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Saturday, March 26, 2011

Preparation of Income and Expenditure Account

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.
  1. 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.
  2. Take only the revenue receipts and revenue payments and do not include the portions to previous and subsequent years.
  3. Ignore all the capital receipts and capital expenditures.
  4. Add the amount of incomes pre-received in the previous year on account of current year.
  5. Add the amount of incomes of the current year but due to receive.
  6. Add the amount of expenses prepaid in the previous year on account of current year.
  7. Add the amount of expenses of current year but still outstanding to pay.
  8. 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.
  9. 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.

Tuesday, March 22, 2011

Usual Terminology of Non-Trading Concern

8. Endowment Fund
Endowment fund is a fund that arises from a gift. It is relatively large amount of money advanced to the concern and now placed in fixed deposits or invested in securities. The endowment fund is a capital receipts and shown on the liability side of the balance sheet. However, the income from the investment is a revenue receipts and appears on the credit side of income and expenditure account.

9. Sale of old Assets
The profit and loss on sale of old assets must be shown in income and expenditure account. The amount received from sale of an asset is not included in income and expenditure account. The book value of the assets sold is deducted from the relevant assets in the balance sheet.

10. Sale of Newspaper and Magazines
Amount received from the sale of newspapers and magazines is a revenue item i.e. they are sold every year or month or many times within a year. It is shown on the credit side of income and expenditure account.

11. Sale of Sport Materials
Sale of sport materials is also treated as a revenue income and shown on the credit side of income and expenditure account.

12. Special Fund
Specific fund like prize distribution fund, tournament fund etc are known as special fund and shown on the liability side of balance sheet.

Usual Terminology of Non-Trading Concern

5. Entrance Fees/ Admission Fees
Entrance fees/ admission fees refers to the amount paid by a member for his admission. These are the fees collected from new members are the time of his admission into membership which is usually charged by a club or society or by any non-profit making organization. It is treated as revenue receipt since it is collected every year and shown on the credit side of income and expenditure account. However, the students are advised to treat as capital receipts in the presence of specific instructions given in problem.

6. Honorarium
Honorarium denotes the remuneration to be paid to the outsider (not an employee) for their specific services like delivering speech, lectures, showing stage performance and concert etc. It is accounted as revenue expenditure and shown on the debit side of income and expenditure account.

7. Grants
Grants are the financial assistance received from public, government, other organizations and countries. It may be received for specific or general purposes. Therefore, general grants are treated as revenue receipts and shown on the credit side of income and expenditure account. However, specific grants must be treated as capital receipts which is shown on the liability side of balance sheet.

Usual Terminology of Non-Trading Concern

1. Subscription:
Subscription is a periodic fee paid by a member for his membership to the organization.It is a main source of income of a club annually paid by the members. However, it is also paid monthly, quarterly and half-yearly. Subscription may be paid periodically or as a lump sum for life-time membership. Periodical subscription are treated as revenue receipts and shown in Income and Expenditure Account as an income. Life membership subscriptions are treated as capital receipts and transferred to the capital fund.

2. Donations:
Donations refers to the amount received form any member or outsider to the organization for general or specific purpose. It is received by the way of gift. It appears on the receipt side of the receipts and payments account. It can be classified as general and specific.
  • General Donation: This is such donation, which is received not for a specific purpose. It can be used for any purpose. It is taken to the credit side of Income and Expenditure Account if the amount of such donation is small. However, in case of large amounted general donation, it is to be treated as a capital receipt and shown on the liability side of the Balance Sheet. The nature and size of the firm decides the size of general donations whether it is small or large.
  • Specific Donation: Specific donation is received for specific purpose. Donation for library building, donation for the purchase of ambulance, donation for medical supplies and laboratory etc. are some examples of specific donation. Specific donations are often treated as capital receipts and shown in the liability side of balance sheet.
3. Legacy:
Legacy is a specific donation, which is the amount left to the organization by the will f deceased person. In other words, it refers to the amount that is donated under a will on the death of donor. Legacies are generally treated as capital receipts and shown on the liability side of a balance sheet.

4. Life Membership Fees:
It represents the amount (fees) paid by a member for a life in one lump sum. It enables the payer to become the member of the organization for whole of the life if he/she pays fees only once often large amount. In the absence of any specific instruction, it is treated as a capital receipt and shown on the liability side of balance sheet.

Income and Expenditure Account

Non-trading concerns do not prepare profit and loss account. They prepare income and expenditure account in stead of profit and loss account. It is prepared to see whether annual revenue income is sufficient to meet the annual revenue expenditure. It shows the classified summary of income and expenditures which are of revenue nature and which relate to the current accounting period. It helps to ascertain the amount of surplus or deficit occurred in a non-profit making organization.

According to F.G. William,"An income and expenditure account prepare to show all the revenue incomes for the period whether actually received or accrued and all the revenue expenditures for the period whether actually paid or accrued and not yet paid." In other words, all the expenditures which related to the year whether it has actually been paid or not, are debited to income and expenditure account whereas all incomes are credited. If the credit total is greater than the debit, the difference is known as 'surplus' or 'excess of income over expenditure' but when debit total is higher, there is 'deficit' i.e. excess of expenditure over incomes'.

The way of preparing the income and expenditure account is similar as trading and profit and loss account. The accounts heads and adjustments to them and the sides on which they appear are also the same.

Features of Income and Expenditure Account:
  1. It records only those incomes and expenses which are of revenue nature. Purchase of furniture is not recorded since it is a capital item.
  2. It records incomes, expenses and losses, which relate to current accounting year. It excludes all the items of previous and coming year. In other words, it is prepared on accrual basis.
  3. It records all the expenses and losses on the debit side and all the incomes on the credit side.
  4. It does not record opening or closing balance of cash or bank.
  5. The difference between two sides of the income and expenditure account is either surplus or deficit.

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