Accounting Definition

The systematic recording, reporting, and analysis of financial transactions of a

business.
The process or work of keeping financial accounts.

Definition of income and expenditure account. A record showing the amounts

of money coming into and going out of an organization, during a particular period of
time. In British companies, this is usually called the profit and loss account; in US
companies, it is called the income statement.
Income and Expenditure Account:
All transactions relating to non-profit-seeking concerns like Club, Library etc. are
recorded in the books of account strictly according to Double Entry System. At the
year-end result is determined through Final Accounts. Final Accounts consist of two
stages:
1. Income and Expenditure Account
2. Balance Sheet
Here we are going to discuss income and expenditure account.
Definition and Explanation:
The account through which surplus or deficit of a non-profit-seeking concern is
ascertained, is called Income and Expenditure Account.
All the information necessary for preparation of this account will be available from
ledger accounts. Its left-hand (i.e. Debit) side records all revenue expenditure, while
the right-hand (i.e. Credit) side records all revenues relating to the current year. The
balance of the account, if credit, indicates surplus, i.e. excess of income over
expenditure. Conversely, the balance of the account, if debit, indicates deficit, i.e.
excess of expenditure over income.
Characteristics:
The following are the characteristics of Income and Expenditure Account:
1. It is in fact like a Profit and Loss Account of a profit-seeking concern.
2. All expenses are recorded on Debit side and all revenues on Credit side.
3. Only revenue transactions are included in it. No capital items is taken into
account.

4. All the items of income/revenue concerning current year whether received

in cash or notand all items of expense whether paid in cash or notare
taken into account. But no item of income or expense concerning last year or
next year is included in it.
5. Surplus or deficit of a concern is ascertained through this account. Credit
balance "indicates surplus, while debit balance indicates deficit.
6. Its balance is transferred to Capital Fund Account.
7. It is prepared on the last day of an accounting year.
8. It does not start with any opening balance.
Method of Preparation:
The following points are to be noted, while preparing the above account:
1. Surplus or deficit of a fixed, period of time is ascertained through this
account. So it's heading will be:
Income and Expenditure Account for the year ended 31.12.2005.
2. Income and Expenditure Account is a Nominal Account. Hence, only revenue
(no capital) items will find place in it.
3. All items of revenue income and expenditure relating to the current year will
appear in it. In other words, all items of income relating to the current year whether received in cash or not - and all items of expenditure relating to the
current year - whether paid in cash or not - will find place in this account. No
items of income or expenditure relating to last year or next year will be
included in this account.
Method of Conversion of Receipts and Payments Accounting into Income
and Expenditure Account:
At first, Receipts and Payments Account is prepared by analyzing the Cash Book
subsequently, Income and Expenditure Account is prepared in the following manner:
1. Exclude the opening and closing balance of receipt and payment account.
2. Exclude all the payment items.
3. Exclude all revenue items relating to last or next year.
4. Include all items of income or expenditure relating to the current year, if they
are not received or paid in the current year.

5. Charge depreciation on all wasting assets.

Hints:
While preparing income and expenditure account from receipts
and payments account, apply the following rules:
1. Exclude all capital items.
2. Adjust all revenue items with outstanding and advance
items in the following manner:
(i) If relates to current year: Add
(ii) If relates to last or next year: Deduct
Example:
The following is the receipt and payment account of a club for the year ended
31.12.2005
Receipt and Payment Account
For the Year Ended 31.12.2005
Receipts

Payments

Balance b/d

5,000

Supports equipment

7,000

Salaries & wages

3,000

Subscription:
2004

2,000

Office expenses

400

2005

10,000

Electric charges

600

Donation

1,000

Telephone charges

600

Entrance fees (To be

capitalized)

2,000

Balanced c/d

8,400

20,000

1. In 2004 subscription for 2005 was received $1,000.

2. Outstanding subscription $1,500
3. Outstanding salaries & wages $ 1,000.
4. Depreciation to be charged @ 20% on sports equipments.

20,000

Required: Prepare from the above particulars the income and expenditure account
of the club.
Income and Expenditure Account
For the Year Ended 31.12.2005
Receipts

Salaries &
wages

3,000

Add
outstanding

1,000

4,000

Income

Subscription

10,000

Add received
in 2004

1,000

Add accrued

1,500

12,500

Office expenses
Electric charges

Donation

1,000

Telephone
charges
Depreciation on
sports equip.
20% of 7,000

1,400

Surplus i.e.
excess of
income over
expenditures

6,500

13,500

13,500

Note:
Rate of depreciation on sports equipment is 20% (not 20% p.a). so the amount of
depreciation will be $1,400 (20 % of 7,000). The date of purchase is immaterial
here.
Accounts payable and accounts receivable?
Accounts payable are amounts a company owes because it purchased goods or
services on credit from a supplier or vendor. Accounts payable are debts that must
be paid off within a given period of time in order to avoid default. For example, at
the corporate level, AP refers to short-term debt payments to suppliers and banks.

Payables are not limited to corporations. At the household level, people are also
subject to bill payment for goods or services provided to them by creditors. For
example, the phone company, the gas company and the cable company are types
of creditors. Each one of these creditors provide a service first and then bills the
customer after the fact. The payable is essentially a short-term IOU from a customer
to the creditor. Each demands payment for goods or services rendered and must be
paid accordingly. If people or companies don't pay their bills, they are considered to
be in default.
Accounts receivable are amounts a company has a right to collect because it sold
goods or services on credit to a customer. If a company has receivables, this means
it has made a sale but has yet to collect the money from the purchaser. Most
companies operate by allowing some portion of their sales to be on credit. These
type of sales are usually made to frequent or special customers who are invoiced
periodically, and allows them to avoid the hassle of physically making payments as
each transaction occurs. In other words, this is when a customer gives a company
an IOU for goods or services already received or rendered.Accounts receivable are
not limited to businesses - individuals have them as well. People get receivables
from their employers in the form of a monthly or bi-weekly paycheck. They are
legally owed this money for services (work) already provided.When a company owes
debts to its suppliers or other parties, these are known as accounts payable.
Accounts payable are liabilities. Accounts receivable are assets.
Let's assume that Company A sells merchandise to Company B on credit. (Perhaps
the invoice states that the amount is due in 30 days.) Company A will record a sale
and will also record an account receivable. Company B will record the purchase
(perhaps as inventory) and will also record an account payable.
Our example reminds me of an old saying, "There are two sides to every
transaction." In accounting we also expect symmetry: Company A has a sale and a
receivable, Company B has a purchase and a payable.

Trial Balance Sheet

Preparing a trial balance for a company serves to detect any mathematical errors
that have occurred in the double-entry accounting system. Provided the total debts
equal the total credits, the trial balance is considered to be balanced, and there
should be no mathematical errors in the ledgers.
However, this does not mean there are no errors in a company's accounting system.
For example, transactions classified improperly or those simply missing from the

system could still be material accounting errors that would not be detected by the
trial balance procedure.