Income and Expense Accounts

An income and expense account is the profit and loss account of a non-commercial business. It contains only income items, which are charged with all expenses and credited with all income for a period, whether actually paid or received within that period or not. The final 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 receipt and payment 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 principal receipts and principal payments, the balance represents the surplus/deficiency of income over expenses during a given period.

base of preparation

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 Expenses 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 rents, salaries, repairs such as those that appear on the credit of the collection account and payments must 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 equity, but is often called the accumulated fund, or fund in general, since it is typically made up of the excess of income over expenses that has accumulated within the business.

Separate accounts must be maintained for funds raised for special purposes, eg, building 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 appear on the club’s balance sheet as an addition to the accumulated fund? As long as entry fees are treated consistently, either method is correct; although it can be argued that revenue could be destroyed if there were a large number of gate fees in any period, the benefit of which would be spread over several accounting periods.

2. Should the arrears of the clubs appear as receivables on the balance sheet date? A large amount of arrears of club fees are never received and the balance could be destroyed by a fictitious asset of the debtors if the arrears of club fees are included in the balance sheet and are never received. In practice, subscriptions in arrears are often excluded from the balance sheet for prudential reasons.