Preparation of income and expenditure account from receipt and payment account

If the points of difference between receipt and payment account and income and expenditure account have been understood, it should be a simple matter to convert a receipt and payment account into an income and expenditure account. As a general guide, the following steps should be carefully followed to convert the receipt and payment account to an income and expenditure account.

  • Exclude the opening cash and bank balance and similarly the closing cash and balances.
  • Eliminate all items of capital receipts and payments.
  • Exclude income of the previous period and any income received in advance.
  • Exclude expenditure of the previous or the coming period.
  • Include all incomes relating to the current period but not received as yet.
  • Include all expenditure relating to the current period but not paid as yet.
  • Provision for bad debts and depreciation on fixed assets should be made and charged to income and expenditure account.

Accounting treatment of some important items

While preparing the income and expenditure account, special attention should be given to the following items:


Legacies:

This amount is received as per the will of the deceased person. If the amount is greater it is normally treated as capital item and shown as liability in the balance sheet, otherwise, it is treated as income and entered in the income and expenditure account. Sometimes a portion of legacy is transferred to income and expenditure account. If nothing is clear it may be treated as income or capitalized but a footnote of its treatment should be given.

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Donations

The treatment regarding the donations may vary, large amounts are capitalized and shown as liability in the balance sheet. Some donations are simply treated as income and are taken to the credit side of income and expenditure account. If the amount is moderate it can be treated in any manner, but a footnote should be given regarding the treatment of such amount.

If the donations are given for some specific purpose e.g. construction of a room, purchase of sports material etc., then it should be capitalized and will be shown as a liability on the balance sheet.

Life Membership Subscription:

The following two methods are used to deal with the amount received on account of life membership subscription:

  • When the amount is relatively small and a regular flow of members, take the advantage of this facility each year, then this item is considered as income and entered in the income and expenditure account.
  • When the amount is large, then a certain percentage should be treated as income each year. For example, 10% so that complete income is taken over the ten years.

Items relating to a specific fund:

If there is a specific fund and there are certain items of expenditure relating to such fund then the expenditure should not be shown in the income and expenditure account but it should be subtracted from its relative fund in the balance sheet. For instance, if there is tournament fund in the receipt and payments account and tournament expenses are also given, then tournament expenses should not be entered in income and expenditure account but will be deducted from tournament fund in balance sheet.

Sale of old sports material and old newspapers:

The cash received on account of old sports material and old newspapers is recurring income and will be entered In the income and expenditure account.

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Sale of an old asset:

Sale of an old asset will be deducted from a particular asset in balance sheet. The. profit or loss made on sale of an old asset will be recorded in income and expenditure account.

Closing the income and expenditure account

If incomes are greater it is termed as:
Excess of income over expenditure or Surplus balance.
If expenditures are greater it is termed as:
Excess of expenditure over income or Deficit balance.

Explanatory Note: Any amount of credit to income will be shown as a liability on the balance sheet.

Example:

For the year ended 31 March 2017, the treasure of Youth Centre produced the following summary of Receipt and Payment.

Non-trading concerns income and expenditure account

Required: Prepare Income and expenditure account for the year ended on 31 March 2017.

Solution:

Non-trading concerns income and expenditure account

Note: Expenditure incurred on the purchase of new tools and new games equipment has not been entered in Income & Expenditure account because this is paid expenditure and will be treated as an asset.

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