/carried down appropriately) and the amount transferred to the Income and Expenditure Account; credit the opening advance subscription, the closing outstanding subscription, and the subscription act …

The most common error is applying the addition/subtraction signs backwards — students often add the opening outstanding subscription instead of subtracting it, or subtract the opening advance instead of adding it. Writing out all four adj …