Income and expenditure account is prepared on the basis of receipt and payments account or trial balance. The following steps are followed to prepare an income and expenditure account from a receipts and payments account.
- Ignore the opening and closing balance of cash in hand and at bank available in the receipts and payments account. The closing balance of cash and bank will be shown in the balance sheet.
- Take only the revenue receipts and revenue payments and do not include the portions to previous and subsequent years.
- Ignore all the capital receipts and capital expenditures.
- Add the amount of incomes pre-received in the previous year on account of current year.
- Add the amount of incomes of the current year but due to receive.
- Add the amount of expenses prepaid in the previous year on account of current year.
- Add the amount of expenses of current year but still outstanding to pay.
- Make necessary adjustments as per the need of additional information given in question like depreciation on fixed assets, reserve for doubtful debts, loss or profit on sale of fixed assets etc.
- Determine the amount of surplus or deficit. 'Surplus' arises when credit side of income and expenditure account is bigger. On the other hand, 'Deficit' arises in case of excess of expenses over incomes.