Income and Expense Accounts
An income and expense account is the profit and loss account of a non-business company. It contains only revenue items, which are debited with all expenses and credited with all revenue for a period, whether or not it was actually paid or received within that period. The ending balance of the income and expense account represents the excess of income over expenses, or the excess of expenses over income, as the case may be, for that period. This balance is similar to the net profit or loss of a business enterprise.
Receipt and payment accounts and income and expense accounts are commonly used by non-commercial companies such as social clubs, societies in order to present their financial situation to their members. A receipts and payments account is not a substitute for an income and expense account, as the letter is prepared on an accrual basis.
Contrast with collection and payment accounts
The main differences between the two accounts are:
Receipts and payments cash transactions only, indicates principal payments, balance represents cash on hand, bank balance or bank overdraft. Income and expenses include accruals and prepayments, exclude capital receipts and principal payments, the balance represents the surplus/deficiency of income over expenses during a given period.
preparation basis
To prepare an income and expense account Receipts and Payments Accounts, post all income items that appear in the Receipts and Payments Accounts on opposite sides of the income and expense account, and make adjustments for accruals and prepayments to the beginning and end of the period.
Items like subscriptions, entry fees, income from investments like that. Those that have been received in cash and charged to the collection and payment account, must be credited to the income and expense account, while expenses such as rent, salaries, repairs such as those that appear on the credit of the collection account and payments should be charged to the income and expense account. The capital elements that appear in the collection and payment account will be allocated to the charge or credit, as the case may be, of the corresponding asset or liability accounts, and will not affect the income and expense account.
The balance sheet of a non-profit company is prepared in the usual way and contains details of all assets and liabilities on the date it is incorporated. The excess of assets over liabilities is similar to a trader’s capital, but is often referred to as the accumulated fund, or fund in general, as it is normally made up of the excess of income over expenses that has been accumulated within the company.
Separate accounts should be maintained for funds raised for special purposes, for example, construction appeal funds and election funds.
Two problems whose solutions accountants divide are:
1. Should club entrance fees be credited to the income and expense account or shown on the club balance sheet as an addition to the accumulated fund? As long as entrance fees are treated consistently, either method is fine; although it can be argued that revenue could be destroyed if there were a large number of entry fees in any period, the benefit of which would be spread over several accounting periods.
2. Should club dues in arrears be listed as debtors on the balance sheet date? A large amount of club dues in arrears are never received and the balance could be destroyed by a fictitious asset of the debtors if club dues in arrears are included in the balance and never received. In practice, overdue subscriptions are often excluded from the balance sheet for prudential reasons.
