How to Prepare an Income and Expenditure Account

Understand Income and Expenditure Account

Key rules to remember

Income for an item (accrual)

Income of the year = Received during the year − Outstanding at start + Outstanding at end + Advance at start − Advance at end

Use for subscriptions and other income items. Drop any term that is not given.

Expense for an item (accrual)

Expense of the year = Paid during the year − Outstanding at start + Outstanding at end + Prepaid at start − Prepaid at end

Use for salaries, rent, stationery and similar items. Drop any term that is not given.

Surplus or deficit

Surplus = Total income − Total expenditure (if positive); Deficit = Total expenditure − Total income (if positive)

Surplus increases the Capital Fund. Deficit reduces it.

Capital or revenue test

Benefit lasts beyond the year and creates an asset = capital (leave out). Benefit used up in the year = revenue (include).

Purchase of an asset is capital. Depreciation on that asset is a revenue expense and is included.

Layout

Debit side: Expenditure. Credit side: Income. Balancing figure: Surplus or Deficit.

Opening and closing cash and bank balances never appear here.

How to solve Income and Expenditure Account questions

1. 1Read the adjustments first. Mark each as outstanding, prepaid, advance or capital in nature.
2. 2Go through the Receipts and Payments Account item by item. Cross out opening and closing cash and bank balances.
3. 3Cross out capital items: purchase or sale of assets, investments, loans taken or repaid, and receipts to be capitalised (for example, entrance fees or donations for a specific fund if the question says so).
4. 4Write down the remaining revenue items on the correct side. Receipts go to income, payments go to expenditure.
5. 5For each item with an adjustment, work out the figure for the year with the accrual formula. Show the working clearly.
6. 6Add items that appear only in adjustments, such as depreciation, outstanding expenses with no cash paid, or income earned but not received.
7. 7Total both sides. The difference is the surplus (income more) or deficit (expenditure more).
8. 8Check once more that no capital item is in the account and no revenue item is missed.

Quickest way: Item-by-item cross-out method

Common mistakes in Income and Expenditure Account

• Including purchase of assets such as furniture or sports equipment in the account.

  Students copy every payment from the Receipts and Payments Account.

  Fix: Ask if the benefit lasts beyond the year. If yes, it is capital. Show it in the Balance Sheet and charge only depreciation.

• Taking the cash received for subscriptions as income without adjusting.

  The subscription figure in the Receipts and Payments Account looks complete.

  Fix: Always adjust for opening and closing outstanding and advance subscriptions, using the accrual formula.

• Adding the closing outstanding expense on the wrong side or subtracting it.

  Students mix up the rules for income and expenses.

  Fix: For expenses: outstanding at end is added, prepaid at end is subtracted. For income: outstanding at end is added, advance at end is subtracted.

• Showing opening or closing cash and bank balances in the account.

  Students confuse it with the Receipts and Payments Account.

  Fix: Remember that Income and Expenditure is a nominal account. Balances of cash and bank never appear in it.

• Forgetting depreciation, which appears only in the adjustments.

  There is no matching payment, so it is missed.

  Fix: After the cash items, scan the adjustments for depreciation and other non-cash items. Debit them.

• Treating all donations as income.

  Students ignore the nature of the donation.

  Fix: General donations are revenue income. Donations for a specific purpose, such as a building fund, are capital and go to the Balance Sheet, unless the question says otherwise.

Worked examples