Fundamentals of Financial and Cost Accounting · Financial Statements of a Not-for-Profit Organisation

Income and Expenditure Account: Format and Preparation Steps

Updated 10 October 2026 · Fact-checked

The **Income and Expenditure Account** is the revenue statement of a not-for-profit organisation. It is prepared on accrual basis. Start from the Receipts and Payments Account, keep only revenue items, adjust for outstanding and prepaid amounts, and match income of the year against expenses of the year. The balancing figure is a surplus or a deficit.

Understand Income and Expenditure Account

A club, school society or charitable trust does not aim at profit. So it does not prepare a Profit and Loss Account. It prepares an Income and Expenditure Account to show whether income of the year was enough to cover the expenses of the year. The result is called surplus (income more than expenditure) or deficit (expenditure more than income).

The starting point is usually the Receipts and Payments Account. That account is a summary of cash and bank. It includes items of every kind: capital and revenue, and of this year or of other years. The Income and Expenditure Account is different. It is prepared on accrual basis, so it takes only revenue items that belong to the current year, whether cash has moved or not.

This gives you two jobs. First, separate capital items from revenue items. Purchase of furniture, sale of investments, life membership fees and donations for a specific purpose go to the Balance Sheet, not to this account. Legacies and entrance fees are normally capitalised too, but always follow the treatment stated in the question. If the question says to treat a legacy or entrance fee as revenue, take it as income. Second, adjust for time. Add outstanding expenses and subtract prepaid expenses. Add subscriptions outstanding and subtract subscriptions received in advance.

The format looks like a Profit and Loss Account but is written in the Income and Expenditure form. Expenditure is on the left (debit) side. Income is on the right (credit) side. It has no opening or closing cash and bank balances. Those belong only to the Receipts and Payments Account.

Key formulas to remember

Result of the account: Surplus = Total Income − Total Expenditure; If expenditure is more, the difference is a deficit. A surplus is added to the Capital Fund; a deficit is deducted.
Expense for the year (outstanding and prepaid): Expense for the year = Paid in year + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end; Use this for salaries, rent, and similar items. Show the result on the debit side.
Subscription income for the year: Subscription = Received in year + Outstanding at end − Outstanding at start − Advance at end + Advance at start; Show the result on the credit side. Subscription outstanding at end is an asset, and subscription received in advance is a liability.
Consumption of stationery or similar stock: Consumed = Opening stock + Purchases − Closing stock; Purchases are the amount for the year, so adjust for unpaid amounts first.
Depreciation: Depreciation charged to Income and Expenditure Account; asset shown in Balance Sheet at reduced value; Depreciation is a non-cash expense. It does not appear in the Receipts and Payments Account.
Items excluded: Capital receipts and capital payments → Balance Sheet only; Examples: sale of old assets, purchase of fixed assets, life membership fees, specific-purpose donations, and normally legacies and entrance fees unless the question says otherwise. Also exclude opening and closing cash balances.

How to solve Income and Expenditure Account questions

Use this method for any question that gives a Receipts and Payments Account with adjustments.

1Read the Receipts and Payments Account and mark each item as revenue or capital. Ignore capital items and the opening and closing cash and bank balances.
2Write the revenue receipts on the income side and the revenue payments on the expenditure side, as a first draft.
3For each item in the adjustments, work out the amount for the current year using the outstanding and prepaid formula.
4Add items that appear only in adjustments, such as depreciation, which have no cash entry.
5Treat the special items correctly. Capitalise life membership fees and specific donations. Take general donations as income. Treat legacies and entrance fees as capital unless the question says otherwise.
6For sports material and similar items, take the consumption for the year, not the cash paid.
7Total both sides. The difference is the surplus or deficit. Check the items again before marking the answer.

Quickest way: Item-by-item table check

When to use it: Use this when a numerical MCQ asks for the surplus, deficit, or one line of the account, and time is short.

Find only the figure asked for. If the question asks for subscription income, do not build the whole account.
Write the one-line formula: Received + Outstanding at end − Outstanding at start ± advance changes.
Put the numbers in the correct slots. Items at the start come from last year's Balance Sheet.
If the question asks for the surplus, sum only the revenue incomes and revenue expenses after adjustment.
Eliminate options that obviously include a capital item or that use the cash balance.

Common mistakes in Income and Expenditure Account

Including capital receipts such as life membership fees or specific donations as income.
These items appear on the receipts side, so students copy everything across.
Fix: Ask of each receipt: does it benefit only this year? If not, send it to the Balance Sheet.
Showing opening and closing cash and bank balances in the Income and Expenditure Account.
Students copy the format of the Receipts and Payments Account.
Fix: Remember that the account is not a cash summary. Balances are never shown in it.
Taking the cash paid for an expense and ignoring outstanding or prepaid amounts.
The cash figure is the easiest to see in the question.
Fix: Read the adjustments first, then apply the outstanding and prepaid formula to each item.
Adding subscription received in advance to income.
Students confuse advance with outstanding.
Fix: Advance belongs to next year, so subtract it. Outstanding at the end is earned but unreceived, so add it.
Ignoring depreciation because it is not in the Receipts and Payments Account.
Students think only cash items go into the account.
Fix: Accrual basis includes non-cash expenses. Always charge depreciation given in adjustments.
Taking purchase of sports material as an expense instead of its consumption.
Purchases are visible, stocks are in a note.
Fix: Compute opening stock + purchases − closing stock.

Worked examples

Example 1

A club received subscriptions of ₹1,50,000 during the year. Subscriptions outstanding were ₹10,000 at the start and ₹15,000 at the end. Subscriptions received in advance were ₹4,000 at the start and ₹6,000 at the end. What is the subscription income to be credited in the Income and Expenditure Account?

Show the solution

Start with cash received: ₹1,50,000.
Add outstanding at end: 1,50,000 + 15,000 = 1,65,000.
Deduct outstanding at start, because it belongs to last year: 1,65,000 − 10,000 = 1,55,000.
Deduct advance at end, because it belongs to next year: 1,55,000 − 6,000 = 1,49,000.
Add advance at start, because it was received last year for this year: 1,49,000 + 4,000 = 1,53,000.

Answer: ₹1,53,000

Example 2

A society's Receipts and Payments Account shows these items: subscriptions ₹80,000; donations (general) ₹20,000; life membership fees ₹30,000; salaries paid ₹40,000; purchase of furniture ₹25,000; general expenses ₹10,000. Salaries outstanding at year end are ₹5,000. Depreciation on furniture is ₹2,500. Find the surplus or deficit, assuming no other items.

Show the solution

Income: subscriptions ₹80,000 plus general donations ₹20,000 = ₹1,00,000. Life membership fees are capital, so exclude them.
Salaries for the year: 40,000 + 5,000 = ₹45,000.
Expenditure: salaries ₹45,000 + general expenses ₹10,000 + depreciation ₹2,500 = ₹57,500. Furniture purchase is capital, so exclude it.
Surplus = 1,00,000 − 57,500 = ₹42,500.

Answer: Surplus of ₹42,500

Exam tips

In MCQs on this topic, first check which items are capital. Wrong options often include a capital item.
Learn the subscription formula so well that you can complete it in under 30 seconds.
Opening and closing balances of cash and bank never go in this account. Use this to eliminate options quickly.
Read the question wording for treatment clues, such as 'to be capitalised' or 'specific purpose'. Follow those instructions over general rules.
With no negative marking, always mark an answer. If time is short, eliminate options that include capital items and guess among the rest.

Practice questions from Financial Statements of a Not-for-Profit Organisation

Income and Expenditure Account in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income and Expenditure Account: frequently asked questions

What is the format of an Income and Expenditure Account?

It has two sides. Expenditure is on the left and income is on the right. Each item is the amount for the current year after adjustments. The balancing figure is a surplus or deficit, added to or deducted from the Capital Fund.

How do I prepare it from a Receipts and Payments Account?

Remove capital items and cash balances. Keep revenue items. Then adjust each item for outstanding, prepaid and advance amounts. Add non-cash items like depreciation, and balance the account.

Is the Income and Expenditure Account a nominal account?

Yes. It records incomes and expenses of the year, so it works like a Profit and Loss Account. Its balance moves to the Capital Fund in the Balance Sheet.

How are subscriptions outstanding and prepaid treated?

Subscription outstanding at the end is added to income and shown as an asset. Subscription received in advance is deducted from income and shown as a liability. Reverse the effect for opening balances.