Financial Accounting · Financial Statements of Not-for-Profit Organisations

How to Prepare an Income and Expenditure Account

Updated 10 October 2026 · Fact-checked

An income and expenditure account is the revenue statement of a not-for-profit organisation. It is prepared on accrual basis: only revenue income and revenue expenses of the year are shown, adjusted for outstanding and prepaid items. Its balancing figure is a surplus or a deficit, which goes to the Capital Fund.

Understand Income and Expenditure Account

A not-for-profit organisation such as a club, school or charitable trust does not aim to earn profit. It keeps a Receipts and Payments Account, which is a summary of cash and bank. That account does not tell you whether the year ended well or badly.

The Income and Expenditure Account does. It is like a Profit and Loss Account of a business. It shows the income earned and the expenses incurred for the year, whether or not cash moved. The result is a surplus (income more than expenditure) or a deficit (expenditure more than income).

It follows the accrual basis. Subscription earned for the year is income even if unpaid. Salary for the year is expense even if unpaid. So you adjust the cash figures for outstanding and prepaid (advance) amounts.

It shows only revenue items. Capital receipts (entrance fees treated as capital, legacies, specific donations, sale of assets) and capital payments (purchase of assets, investments) go to the Balance Sheet. Capital items never appear in the income and expenditure account.

The account is built from the Receipts and Payments Account plus the extra information given. You pick out the revenue items, adjust each for accrual, add non-cash items such as depreciation, and balance the account.

Key rules to remember

Result of the year: Surplus or Deficit = Total Income − Total Expenditure; Surplus is added to the Capital Fund. Deficit is deducted from it.
Income for the year (accrual): Income = Received in cash + Outstanding at end − Outstanding at beginning − Advance at end + Advance at beginning; Use for subscriptions and other incomes.
Expenditure for the year (accrual): Expense = Paid in cash + Outstanding at end − Outstanding at beginning − Prepaid at end + Prepaid at beginning; Use for salaries, rent, insurance and similar items.
Format sides: Debit side: Expenditure. Credit side: Income.; Opposite of the Receipts and Payments Account, where receipts are on the debit side.
Non-cash items: Depreciation and loss on sale of asset go to the debit side. Profit on sale of asset goes to the credit side.; These never appear in the Receipts and Payments Account as such. Sale proceeds are a capital receipt.
Stock-based items: Consumption = Opening stock + Purchases − Closing stock; Purchases are the amount for the year, adjusted for creditors.

How to solve Income and Expenditure Account questions

Use this method for any question that gives a Receipts and Payments Account with adjustments and asks for the income and expenditure account.

1Read the adjustments first. List opening and closing balances such as outstanding, prepaid and advance items.
2Go through the Receipts and Payments Account line by line. Mark each item as revenue or capital. Capital items stay out.
3For each revenue item, adjust for accrual using the outstanding, prepaid and advance figures. Show your working in a note.
4Add items that have no cash entry: depreciation, provision for bad debts, and loss or profit on sale of an asset.
5Treat special items correctly. Entrance fees, legacies and donations go to income only if the question says they are revenue. Specific funds go to the Balance Sheet.
6Show trading activities such as a canteen or sports material by their net profit or loss. Show the net figure on the relevant side.
7Write the account with Expenditure on the debit side and Income on the credit side. Balance it to get a surplus or deficit.
8Check that no capital receipt or payment is included and that the opening cash and bank balances are not shown.

Quickest way: Three-column working table

When to use it: Use when there are many items with adjustments and you have limited time.

Draw columns: Item, Cash figure, Adjustment, Amount for the account.
Write each revenue item from the Receipts and Payments Account in the first column and its cash figure beside it.
Fill the adjustment column using the outstanding, prepaid and advance rule. Add or subtract with a sign.
Copy the final amounts to the correct side of the account. Mark each capital item as 'B/S' so you do not forget it.
Total both sides and balance. Add the capital-versus-revenue note as your reasoning.

Common mistakes in Income and Expenditure Account

Including opening cash and bank balances in the account.
Students copy the Receipts and Payments Account directly.
Fix: Opening and closing cash and bank balances are never in the income and expenditure account. Leave them out.
Putting purchase of furniture or investments on the debit side.
These items are payments in the Receipts and Payments Account, so they look like expenses.
Fix: Treat them as capital payments. They are shown as assets in the Balance Sheet. Only depreciation goes to the account.
Adjusting subscriptions the wrong way for advance and outstanding.
Students add all adjustments without checking the opening or closing position.
Fix: Use the formula. Add closing outstanding and opening advance. Subtract opening outstanding and closing advance.
Showing the full sale proceeds of an asset as income.
Sale proceeds appear on the receipts side.
Fix: Take the sale proceeds to the Balance Sheet by removing the asset. Show only the profit or loss on sale in the account.
Treating all donations and entrance fees as income.
Students ignore the wording of the question.
Fix: Specific donations and legacies are capital receipts. General donations are normally revenue. Follow the question. Where it is silent on entrance fees, state your assumption.
Missing non-cash items such as depreciation.
They do not appear in the Receipts and Payments Account.
Fix: Read the adjustments list and tick each item off as you use it.

Worked examples

Example 1

A club's Receipts and Payments Account for the year ended 31 March 2027 shows: subscriptions received ₹1,80,000; salaries paid ₹60,000; purchase of furniture ₹40,000. Further information: subscriptions outstanding on 1 April 2026 were ₹12,000 and on 31 March 2027 ₹18,000; subscriptions received in advance on 31 March 2027 were ₹6,000 (none at the beginning); salaries outstanding on 31 March 2027 were ₹5,000 (none at the beginning). Prepare the income and expenditure account. Ignore other items.

Show the solution

Subscriptions for the year = 1,80,000 + 18,000 − 12,000 − 6,000 = ₹1,80,000.
Salaries for the year = 60,000 + 5,000 = ₹65,000.
Furniture purchase of ₹40,000 is a capital payment. It is not in the account.
Total income = ₹1,80,000. Total expenditure = ₹65,000.
Surplus = 1,80,000 − 65,000 = ₹1,15,000.

Answer: Debit side: Salaries ₹65,000; Surplus (to Capital Fund) ₹1,15,000; total ₹1,80,000. Credit side: Subscriptions ₹1,80,000; total ₹1,80,000.

Example 2

A society's Receipts and Payments Account for the year ended 31 March 2027 shows: rent paid ₹48,000; sale of old equipment (book value ₹30,000) ₹25,000; donation for building fund ₹70,000. Further information: rent prepaid on 31 March 2027 was ₹4,000 and rent outstanding on 1 April 2026 was ₹6,000. Depreciation on equipment for the year is ₹8,000 (on the remaining equipment). Prepare the income and expenditure account and find the surplus or deficit.

Show the solution

Rent for the year = 48,000 − 4,000 − 6,000 = ₹38,000.
Loss on sale of equipment = 30,000 − 25,000 = ₹5,000. Debit side.
Depreciation = ₹8,000. Debit side.
The building fund donation of ₹70,000 is a specific, capital receipt. It goes to the Balance Sheet, not to income.
Total expenditure = 38,000 + 5,000 + 8,000 = ₹51,000.
Total income = nil. Deficit = ₹51,000.

Answer: Debit side: Rent ₹38,000; Loss on sale of equipment ₹5,000; Depreciation ₹8,000. Credit side: Deficit (to Capital Fund) ₹51,000. Each side totals ₹51,000.

Exam tips

Write a short 'Working Notes' section for each adjusted item. Examiners award step marks for the working even if a total is wrong.
Scan the Receipts and Payments Account for capital items first. In MCQs, the trap is usually a capital item treated as revenue.
State your assumption in one line when the question is silent, for example about entrance fees. Then be consistent.
In MCQs on subscriptions, apply the formula with the signs. Check the answer against the opening and closing positions.
Write the heading as 'Income and Expenditure Account for the year ended ...' and show the surplus or deficit clearly as the balancing figure.

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

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

The Receipts and Payments Account is a summary of cash and bank. It includes both capital and revenue items and starts with opening balances. The Income and Expenditure Account is on accrual basis, includes only revenue items for the year and shows a surplus or deficit.

Where does the surplus or deficit of the income and expenditure account go?

It is transferred to the Capital Fund (or General Fund) in the Balance Sheet. A surplus increases the fund and a deficit reduces it.

Is depreciation shown in the Receipts and Payments Account?

No. Depreciation is a non-cash expense. It appears on the debit side of the Income and Expenditure Account and reduces the asset in the Balance Sheet.

Which side do income and expenses go on?

Expenditure is on the debit side and income is on the credit side. This is the opposite of the Receipts and Payments Account, where receipts are debited.