Income and expenditure account

3 key takeaways

• An income and expenditure account records the revenues and expenses of non-profit organizations over a specific period to determine their financial performance.
• The account helps in assessing whether the organization is managing its finances effectively and meeting its financial objectives.
• It differs from a profit and loss account used by for-profit entities, as it focuses on measuring the surplus or deficit rather than profit.

What is an income and expenditure account?

An income and expenditure account is a financial statement that captures all the income received and expenses incurred by a non-profit organization, club, or society during a specific accounting period, usually a year. It serves to determine the financial result of the organization’s activities, highlighting either a surplus or a deficit.

This account is similar to the profit and loss account used by businesses but is tailored to the needs of non-profit entities, where the goal is not to generate profit but to ensure that income covers expenses to sustain operations and fulfill their mission.

Components of an income and expenditure account

Income: This section includes all the revenues and receipts the organization earns during the period. Common sources of income include:

• Membership fees
• Donations and grants
• Fundraising event proceeds
• Sales of goods or services
• Interest and investment income

Expenditure: This section lists all the expenses and payments made by the organization. Common types of expenditure include:

• Administrative costs (e.g., salaries, office supplies)
• Program expenses (e.g., costs related to specific projects or activities)
• Fundraising expenses
• Maintenance and utilities
• Depreciation of assets

Surplus or Deficit: The final part of the account shows the net result of the period’s activities:

• Surplus: If total income exceeds total expenditure, the organization has a surplus.
• Deficit: If total expenditure exceeds total income, the organization has a deficit.

Importance of an income and expenditure account

Financial Health Assessment: This account helps non-profit organizations monitor their financial health by providing a clear picture of their income and expenses. It enables them to assess whether they are financially sustainable.

Budgeting and Planning: By comparing actual income and expenditure against budgets, organizations can plan more effectively and make informed financial decisions.

Transparency and Accountability: An income and expenditure account promotes transparency and accountability to stakeholders, including members, donors, and regulatory bodies. It demonstrates how funds are being utilized and whether financial resources are managed responsibly.

Regulatory Compliance: Many non-profit organizations are required by law to prepare and submit financial statements, including income and expenditure accounts, to maintain their tax-exempt status and comply with regulatory requirements.

Preparing an income and expenditure account

To prepare an income and expenditure account, follow these steps:

1. Collect Data: Gather all financial records for the period, including receipts, invoices, bank statements, and payroll records.
2. Classify Transactions: Categorize all transactions into income or expenditure and assign them to appropriate subcategories (e.g., membership fees, program expenses).
3. Summarize Totals: Calculate the total income and total expenditure for the period.
4. Calculate Surplus/Deficit: Subtract the total expenditure from the total income to determine the net surplus or deficit.
5. Review and Adjust: Review the account for accuracy, and make any necessary adjustments to ensure all transactions are recorded correctly.
6. Report: Present the income and expenditure account in a clear and organized format, typically as part of the annual financial statements.

Example of an income and expenditure account

Example: ABC Charity Income and Expenditure Account for the Year Ended December 31, 2023

Income:

• Membership Fees: $10,000
• Donations and Grants: $25,000
• Fundraising Events: $15,000
• Sales of Goods: $5,000
• Interest Income: $1,000

Total Income: $56,000

Expenditure:

• Administrative Costs: $12,000
• Program Expenses: $20,000
• Fundraising Expenses: $6,000
• Maintenance and Utilities: $5,000
• Depreciation: $2,000

Total Expenditure: $45,000

Surplus: $11,000 (Total Income $56,000 – Total Expenditure $45,000)

Related topics

• Financial statements
• Budgeting for non-profits
• Cash flow management
• Fund accounting

Explore these related topics to gain a deeper understanding of financial management practices in non-profit organizations and how they can maintain financial health and sustainability.