Income and Expenditure Account and Balance Sheet (Guidelines)

Read this article to learn about the guidelines for preparation of Income and Expenditure Account and Balance Sheet.

(1) While preparing Income & Expenditure Account, it should be noted that items related to the current accounting period are recorded therein. For this purpose income and expenditure should be recognized on the basis of accrual concept.

(2) When the size of the amount is the base for treating the item as capital or revenue (as in the case of donations), the fact that a particular amount is big or small depends on the facts of each case and decision shall be made after considering the overall involvement of monetary transactions in the organizations. However, a suitable note should be given in the examination problem.

(3) In Receipts and Payments Account there may be several items which are not recorded in the Income & Expenditure Account. Transactions related to Capital Receipts, Capital Payments and Revenue Receipts/Revenue Payments of the previous/future periods and occurred during the current year are recorded in the Receipts and Payments Account but do not appear in the Income & Expenditure Account. For example, subscription of the previous year received in the current year or subscription of the future year received in the current year.

(4) There may be some items which pertain to current year and even revenue in nature but were not received or paid during the current period, hence, could not find place in the Receipts and Payments Account. These items should be carefully examined on the basis of accrual concept and recorded in the Income & Expenditure Account.

For example, audit fees for the audit of accounts of the current year is usually paid after the end of the accounting period but it shall be shown on the expenditure side of the Income & Expenditure Account of the current accounting year.

(5) Income from specific fund investment should be added to that fund in the balance sheet directly. Similarly, expenses related to fund should be deducted from that fund in the balance sheet directly.

(6) Opening Balance Sheet is to be prepared to find out any missing figure in the question viz. balancing figure on the liabilities side may be taken as ‘capital fund’ if the same has not already been given.

(7) When Receipt & Payment Account and Income & Expenditure Account both are given and the Balance Sheet is required to be prepared, item-wise figures appearing in Income & Expenditure Account and Receipt & Payment Account are to be compared. Income & Expenditure Account shows the total expenditure/income of the year, whereas Receipt & Payment Account gives details regarding actual receipt of income and payments of expenditures.

If payment for an expenditure shown in the Receipts & Payments Account is more than the amount as shown in Income & Expenditure Account, then in the absence of any other information given in the question viz. any amount outstanding in the previous year, the excess amount should be treated as prepaid. Similarly, if the payment as shown in the Receipts & Payment Account is less than the figure appearing in Income & Expenditure Account, it means the expense is outstanding to the extent of deficit. Adjustments for outstanding/paid in advance or received in advance etc. in previous year are also required to be made. The amount of Income received in advance or accrued income is also calculated in the same manner.

(8) Whether an item appearing on the receipts side of the Receipts & Payments Account is an income or not is a question of fact. To treat that item as income two steps are to be taken.

Step 1. Examine the nature of receipt:

In this regard two tests are to be satisfied. They are:

(a) The receipt should be recurring in nature &

(b) The receipt should not be reserved for some specific purpose such as donations for Prize Fund etc.

Step 2. Computation of Income:

If both the above conditions are satisfied, next step is to adjust that receipt with the adjustment related to previous periods, current period and future period. In this regard following sub-steps should be taken.

Income to be shown in The Income & Expenditure Account:

(9) In accounting for not-for-profit organisation, the terms expenditure and expenses are used in place of each other. For the purpose of recording in Income & Expenditure Account two steps are to be taken.

They are:

Step 1: Examine the nature of expenditure. In this regard two tests are to be taken they are:

(i) The item must be recurring in nature &

(ii) The item must be useful for the current accounting period only.

Step 2: Computation of Expenditure:

If both the above conditions are satisfied, next step is to adjust that payment with the adjustment related to previous period, current period and future period. In this regard allowing sub-steps should be taken.