Since the Cash Book entries have been summarized into the Receipts and Payments Account, information necessary to prepare Income and Expenditure Account will be largely found in it. A scrutiny of the receipts side will show what items are of revenue nature and also relate to the present period.
These will appear on the credit side of the Income and Expenditure Account. The items should be increased by outstanding amounts. The outstanding amounts will also appear in the Balance Sheet. Suppose, the Receipts and Payments Account shows subscriptions to have been received to the extent of Rs 18,300 including Rs 450 for the next year; but subscriptions for the current year not yet received total Rs 1,100.
The entries to adjust the subscriptions will be as follows:
The Income and Expenditure Account will be credited in respect of Subscriptions with Rs. 18,950.
The Subscriptions Account will appear as follows:
The Subscriptions Received in Advance Account will appear in the Balance Sheet on the liabilities side; Subscriptions Outstanding Account will appear on the assets side. Next year, these two accounts will be transferred to the Subscriptions Account.
An examination of the payments side will show which items relate to the present year and are of revenue nature. These will appear on the debit side of the Income and Expenditure Account. Any outstanding expense must be added. Expenses paid in advance must be deducted. Both the outstanding and prepaid amounts will appear in the Balance Sheet.
Suppose, salaries paid for the year ended 31st March, 2012 total Rs 96,000 and include Rs 8,000 for the month of March, 2011 paid in April, 2011 and at the end of the accounting year 2011-2012 on 31st March, 2012, a sum of, Rs 9,000 is unpaid in respect of salary for the month of March, 2012.
The Salaries Account will appear as shown below:
The Salaries Outstanding Account will appear as follows:
The amount of Rs 9,000 will be shown in the Balance Sheet as a liability. Care must be taken to exclude the opening balances of cash and bank and items of capital nature.
Balance Sheet:
In the absence of a regular trial balance, a balance sheet can be prepared only by taking each item in the previous year’s balance sheet and adjusting it for cash paid or received on capital account (i.e., additions or deductions because of cash transactions) and for loss or depreciation. Outstanding expenses and incomes received in advance and also expenses prepaid and outstanding income must also be shown in the balance sheet. Previous year’s General (or Capital) Fund will be adjusted for the current year’s surplus (excess of income over expenditure which will be added) or deficit (which will be deducted).
Notes:
(1) Income against which service has to be rendered for a long time without further payment, such as life membership fees, should be added directly to the General or Capital Fund and not credited to the Income and Expenditure Account.
(2) Donations received for a special purpose, say, for conducting a tournament, should be credited to a separate account and shown on the liabilities side of the balance sheet. Income derived from such an amount should be added to it and the expenses incurred for the specific purpose should be deducted from it. Needless to add, such items will not appear in the Income and Expenditure Account.
(3) Treatment similar to (1) above is sometimes recommended for entrance fees. This would be correct if the amount is large, being in the nature of a capital receipt in lieu of reduced subscriptions in future. But if the amount is small, it does not matter whether it is credited to the Income and Expenditure Account or added to the General (Capital) Fund directly.
