An income and expense account is the income statement for a non-trading concern. It contains only revenue items that are debited with all expenses and credited to all revenue for a period, weather or not, it has actually been paid or received within that period. The final balance of income and expenditure account represents excess income over expenditure or profit over expenditure, as the case may be, for that period. This balance corresponds to the net result or loss of a trading relationship.
Receipts and Payments Accounts and Revenue and Expenditure Accounts are often used by such non-commercial concerns as social clubs, communities for the purpose of presenting their financial position to their members. A receipt and payment account cannot replace an income and expense account as the letter is prepared on accrual basis.
Contrast with receipts and payment accounts
The main differences between the two accounts are:
Receipts and payments cash transactions only indicate capital payments, balance representing cash in hand, bank balance or bank overdraft. Revenues and expenses include accruals and prepayments, excluding capital income and capital payments, balance sheet represents profit / loss of income relative to expenses in a given period.
Basis for preparation
To prepare a Revenue and Expense Account Receipts and Payments Account, place all revenue items that appear on Receipt and Payment Accounts on the opposite sides of the Income and Expenditure Account and make adjustments for accruals and prepayments at the beginning and end of the period.
Such items as subscription, access fees, income from such investments. If received in cash and debited to the receipt and payment account, the income and expense account must be credited, while expenses such as rent, wages, repairs such as that shown on the credit side of the receipt and payment account must be debited to the income and expense accounts. Capital items that appear in the receipt and payment account are posted to the debit or credit, as the case may be, in the relevant asset or liability account and do not affect the income and expense accounts.
The balance sheet of a non-trading entity is prepared in the usual manner and contains information on all assets and liabilities at the time it exists. Surplus assets over liabilities are similar to a trader’s capital, but are usually called the accumulated fund, or generally fund, as it usually consists of excess revenue over expenses accumulated within the concern.
Separate accounts should be kept for funds collected for special purposes, e.g. Building appeal funds and election funds.
Two problems with accounting department solutions are:
1. Should Club Entry Fees be credited to the Income and Expenditure Account or displayed on the Club Balance Sheet as a supplement to the accumulated fund? Provided entry fees are processed consistently, both methods are correct; While it can be argued that revenue could be ruined if there were a large number of entry fees in a period whose benefit is distributed over a number of accounting periods.
2. Should the club’s subscription for arrears appear as debtors on the balance sheet date? A large number of club subscriptions that are in arrears are never received and the balance could be destroyed by a fictitious asset to debtors if club names on demand are included in the balance and never received. In practice, subscriptions that are backward are often exempt from the balance for reasons of caution.