Get a Deeper Understanding of Income and Expenditure Account
Entities will always give great amount of importance on tracking their income and expenditure account. However, such tracking is not possible when the entity expands exponential that’s when they take the help of accounting practices like you. These days accounting practices such as yours are keeping a track of expenses and income of your clients through income.
Through income, your client will be able to know about the surplus earned and deficit faced during a set period. Clients not having this account would find it very difficult to track the cash flow at the end of the business cycle.
We understand that the words income and expenditure account can create a lot of confusion, and some of your clients may not even take it seriously. That’s why we are writing this guide to explain what an income is, what is contains, how to prepare it, and its essential aspects.
What is an Income and Expenditure Account?
An income and expenditure account gives a detailed of your client’s income and expenditure in an exact financial year. This account records every single income and expenses that occurred during a specific year, regardless of whether it is clear or not. It is important to note that the income and expenditure account is for non-trading and non-profit entities whose primary motive is not to earn profit.
Typically, these are nominal accounts, which outline an organisation’s final accounts and are similar to that of profit and loss accounting by a business entity. These accounts primarily determine an organization’s surplus or deficit by considering current income and expenses.
Difference between Income and Expenditure Account and Profit and Loss Account
You may think income and expenditure accounts are similar to profit and loss, but that’s a common mistake. These accounts differ fundamentally: income and expenditure accounts are for non-profits, using accrual to record revenue expenses.
On the other hand, profit and loss account is for organisations and businesses that earn profits. Through this account, a business or an organisation will be able to establish net loss or net profit of an organisation.
There are many other differences between an income and a profit and loss account, which are as follows:
Methods
While preparing an income and expenditure account the information is collected from trail balance when the set of books are completed. But when the set of books are not maintained information will be collected from receipt and payment account. On the other hand, the profit and loss account will get its information from trail balance and other transactions.
Purposes
Income and expenditure accounts determine surplus or deficit; profit and loss accounts determine net profit or loss.
Ideal for Which Entities
Non-profit and non-trading organizations prepare and use an income and expenditure account, while business entities prepare and utilize a profit and loss account to determine their profit.
Balance
The closing balance of an income and expenditure account is surplus or deficit, and the closing balance of a profit and loss account is net profit or net loss.
As person who is running an accounting practice your client’s will have great expectations from you, especially when it comes to handling income and expenditure account. While we are confident that you will be able to handle it, but preparing income and expenditure accounts for multiple clients will surely increase the work load of your accounting team and also increase chances of error due to work pressure.
To avoid such situations, you can outsource this task to a professional and experienced service provider offering year-end accounting outsourcing services. The easiest way to find the top accounting outsourcing services is through the best agency, such as DesignRush. It is the best platform to connect with multiple agencies where you can check their reviews, compare them with others, check their websites, view their portfolios, and choose the one that suits your requirements. We bet you will not regret the experience!
Basic Features of an Income and Expenditure Account
Understanding the basic features of an income and expenditure account will help in its preparation. These features are as follows:
- A business prepares a profit and loss account, while a non-profit uses an income.
- The income covers one year and is reviewed once the fiscal year ends.
- An income uses the double-entry system of accounting to record expenses.
- The income only takes revenue and expenses into consideration.
- Accountants or outsourcing services prepare the account, while a third-party external auditor audits it.
- Such an account does not begin with its opening balance. Usually, they follow back every income with expenditure through a concerned financial year.
- An income and debits expenses and credits all the incomes. Also, note that the account follows the accrual basis.
How to Prepare Income and Expenditure Account
You cannot prepare an income just by knowing the format or the formulas. You must follow certain steps when creating an income. These steps are as follows:
- Collect the receipts and payments accounts of the non-profit or non-trading entity to prepare the expenditure account.
- Include current year revenues, which cover both income and expenditures. Consider depreciation and profit or loss from asset sales, excluding capital revenue items.
- Calculate total expenditure and income to determine if the non-trading entity has a surplus or deficit.
- Ignore the opening and closing balances of the receipt and payment account. Also, disregard all payments for previous and future expenses, along with capital payments for the current year.
- Omit every receipt from the previous year’s revenue and the upcoming years from the listing. Additionally, ignore the capital revenue for the current year.
Conclusion
We hope that there is no confusion regarding income. This guide will help you understand and flawlessly prepare income and expenditure accounts for your non-trading entity clients. If overwhelmed, consider outsourcing income and expenditure accounts to a provider like Corient.
Our well-trained accountants will prepare your income transparently and professionally as part of our year-end outsourcing services. For more details about our services and to explain your requirements more freely, please contact us via our website.