income and expenditure account

 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

1. It is a Nominal Account.
2. Items of income are recorded on the credit side (Income) of this account.
3. Items of expenses are recorded on the debit side (Expenditure) of this account.
4. 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.
5. 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.
6. It is prepared on an accrual basis:
   1. 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.
   2. 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.
   3. 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.
   4. 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.

 Steps in the Preparation of Accounts of Professional Firm

Step 1:	First, the Income and Expenditure Account is to be prepared in the usual manner, in addition, the following have to be recorded:
(i)	In the beginning, value of incomplete work is to be shown on expenditure side.
(ii)	Value of incomplete work at the end has to be recorded as the last item on income side.
(iii)	All fees and charges for completed work have to be recorded properly.
Step 2:	“Surplus” from income and expenditure has to be transferred to “Receipts and Expenditure Account” and credited (i.e., enter on the Credit side of Receipt and Expenditure Account).
Step 3:	Items relating to “Provision for Outstanding Fees and Charges” for the completed works and for the value of incomplete work – at the end of the year is to be recorded on the Expenditure side of Receipts and Expenditure as the first item (debited to Receipt and Expenditure A/c).

Instructions   

• • 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:
    Sales
    - Allowances
    = Net Sales
    - CGS
    = Gross Profit
  • Calculate net operating profit. This is the difference between gross profit and SG&A. The account statement should look like the following:
    Gross Profit
    - 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

Tips & Warnings

• Income and expenditures must match. That is, expenses incurred to generate sales must be matched to sales data of that same accounting period.
  

  Audit of profit and loss account (or) Income and expenditure account

  business with the aim of earning profit prepare P&L account and other non-profit organisation prepare income and expenditure accounts.

  The P&L account should be prepared to disclose the result of the working of the company during the period clearly. In expenditure side various expenditure are to be disclosed, but they can be grouped and given under appropriate heads. Specifically, the following important expenses are to be distinctly shown:        
  

  • Consumption of raw materials/purchases of goods
  • Opening stock of finished goods, work in progress
  • Consumption of stockes, spares.
  • Power and fuel
  • Staff expenses-salaries, wages, bonusRent
  • Contribution to provident and other funds
  • Welfare expenses
  • Repairs to building, machinery
  • Deprecation
  • Insurance
  • Taxes
  • Interest
  • Provision to meet specific liability
  • Reserves set apart
  • Miscellaneous expenditure

  In income side, all income are to be disclosed but they may be disclosed after condensing them in convenient grouping. The following items of revenue are to be specifically disclosed
  

  • Sales
  • Closing stock of finished goods/closing work in progress
  • Income from investments
  • Dividend from subsidiaries
  • Miscellaneous income

  The profit and loss account shall also disclose by way of note (or) otherwise, the following:
  

  • Payment made to managerial personnel and computation of profit for determination of managerial remuneration payable.
  • Payment made to auditor for his services in various capacities
  • Quantitative details of raw materials consumed, purchases, stocks of finished goods, and turnover of goods
  • Licensed, installed capacity and actual production
  • C.I.F value of import
  • F.O.B value of export
  • Expenditure in foreign currency
  • Income in foreign exchange
  • Percentage of imported raw  material consumed and indigenous raw materials consumed.

  The auditor has to check that the items of income and expenditure appearing in trial balance by scrutinizing the ledgers. Then he has to check that the items of expenditure and revenue are properly grouped as all and sundry item cannot be disclosed in P&L account. Where the Act requires certain item to be disclosed specifically. (as illustrated above) they are to be disclosed in P&L account itself (or) in the schedules accompanying them. The auditor has to check that items to be disclosed in notes to P&L account are properly disclosed. The auditor has to make a critical evaluation of result of the working of the company (i.e. profit/loss) by doing comparative studies (or) ratio analysis.