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 not—and all items of expense —whether paid in cash or not—are 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 AccountFor the Year Ended 31.12.2005

Receipts $ Payments $

Balance b/d 5,000 Supports equipment 7,000

Subscription: Salaries & wages 3,000

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 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.

Required: Prepare from the above particulars the income and expenditure account of the club.

Income and Expenditure AccountFor the Year Ended 31.12.2005

Receipts $ Income $

Salaries & wages 3,000 Subscription 10,000

Add outstanding 1,000 4,000Add 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.