Steps To Prepare Income And Expenditure Account

By Anil_Kumar_Gupta

The steps are as follows:

1. Ignore opening and dosing cash and bank balances appearing in receipts and payments account.

2. Eliminate all items of capital receipts and payments.

3. Ascertain income of the relevant year by deducting from the total receipts the income received on account of previous and future years and by adding the income accrued due in the year but not received and income received in the previous year but relating to this year.

4. Ascertain expenditure of the relevant period by deducting expenditure both relating to preceding period and succeeding period from the total payments and by adding the expenditure outstanding at the end and expenditure prepaid in the beginning.

5. Make adjustments, as per additional information, such as depreciation, bad debts etc., if any.

6. The income and expenditure account, when balanced, will disclose surplus (if the credit side is bigger) or deficit (if the debit side is bigger). If surplus i.e. excess on income over expenditure add it to the capital or accumulated fund. However, if deficit i.e., excess of expenditure over income deduct it from the capital or accumulated fund.

Distinction between receipt and income

“Receipt” means total cash received during the current year. But “income” means total income earned for the current year.

The points of distinction between the two are stated below :-

Receipt

1. Any cash received in regarded as receipt.

2. It is not confined to any accounting year. In other words, it may include cash received for any year-past, present or future.

3. It may be of both capital and revenue nature.

4. In case of receipt, cash increases equal to amount of receipt.

5. An item can’t be called “receipt” unless equivalent amount of cash received.

6. It is recorded on debit side of cash book.

7. It is not included in final accounts. In other words, it is not considered in determining the result of concern.

Income

1. Any cash received mayor may not be regarded as income. Cash received for current year is regarded only as income.

2. It is confined to current accounting year only.

3. It is of revenue nature only.

4. In case of income cash may not increase equal to the amount of income.

5. An item may be “income”, even though cash has not been received.

6. It is credited to income and expenditure account.

7. It must be considered in final accounts.

Distinction between payment and expenditure

Payment means total cash paid during the current year. But expenditure means total expenses incurred for the current year only.

The points of distinction between the two, are as follows :-

Payments

1. Any cash paid in regarded as payments.

2. It is not confined to any accounting year, i.e. it may include cash paid for any year-past, present or future.

3. It may be of both capital and revenue nature.

4. In case of payment, cash decreases equal to amount of payment.

5. An item can’t be called “payment” unless equivalent amount of cash is paid.

6. It is recorded on credit side of cash book, i.e. credited to cash account.

7. It is not included in final accounts. In other words, it is not considered in determining the result of concern.

Expenditure

1. Any cash paid mayor may not be regarded as expenditure.

2. It is confined to current accounting year only.

3. It is of revenue nature only.

4. Cash mayor may not decrease equal to the amount of expenditure.

5. An item may be “expenditure” even though cash has not been paid.

6. It is debited to income and expenditure account.

7. It must be considered in final accounts.

The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application development for business. The software are available both for intranet and internet. These software are available for download from the website:

Evaluation version accounting software download is available at http://www.hitech-on-web.com/p10.asp

Copy of the article and full Financial Accounting Primer or Tutorial is available at
http://www.hitech-on-web.com/Accounting_Ledger.asp

Visit HiTech Computer Services at http://www.hitech-on-web.com/

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