Accounting · Financial Statements of Not-for-Profit Organisations

Income and Expenditure Account (Not-for-Profit Organisations) – CA Foundation Accounting

Updated 1 October 2026

The Income and Expenditure Account is the revenue statement of a not-for-profit organisation. It is prepared on an accrual basis and shows revenue income and revenue expenses of the year. Its result is a surplus or a deficit. To solve it, take the Receipts and Payments Account, remove capital items and adjust for outstanding and prepaid amounts.

Understand Income and Expenditure Account

A not-for-profit organisation such as a club, school or charity does not exist to earn profit. So it does not prepare a Profit and Loss Account. It prepares a Receipts and Payments Account and an Income and Expenditure Account.

The Receipts and Payments Account is a summary of the cash book. It records actual cash receipts and payments, whether they relate to this year, past years or future years. It includes both capital and revenue items. It starts with opening cash and bank balances and ends with closing balances.

The Income and Expenditure Account is like a Profit and Loss Account. It follows the accrual basis. It records only revenue items that belong to the current year, whether or not cash has moved. Its debit side shows expenses. Its credit side shows income. If income is more than expenditure, the balancing figure is a surplus. If expenditure is more, it is a deficit. The surplus or deficit is added to or deducted from the Capital Fund (also called Accumulated Fund) in the Balance Sheet.

To convert receipts and payments into income and expenditure, do two things. First, leave out capital items, such as purchase of furniture or sale of investments. These go to the Balance Sheet. Second, adjust each revenue item for the current year only. For an expense, add outstanding at the end and deduct outstanding at the start, and deduct prepaid at the end and add prepaid at the start. For income, adjust the same way in the opposite direction: add income receivable at the end, deduct income received in advance at the end, and adjust the opening balances in reverse.

Opening cash and bank balances, and closing balances, never appear in the Income and Expenditure Account. Non-cash items like depreciation do appear, as they are revenue expenses of the year.

Key rules to remember

Surplus or deficit: Surplus or Deficit = Total revenue income − Total revenue expenditure; Income more than expenditure is a surplus. Expenditure more than income is a deficit.
Expense for the year: Expense = Cash paid + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end; Use the current year's expense only. Cash paid comes from the Receipts and Payments Account.
Income for the year: Income = Cash received + Receivable at end − Receivable at start + Received in advance at start − Received in advance at end; Applies to subscriptions, rent received, interest and similar items. Receivable means accrued or outstanding income.
Capital vs revenue rule: Capital items → Balance Sheet. Revenue items → Income and Expenditure Account; Capital receipts: specific donations (for a building or endowment), legacies and life membership fees. General donations are revenue income. Entrance fees are usually capitalised but may be treated as revenue if the question says so. Purchase and sale of assets are capital items too.
Effect on Capital Fund: Closing Capital Fund = Opening Capital Fund + Surplus (or − Deficit) + Capital receipts credited to it; Capital receipts here means items the question tells you to capitalise, such as entrance fees or legacies.

How to solve Income and Expenditure Account questions

Use this order for any question that gives a Receipts and Payments Account with extra information and asks for an Income and Expenditure Account.

1Read the adjustments first. Note outstanding, prepaid, accrued and advance amounts, and any instruction about capitalising items.
2Go through the Receipts and Payments Account line by line. Mark each item as capital or revenue. Ignore opening and closing cash and bank balances.
3Put revenue receipts on the credit side and revenue payments on the debit side of a rough Income and Expenditure Account.
4Adjust each item for the current year using the formulas. Write the working beside the item, for example 'Salaries 60,000 + 5,000 − 4,000'.
5Add items that never passed through cash, such as depreciation, provision for doubtful debts and profit or loss on sale of assets, if the question gives them.
6Handle special items as per the question, such as specific funds, donations and stock of consumables.
7Total both sides. The balancing figure is the surplus or deficit. Label it clearly.
8Show your workings (subscription account, expense account) neatly as 'Working Notes' to earn step marks.

Quickest way: One-pass tick-and-adjust method

When to use it: Use this when time is short and the question has many receipts, payments and adjustments.

Draw the Income and Expenditure Account first with Expenditure on the left and Income on the right. Leave space for workings.
Take the Receipts and Payments Account and tick capital items. Do not carry them over.
Move each remaining item to its side. Apply its adjustment right away in one line.
For subscriptions, use a small working: Cash received + Receivable at end + Advance at start − Receivable at start − Advance at end.
Add non-cash items from the notes last, then total and find the balancing figure.
Quickly check that every adjustment in the notes was used at least once.

Common mistakes in Income and Expenditure Account

Copying opening and closing cash and bank balances into the Income and Expenditure Account.
Students copy the Receipts and Payments Account as it is.
Fix: Remember that balances are never income or expenditure. Start from the first receipt or payment, not the balances.
Including capital payments like purchase of furniture or investments as expenses.
Payment appears in the cash side, so it feels like an expense.
Fix: Ask for each item: does it give benefit over many years? If yes, it is capital and goes to the Balance Sheet.
Adding outstanding expenses of the opening year instead of deducting them.
Students apply only the closing adjustment and mix up the direction.
Fix: Opening outstanding was paid this year but belongs to last year, so deduct it. Closing outstanding belongs to this year, so add it.
Taking the whole subscription received as income.
Students ignore arrears and advances.
Fix: Prepare a subscription working. Include only the amount that belongs to the current year.
Leaving out depreciation or treating it as a cash item.
Depreciation does not appear in the Receipts and Payments Account.
Fix: Read the notes. Charge depreciation on the Income and Expenditure Account and reduce the asset in the Balance Sheet.
Putting the surplus or deficit on the wrong side of the Income and Expenditure Account.
Students are unsure which side takes the balancing figure.
Fix: If income (credit side) exceeds expenditure, put the surplus on the debit side as a balancing figure. If expenditure (debit side) exceeds income, put the deficit on the credit side as a balancing figure. Then transfer it to the Capital Fund in the Balance Sheet.

Worked examples

Example 1

A club's Receipts and Payments Account for the year ended 31 March 2025 shows: Opening cash ₹10,000; Subscriptions ₹80,000; Interest on investments ₹6,000; Salaries paid ₹40,000; Rent paid ₹24,000; Furniture purchased ₹15,000; Closing cash ₹17,000. Adjustments: Outstanding salaries at year end ₹5,000 (none at start); Rent prepaid at year end ₹4,000 (none at start); Subscriptions outstanding at year end ₹8,000 (none at start). Prepare the Income and Expenditure Account.

Show the solution

Opening and closing cash are not included. Furniture purchased ₹15,000 is capital, so it is excluded.
Salaries = 40,000 + 5,000 outstanding = ₹45,000.
Rent = 24,000 − 4,000 prepaid = ₹20,000.
Subscriptions = 80,000 + 8,000 outstanding = ₹88,000.
Interest on investments = ₹6,000 (no adjustment).
Total income = 88,000 + 6,000 = ₹94,000.
Total expenditure = 45,000 + 20,000 = ₹65,000.
Surplus = 94,000 − 65,000 = ₹29,000.

Answer: Income and Expenditure Account: Expenditure – Salaries ₹45,000, Rent ₹20,000, Surplus ₹29,000 (total ₹94,000). Income – Subscriptions ₹88,000, Interest ₹6,000 (total ₹94,000). Surplus is ₹29,000.

Example 2

A society paid ₹36,000 as electricity charges during 2024-25. Electricity outstanding was ₹4,000 on 1 April 2024 and ₹6,000 on 31 March 2025. Subscriptions received during the year were ₹1,20,000. Subscriptions in arrears: ₹10,000 on 1 April 2024 and ₹14,000 on 31 March 2025. Subscriptions received in advance: ₹5,000 on 1 April 2024 and ₹3,000 on 31 March 2025. Find the amounts to be shown in the Income and Expenditure Account.

Show the solution

Electricity expense = Paid 36,000 − Opening outstanding 4,000 + Closing outstanding 6,000 = ₹38,000.
Subscriptions income = Received 1,20,000.
Add closing arrears 14,000 → 1,34,000.
Deduct opening arrears 10,000 → 1,24,000.
Add opening advance 5,000 (it was received last year but belongs to this year) → 1,29,000.
Deduct closing advance 3,000 (belongs to next year) → 1,26,000.

Answer: Electricity charges to be shown on the expenditure side: ₹38,000. Subscriptions to be shown on the income side: ₹1,26,000.

Exam tips

Read the notes before you start. Most marks are lost by missing an adjustment.
Write short workings for every adjusted item. Even if the final figure is wrong, you may get step marks.
Always state clearly if you have treated an item as capital. Give a one-line reason.
Check that the surplus or deficit makes sense. If your answer is very large compared with receipts, you may have included a capital item.
Use the standard format with 'To' on the debit side and 'By' on the credit side, and label the balancing figure.

Practice questions from Financial Statements of Not-for-Profit Organisations

Income and Expenditure Account: frequently asked questions

What is the difference between Receipts and Payments Account and Income and Expenditure Account?

The Receipts and Payments Account is a summary of cash and bank transactions, on a cash basis, and includes capital and revenue items of any year. The Income and Expenditure Account is on an accrual basis and has only revenue items of the current year. The first starts with opening balances, the second does not.

Are capital items shown in the Income and Expenditure Account?

No. Capital receipts and payments, such as purchase of assets or sale of investments, go to the Balance Sheet. Only revenue income and expenses of the year appear in the Income and Expenditure Account.

How do I treat outstanding and prepaid amounts?

For expenses, add closing outstanding and deduct opening outstanding. Deduct closing prepaid and add opening prepaid. For income, apply the same logic in reverse using receivable and advance amounts.

Where does the surplus or deficit go?

It is added to or deducted from the Capital Fund (Accumulated Fund) in the Balance Sheet. A surplus increases the fund and a deficit decreases it.