An income and expenditure account lists a company's sales and expenses during a period of time. A tally of this account measures a company's net income. Some income and expenditure accounts are prepared weekly and monthly, however most are prepared quarterly and annually. Categories of income and expenditure accounts include net revenues; cost of goods sold (CGS); gross profit; selling, general and administrative expenses (SG&A); taxes; dividends; and net profit.
Main Features of Income and Expenditure Account
- It is a Nominal Account.
- Items of income are recorded on the credit side (Income) of this account.
- Items of expenses are recorded on the debit side (Expenditure) of this account.
- It records only those incomes, expenses, profits and losses which are of revenue nature only. Capital receipts and capital expenditures are to be completely excluded.
- It records only those incomes, expenses, profits and losses which pertain to current accounting period. That means, all transactions relating to previous accounting period and future accounting period are never recorded in this account.
- It is prepared on an accrual basis:
- Any income which is due (to be received, not yet received in cash) but not received (accrued) has to be credited to Income and Expenditure Account. Further it has to be recorded on the Assets side of the current year’s Balance Sheet.
- If any income is received in advance, such income has to be deducted from the total income received. Further it has to be recorded on the Liabilities side of the current year’s Balance Sheet.
- Outstanding expenditures, expenses due but actually not paid till the end of the accounting period, have to be debited to Income and Expenditure Account. Further it has to be recorded on the Liabilities side of the current year’s Balance Sheet.
- Expenditure made in advance (i.e., expenses pertaining to next accounting year) has to be deducted from such total expenditures. Further it has to be recorded on the assets side of the current year’s Balance Sheet.
- Gather your data. You will need to know your net sales, CGS, SG&A and other income and expense items.
- Title the spreadsheet or paper with your company's name and the time period the account will cover.
Calculate net sales. Add total sales and any allowances to calculate net sales.
Subtract CGS from net sales for gross profit. The account statement should look like the following:
= Net Sales
= Gross Profit
Calculate net operating profit. This is the difference between gross profit and SG&A. The account statement should look like the following:
- Selling and General Administrative Expenses
= Net Operating Profit
- Calculate net income based on total expenditures. Total all
other income and expense items such as taxes, disposition of assets,
unusual income from dividends or royalties, etc. Subtract this amount
from your net operating profit. This is your net Income and the final
line item on the income and expenditure account statement. The account
statement should look like the following:
Net Operating Profit
- Other Expenses
+ Other Income
= Net Income