How to prepare the Income and Expenditure Account

Accounting for Clubs and Societies

What you need

• A completed and balanced Receipts and Payments Account for the current year.
• Adjustment details for members' subscriptions: arrears (not yet received) and subscriptions received in advance.
• Details of accrued expenses and prepaid expenses.
• The rate or amount of asset depreciation, plus an understanding of the difference between capital and revenue items.

Step by step

1. 1

   Understand the source of information

   Begin with the Receipts and Payments Account of Kelab Sukan Harmoni (Harmoni Sports Club). It records all cash receipts (Balance b/d RM800, Members' subscriptions RM3,600, Sports day collection RM1,500, Donations RM500) and cash payments (Purchase of sports equipment RM2,000, Hall rental RM1,200, Caretaker wages RM900, Sports day expenses RM600, Stationery RM200, Balance c/d RM1,500). Remember that this account mixes capital and revenue items and ignores adjustments, so it cannot directly show the surplus or deficit.

2. 2

   Separate capital items from revenue items

   Remove all capital items so only revenue items remain. Cash balance b/d RM800 and cash balance c/d RM1,500 are balance sheet items and are excluded. The purchase of sports equipment RM2,000 is capital expenditure (a fixed asset), so it is not entered in the Income and Expenditure Account; only its depreciation is recorded later. The remaining revenue items are Members' subscriptions, Sports day collection and Donations (income), plus Hall rental, Caretaker wages, Sports day expenses and Stationery (expenses).

3. 3

   Adjust income to the current period

   Adjust income so that only amounts belonging to the current year are counted. Of the Members' subscriptions RM3,600 received, RM300 is a subscription received in advance for next year, so it is deducted: current-year subscriptions = RM3,600 − RM300 = RM3,300. Sports day collection RM1,500 and Donations RM500 need no adjustment. Adjusted total income = RM3,300 + RM1,500 + RM500 = RM5,300.

4. 4

   Adjust expenses to the current period

   Add accrued expenses and deduct prepaid expenses. Hall rental of RM1,200 was paid, but RM300 is still owing (accrued rent), so the rent expense for the year = RM1,200 + RM300 = RM1,500. Caretaker wages RM900, Sports day expenses RM600 and Stationery RM200 need no adjustment. Adjusted cash expenses so far = RM1,500 + RM900 + RM600 + RM200 = RM3,200.

5. 5

   Include non-cash items

   Account for expenses that do not involve cash flow. Depreciation of sports equipment for the year is RM400. Although no cash is paid, it is a current-year expense and is recorded on the debit side. Total expenses = RM3,200 + RM400 (depreciation) = RM3,600.

6. 6

   Prepare the T-account

   Record expenses on the debit side and income on the credit side. Debit: Hall rental RM1,500; Caretaker wages RM900; Sports day expenses RM600; Stationery RM200; Depreciation of sports equipment RM400 (total RM3,600). Credit: Members' subscriptions RM3,300; Sports day collection RM1,500; Donations RM500 (total RM5,300).

7. 7

   Determine the surplus or deficit

   Compare the two totals. Because income RM5,300 exceeds expenses RM3,600, there is a Surplus of income over expenditure = RM5,300 − RM3,600 = RM1,700. This surplus is recorded on the debit side to balance the account (debit RM3,600 + RM1,700 = RM5,300) and is transferred to increase the Accumulated Fund. If expenses had exceeded income, it would be called a Deficit, recorded on the credit side and deducted from the Accumulated Fund.

Second example

Now consider Persatuan Seni Setia (Setia Arts Society), which records a deficit. Its current-year income is Members' subscriptions RM2,000 and Donations RM400 (total RM2,400). Its expenses are Room rental RM1,500, Facilitator wages RM800, Utility bills RM500 and Depreciation of furniture RM300 (total RM3,100). Because expenses RM3,100 exceed income RM2,400, the society has a Deficit = RM3,100 − RM2,400 = RM700. The deficit of RM700 is recorded on the credit side of the Income and Expenditure Account to balance it, and this amount reduces the society's Accumulated Fund balance at year end.

Common mistakes

Related chapter: Accounting for Clubs and Societies →

All procedures →