Income and Expenditure Account From Receipts and Payments

Preparing an Income and Expenditure Account from a Receipts and Payments Account feels difficult at first because the question gives you cash information, but the answer expects income and expenses for the year.

That is the whole challenge.

A Receipts and Payments Account tells you what cash came in and what cash went out.

An Income and Expenditure Account tells you what income was earned and what expenses belonged to the current year.

Those two things sound similar, but they are not the same.

Once you understand this difference, the chapter becomes much more logical. You stop copying items blindly and start asking the right question for every amount.

That one sentence explains the whole topic.

First, Understand the Two Accounts

A Receipts and Payments Account is a summary of cash and bank transactions. It records all cash received and all cash paid during the year.

It includes:

• Revenue receipts.
• Capital receipts.
• Revenue payments.
• Capital payments.
• Amounts related to the current year.
• Amounts related to previous years.
• Amounts related to future years.

That is why it is not enough for finding surplus or deficit.

For example, if a club receives Rs. 12,000 as subscription for next year, the cash has been received this year. So it appears in the Receipts and Payments Account. But it is not income of the current year. So it should not be treated as current year’s income in the Income and Expenditure Account.

An Income and Expenditure Account is different. It includes only revenue income and revenue expenses of the current year.

It does not show opening cash balance.

It does not show closing cash balance.

It does not show purchase of fixed assets as an expense.

It does not show loan received as income.

It focuses only on the result of the year: surplus or deficit.

Point	Receipts and Payments Account	Income and Expenditure Account
Basis	Cash basis	Accrual basis
Nature	Summary of cash and bank	Summary of revenue income and expenses
Opening balance	Shows opening cash or bank balance	Does not show opening cash or bank balance
Closing balance	Shows closing cash or bank balance	Does not show closing cash or bank balance
Capital items	Included	Usually excluded
Previous and future year items	Included if cash moved this year	Excluded from current year income or expense
Result shown	Closing cash or bank balance	Surplus or deficit

The Core Rule

Every item in the Receipts and Payments Account should be tested before you place it in the Income and Expenditure Account.

Ask three questions.

1. Is it a revenue item?
2. Does it belong to the current year?
3. Does it need adjustment for outstanding, prepaid, advance, or accrued amounts?

If the answer is clear, the treatment becomes clear.

Item type	Treatment in Income and Expenditure Account
Revenue income of current year	Credit side
Revenue expense of current year	Debit side
Capital receipt	Usually Balance Sheet
Capital payment	Usually Balance Sheet
Income received in advance	Liability in Balance Sheet
Income accrued but not received	Asset in Balance Sheet
Expense outstanding	Add to expense and show as liability
Expense prepaid	Deduct from expense and show as asset

The word “subscription” usually points to income, but the amount may include previous year, current year, and next year portions. The word “furniture” usually points to an asset, so buying furniture is not an expenditure of the year in the Income and Expenditure Account.

Step 1: Start With the Receipts Side

The receipts side may contain many items, but not all of them are income for the current year.

Common items on the receipts side include:

• Subscriptions received.
• Admission fees.
• Donations.
• Interest received.
• Sale of old newspapers.
• Sale of sports material.
• Tournament receipts.
• Life membership fees.
• Legacy.
• Loan received.
• Sale of fixed assets.
• Opening cash or bank balance.

Now separate them carefully.

Revenue income items may go to the credit side of the Income and Expenditure Account after adjustment.

Capital receipts usually go to the Balance Sheet.

Opening balance is ignored while preparing the Income and Expenditure Account.

Receipt	Usual treatment
Subscription for current year	Credit side as income
Interest earned for current year	Credit side as income
Sale of old newspapers	Credit side as income
General donation	Often treated as income unless the question says otherwise
Donation for building fund	Balance Sheet under specific fund
Life membership fees	Usually Balance Sheet as capital receipt or liability
Loan received	Balance Sheet as liability
Sale of fixed asset	Balance Sheet adjustment, not ordinary income
Opening cash balance	Ignore for Income and Expenditure Account

In school-level Accountancy, the wording of the question matters a lot. “Donation for building” is not the same as “general donation”. “Sale of old newspapers” is not the same as “sale of furniture”.

Step 2: Convert Subscriptions Received Into Subscription Income

Subscriptions are usually the most important adjustment in this chapter.

The Receipts and Payments Account shows subscription cash received during the year. But the Income and Expenditure Account needs subscription income for the current year.

Use this logic:

Subscription income for the current year is:

Cash received during the year

Add subscription outstanding at the end

Add subscription received in advance at the beginning

Less subscription outstanding at the beginning

Less subscription received in advance at the end

The formula looks like this:

Particular	Effect
Subscription received during the year	Add
Outstanding subscription at the end	Add
Subscription received in advance at the beginning	Add
Outstanding subscription at the beginning	Less
Subscription received in advance at the end	Less

Why do we add outstanding at the end?

Because it is income earned this year, even if cash has not yet been received.

Why do we add advance at the beginning?

Because the cash was received last year, but the income belongs to this year.

Why do we deduct outstanding at the beginning?

Because that income belonged to last year. This year only the cash was collected.

Why do we deduct advance at the end?

Because the cash was received this year, but the income belongs to next year.

So Rs. 81,000 goes to the credit side of the Income and Expenditure Account.

Step 3: Check Other Income Items

After subscriptions, check other receipts that may be revenue income.

Examples include:

• Interest on investments.
• Rent received.
• Sale of old newspapers.
• Locker rent.
• Entrance fees, if treated as revenue.
• General donation, if treated as revenue.
• Profit on sale of asset, if separately calculated.

The same rule applies: include only the current year’s income.

If interest received is Rs. 9,000, but Rs. 2,000 is still accrued at the end of the year, the income for the year may be Rs. 11,000.

If rent received includes Rs. 3,000 for next year, deduct it from current year income and show it as a liability.

That question prevents most mistakes.

Step 4: Move to the Payments Side

The payments side also contains mixed information.

Common payment items include:

• Salaries.
• Rent.
• Printing and stationery.
• Repairs.
• Insurance.
• Electricity.
• Sports expenses.
• Audit fees.
• Purchase of furniture.
• Purchase of investments.
• Loan repayment.
• Purchase of sports equipment.
• Closing cash or bank balance.

Revenue expenses of the current year go to the debit side of the Income and Expenditure Account.

Capital payments usually go to the Balance Sheet.

Closing balance is ignored while preparing the Income and Expenditure Account.

Payment	Usual treatment
Salaries for current year	Debit side as expense
Rent for current year	Debit side as expense
Repairs	Debit side as expense
Insurance for current year	Debit side as expense
Purchase of furniture	Balance Sheet as asset
Purchase of investments	Balance Sheet as asset
Loan repayment	Balance Sheet adjustment
Closing cash balance	Ignore for Income and Expenditure Account

This is one of the most important distinctions in the chapter.

Step 5: Adjust Expenses to the Current Year

Payments made during the year are not always equal to expenses of the year.

Use this formula for most expense items:

Expense for the current year is:

Cash paid during the year

Add outstanding expense at the end

Add prepaid expense at the beginning

Less outstanding expense at the beginning

Less prepaid expense at the end

Particular	Effect
Expense paid during the year	Add
Outstanding expense at the end	Add
Prepaid expense at the beginning	Add
Outstanding expense at the beginning	Less
Prepaid expense at the end	Less

Think of salaries.

If salaries paid during the year are Rs. 60,000, but Rs. 5,000 is still unpaid at the end, the real salary expense for the year is Rs. 65,000.

If salaries paid during the year include Rs. 4,000 that belonged to last year, that amount should not be treated as this year’s expense.

So Rs. 61,000 goes to the debit side of the Income and Expenditure Account.

Step 6: Handle Consumable Items Carefully

Some items are not used fully in the year. Stationery, sports material, medicine, and uniforms may have opening stock and closing stock.

For these items, do not simply take the amount paid.

Use the consumption idea.

Expense consumed during the year is:

Opening stock

Add purchases during the year

Less closing stock

If creditors or unpaid purchases are given, adjust them too.

For a simple question, the treatment may look like this:

Particular	Amount
Opening stock of stationery	Add
Stationery purchased during the year	Add
Closing stock of stationery	Less
Stationery consumed	Debit side expense

Suppose opening stock of stationery is Rs. 2,000, stationery purchased is Rs. 15,000, and closing stock is Rs. 3,000.

Stationery consumed is Rs. 2,000 + Rs. 15,000 - Rs. 3,000 = Rs. 14,000.

So Rs. 14,000 is shown as expenditure.

The closing stock of Rs. 3,000 is shown as an asset in the Balance Sheet.

Step 7: Add Non-Cash Expenses

Some expenses do not appear as payments in the Receipts and Payments Account because no cash is paid during the year.

The most common example is depreciation.

If the question says “depreciate furniture by 10 percent”, you must record depreciation in the Income and Expenditure Account even though no cash has gone out.

Depreciation is shown on the debit side.

It also reduces the value of the asset in the Balance Sheet.

Other possible non-cash items may include:

• Depreciation on building, furniture, equipment, or books.
• Loss on sale of asset.
• Writing off an amount, if the question clearly says so.

Many students lose marks not because the adjustment is hard, but because they forget to include it.

Step 8: Treat Capital Items in the Balance Sheet

Capital items do not usually go to the Income and Expenditure Account.

They help you prepare the Balance Sheet or adjust existing assets and liabilities.

Examples:

• Purchase of furniture.
• Purchase of sports equipment.
• Purchase of investments.
• Construction of building.
• Loan received.
• Loan repaid.
• Life membership fees.
• Donation for a specific fund.
• Legacy, if treated as capital.

If furniture is purchased for Rs. 25,000, it is not shown as expenditure. It is shown as an asset.

If there is depreciation on furniture, only depreciation goes to the Income and Expenditure Account.

This is why copying every payment to the debit side gives a wrong answer.

Step 9: Watch Special Funds

Not-for-profit organisations often maintain special funds.

Examples include:

• Building fund.
• Tournament fund.
• Prize fund.
• Sports fund.
• Scholarship fund.

If an income is meant for a specific fund, it is usually added to that fund rather than treated as general income.

If an expense is related to that fund, it may be deducted from that fund rather than shown in the general Income and Expenditure Account.

For example, if tournament receipts are Rs. 40,000 and tournament expenses are Rs. 28,000, and a tournament fund exists, both may be adjusted through the tournament fund.

If no special fund treatment is indicated, follow the question carefully.

These words tell you whether the item belongs to the general Income and Expenditure Account or to a specific fund.

The Standard Format

The Income and Expenditure Account is prepared like a Profit and Loss Account for a not-for-profit organisation.

It has a debit side for expenditure and a credit side for income.

Income and Expenditure Account
for the year ended ...

Dr.                                                   Cr.
Expenditure                    Amount    Income                         Amount
To Salaries                    ...       By Subscriptions                ...
To Rent                        ...       By Interest on investments      ...
To Repairs                     ...       By Sale of old newspapers       ...
To Insurance                   ...       By General donation             ...
To Stationery consumed         ...
To Depreciation                ...
To Surplus                     ...

                                       Or

To Deficit                     ...

If the credit side is larger, the balancing figure is surplus on the debit side.

If the debit side is larger, the balancing figure is deficit on the credit side.

A Complete Mini Example

Let us prepare a small Income and Expenditure Account from the following information.

Receipts and payments during the year:

Receipts	Amount	Payments	Amount
Opening cash balance	10,000	Salaries	55,000
Subscriptions	90,000	Rent	18,000
Interest on investments	8,000	Stationery	12,000
Sale of old newspapers	2,000	Purchase of furniture	25,000
Donation for building fund	30,000	Repairs	6,000
		Closing cash balance	24,000

Additional information:

• Subscriptions outstanding at the beginning: Rs. 6,000.
• Subscriptions outstanding at the end: Rs. 9,000.
• Subscriptions received in advance at the end: Rs. 4,000.
• Salaries outstanding at the beginning: Rs. 3,000.
• Salaries outstanding at the end: Rs. 5,000.
• Stationery stock at the beginning: Rs. 1,500.
• Stationery stock at the end: Rs. 2,500.
• Depreciation on furniture: Rs. 2,500.

Now solve it step by step.

Subscription income:

Rs. 90,000 + Rs. 9,000 - Rs. 6,000 - Rs. 4,000 = Rs. 89,000.

Salary expense:

Rs. 55,000 + Rs. 5,000 - Rs. 3,000 = Rs. 57,000.

Stationery consumed:

Rs. 1,500 + Rs. 12,000 - Rs. 2,500 = Rs. 11,000.

Furniture purchased is not an expense. It is an asset.

Donation for building fund is not general income. It goes to the building fund in the Balance Sheet.

Now the Income and Expenditure Account will be:

Expenditure	Amount	Income	Amount
Salaries	57,000	Subscriptions	89,000
Rent	18,000	Interest on investments	8,000
Stationery consumed	11,000	Sale of old newspapers	2,000
Repairs	6,000
Depreciation on furniture	2,500
Surplus	4,500
Total	99,000	Total	99,000

The surplus for the year is Rs. 4,500.

Notice what did not appear in the Income and Expenditure Account:

• Opening cash balance.
• Closing cash balance.
• Purchase of furniture.
• Donation for building fund.

These items are important, but they are not revenue income or revenue expense of the current year.

A Simple Working Order for Exam Questions

When you get a full question, do not start writing the final account immediately.

Use this order:

1. Read the Receipts and Payments Account once without writing anything.
2. Mark revenue income items.
3. Mark revenue expense items.
4. Circle capital items for the Balance Sheet.
5. Read additional information slowly.
6. Adjust subscriptions.
7. Adjust expenses for outstanding and prepaid amounts.
8. Calculate consumables like stationery used.
9. Add depreciation and other non-cash expenses.
10. Prepare the Income and Expenditure Account.
11. Balance it to find surplus or deficit.

This order keeps the answer clean.

In this chapter, neat working notes are not extra work. They are the safest way to reach the correct answer.

Common Mistakes to Avoid

The most common mistake is copying all receipts to the credit side and all payments to the debit side.

That is wrong because the Receipts and Payments Account contains capital items, old year items, next year items, and cash balances.

Another common mistake is showing opening cash and closing cash in the Income and Expenditure Account. These balances belong to the Receipts and Payments Account and the Balance Sheet, not to the Income and Expenditure Account.

Students also forget depreciation because it is not a cash payment. But the Income and Expenditure Account is prepared on accrual basis, so depreciation must be included if given.

Subscription adjustment is another major area of confusion. Remember that the question is not asking, “How much subscription cash came in?” It is asking, “How much subscription income belongs to this year?”

This small habit improves accuracy quickly.

How to Think Like an Accountant

The Income and Expenditure Account is not trying to show cash position.

It is trying to show performance.

Did the organisation earn enough revenue income to cover its revenue expenses for the year?

That is the question.

So, every adjustment is trying to make the answer fair.

Outstanding income is added because it was earned.

Income received in advance is deducted because it was not earned yet.

Outstanding expense is added because the service or benefit was used.

Prepaid expense is deducted because the benefit belongs to a future period.

Depreciation is added because the asset was used during the year.

Capital items are excluded because they belong to financial position, not yearly performance.

Once you see the purpose, the rules stop feeling random.

Quick Revision Table

Item	What to do
Opening cash balance	Do not show in Income and Expenditure Account
Closing cash balance	Do not show in Income and Expenditure Account
Subscription received	Adjust to current year’s subscription income
Outstanding income at end	Add to income
Income received in advance at end	Deduct from income
Expense outstanding at end	Add to expense
Expense prepaid at end	Deduct from expense
Purchase of fixed asset	Show in Balance Sheet
Depreciation	Show as expenditure
Specific fund donation	Add to that fund, unless instructed otherwise
General revenue income	Credit side
General revenue expense	Debit side

Keep this table beside you while practising a few sums. After three or four questions, the pattern becomes familiar.

Frequently Asked Questions

What is the first step in preparing an Income and Expenditure Account?

Start by separating revenue items from capital items in the Receipts and Payments Account. Only revenue income and revenue expenses of the current year are used in the Income and Expenditure Account.

Why is opening cash balance not shown in the Income and Expenditure Account?

Opening cash balance is a cash position, not income of the current year. It belongs to the Receipts and Payments Account and the Balance Sheet.

Why is closing cash balance not shown in the Income and Expenditure Account?

Closing cash balance shows how much cash or bank balance is left at the end of the year. It does not tell us the surplus or deficit for the year, so it is not shown in the Income and Expenditure Account.

How do I adjust subscriptions?

Take subscriptions received during the year, add outstanding subscription at the end, add advance subscription at the beginning, deduct outstanding subscription at the beginning, and deduct advance subscription at the end. The result is subscription income for the current year.

Is purchase of furniture shown as expenditure?

No. Purchase of furniture is a capital payment. It is shown as an asset in the Balance Sheet. If depreciation on furniture is given, only depreciation is shown as expenditure.

Where is depreciation shown?

Depreciation is shown on the debit side of the Income and Expenditure Account. It is also deducted from the value of the related asset in the Balance Sheet.

What is the difference between surplus and deficit?

Surplus means income is more than expenditure. Deficit means expenditure is more than income.

Are donations always income?

No. General donations may be treated as income, but donations for a specific purpose, such as building fund or prize fund, are usually added to that fund in the Balance Sheet. Always follow the wording of the question.

Why do we prepare working notes?

Working notes help you adjust items correctly before writing the final account. They are especially useful for subscriptions, salaries, consumable items, depreciation, and special funds.

What is the easiest way to avoid mistakes in this chapter?

Do not copy items blindly. For each item, ask whether it is revenue or capital, whether it belongs to the current year, and whether any adjustment is needed.