Financial Accounting, SS2, Week 1

Topic: Income and Expenditure

Contents

  • Preparation of income and expenditure account
  • Format for income and expenditure account
  • Similarities between receipt and payment account and income and expenditure account
  • Difference between receipt and payment and income and expenditure

Preparation of income and expenditure account

In order to prepare income and expenditure account from receipt and payment account the following step must be taken

  1. Eliminate all capital receipt like cash receives sales of equipment and capital payment to purchase equipment and capital accounts.
  2. Eliminate all item of revenue nature that is item that belong to the accounting period such as subscription for previous year and subscription for the next year collected this year, this is known as subscription paid in advance and it is treated as liability under current liability in the balance sheet
  3. If there are members owing subscription pre-credited to the income and expenditure account left the club without paying such subscription will be written off, by debiting the income and expenditure account.
  4. Make necessary adjustment for outstanding or accrual of the beginning and the end period e.g subscription in arrears.
  5. Debit the income and expenditure account and the depreciation of fixed asset get like of trading concern
  6. What is required to known is the gross profit activities like dance or bazaar,the revenue activity is matched with the relevant cost

Format for income and expenditure account

Income and expenditure account for the year ended

Expenditure Income
Rent                                                             xxx Subscriptions                                          xxx
Printing                                                     xxx Interest on investment
xxx
Postage                                                     xxx Entrance fee                                             xxx
Honorarium                                               xxx Arrival dinner                                             xxx
Wages                                                       xxx Donations                                                   xxx

Similarities between receipt and payment account and income and expenditure account

  • Both account follows the principle of double entry
  • They are summarized financial statement
  • Both are prepaid by non-profit making concern
  • They are prepaid to lower the pare period

Difference between receipt and payment and income and expenditure

Receipt and payment Income and expenditure
1    real account Nominal account
2  only actual cash receipt and payment are recorded Cash accrual and prepayment are include
3 no record of depreciation Give effect to depreciation
4 balance represent cash or bank overdraft Balance represent purpose income or expenditure
5 another name for cash book prepared by club Another name for profit and loss adopted by clubs
6 includes capital and revenue earns Only revenue item are recorded
7 receipt is debited and payment is credited Expenditure are debited and income are credited

Test and Exercise

  1. State the differences between income and expenditure account and receipt and payment account
  2. Highlight the steps to be taken for the preparation of income and expenditure account
  3. State the similarities between income and expenditure and income and receipt account

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