An Income and Expenditure Account is a financial statement used by non-trading organizations such as clubs, societies, charities, and associations. It records all income earned and expenses incurred during a specific accounting period, following the accrual basis of accounting. This account helps determine whether the organization has a surplus (excess of income over expenses) or a deficit (excess of expenses over income) at the end of the period.
1. Structure of an Income and Expenditure Account
The Income and Expenditure Account is similar to a profit and loss account in commercial organizations but focuses on the financial performance of non-profit activities. It includes:
A. Income
- Membership subscriptions
- Donations and grants
- Fundraising event income
- Investment income (interest, dividends)
- Proceeds from the sale of goods or services
B. Expenditure
- Salaries and wages
- Rent and utilities
- Office supplies and administrative expenses
- Depreciation on fixed assets
- Maintenance and repairs
C. Surplus or Deficit
The difference between total income and total expenditure determines whether the organization has a surplus or deficit.
2. Example of an Income and Expenditure Account
Let’s consider the case of Greenfield Community Club for the year ending December 31, 2024. The following financial information is provided:
A. Financial Information
- Subscriptions Received: $40,000 (includes $2,000 for next year)
- Donations: $5,000
- Fundraising Event Income: $8,000
- Interest Earned on Investments: $1,500
- Salaries and Wages: $20,000 (includes $1,500 unpaid)
- Rent and Utilities: $6,000 (includes $500 prepaid for next year)
- Office Supplies: $3,000
- Depreciation on Equipment: $2,500
B. Adjustments
- Subscriptions: Subtract $2,000 received in advance for next year.
- Salaries: Add $1,500 unpaid salaries for the current year.
- Rent and Utilities: Subtract $500 prepaid for next year.
3. Preparing the Income and Expenditure Account
| Greenfield Community Club | |
|---|---|
| Income and Expenditure Account for the Year Ending 31/12/2024 | |
| Income | Amount ($) |
| Subscriptions ($40,000 – $2,000 advance) | 38,000 |
| Donations | 5,000 |
| Fundraising Event Income | 8,000 |
| Interest Earned on Investments | 1,500 |
| Total Income | 52,500 |
| Expenditure | Amount ($) |
| Salaries and Wages ($20,000 + $1,500 unpaid) | 21,500 |
| Rent and Utilities ($6,000 – $500 prepaid) | 5,500 |
| Office Supplies | 3,000 |
| Depreciation on Equipment | 2,500 |
| Total Expenditure | 32,500 |
| Surplus for the Year | 20,000 |
4. Explanation of the Example
A. Income Adjustments
- Subscriptions: The club received $40,000 in subscriptions, but $2,000 of that amount was for the next year. Therefore, only $38,000 is recognized as income for 2024.
B. Expenditure Adjustments
- Salaries: An additional $1,500 of unpaid salaries is added to the current year’s expenses.
- Rent and Utilities: The $500 prepaid for next year is subtracted from the current year’s expenses.
C. Surplus Calculation
- The total income of $52,500 exceeds the total expenditure of $32,500, resulting in a surplus of $20,000 for the year.
5. Importance of the Income and Expenditure Account
A. Financial Performance Assessment
- The account provides a clear picture of the organization’s financial health, showing whether it is operating within its means.
B. Budgeting and Planning
- Helps in preparing future budgets and planning for upcoming activities based on the surplus or deficit.
C. Transparency and Accountability
- Enhances the organization’s credibility with members, donors, and stakeholders by showing how funds are managed.
6. Common Challenges in Preparing Income and Expenditure Accounts
A. Distinguishing Between Capital and Revenue Items
- Capital items, such as the purchase of equipment, should not be included in the income and expenditure account but recorded in the balance sheet.
B. Accruals and Prepayments
- Ensuring all income and expenses are recognized in the correct accounting period can be challenging but is crucial for accurate reporting.
C. Non-Cash Items
- Items like depreciation must be included even though they do not involve actual cash flow, which can be overlooked if not properly managed.
The Role of Income and Expenditure Accounts in Non-Trading Organizations
An Income and Expenditure Account is vital for non-trading organizations to track their financial performance and ensure sustainability. By accurately recording income and expenses, adjusting for accruals and prepayments, and including non-cash items like depreciation, organizations can present a true and fair view of their financial health. This transparency fosters trust among stakeholders and supports effective decision-making and long-term planning.