How to prepare an income and expenditure account

Step by step

1. Start from the receipts and payments. Begin with the club's cash-based receipts and payments account.
2. Adjust income for accruals. Adjust subscriptions and other income for amounts owing and prepaid, so they match the period.
3. Adjust expenses. Adjust expenses for accruals and prepayments in the same way.
4. Include non-cash items. Include depreciation and any profit or loss on activities.
5. Find the surplus or deficit. Income less expenditure gives a surplus (like a profit) or a deficit (like a loss).

Worked example

Subscriptions received are RM8,000. RM500 is owing at the year end and RM300 was paid in advance for next year. Subscription income is 8,000 + 500 − 300 = RM8,200.

Understanding the method

A club is not run for profit, but it still needs to know if its income covered its costs or used up its reserves. The income and expenditure account does this. It follows the same accruals logic as an income statement: record income earned and expenses incurred in the period, whatever the date the cash moved.

Start with the receipts and payments account, because that is where the cash figures are. Do not copy it across, because it mixes revenue items with capital items.

A payment for new equipment is capital. It goes on the statement of financial position, and only depreciation appears here.

Subscriptions need adjusting for amounts owing and prepaid at the start and end of the year. A member who has paid next year's subscription in advance has given the club cash it has not yet earned.

The surplus or deficit is not profit. It is the change in the accumulated fund, the club's equivalent of capital.

Work out subscriptions in a small account. Cash received is RM4,200. RM150 was owing at the start, RM280 is owing at the end, RM90 was prepaid at the start and RM120 is prepaid at the end.

Income = 4,200 − 150 + 280 + 90 − 120 = RM4,300. Amounts owing at the end increase income. Amounts prepaid at the end reduce it.

Now a full example for a photography society. Receipts: subscriptions RM4,300 (as above), competition fees RM600 and bank interest RM40. Payments: a new projector RM1,500, hall hire RM900, printing RM320 and refreshments RM210.

The projector is a capital item, so it is not an expense. Only its depreciation, say RM300, is.

RM100 of hall hire is still owed, so hall hire is RM1,000. Printing had an opening prepayment of RM40 that was used up this year, so the charge is 320 + 40 = RM360.

Income is 4,300 + 600 + 40 = RM4,940. Expenditure is 300 + 1,000 + 360 + 210 = RM1,870. The surplus is RM3,070, which is added to the accumulated fund.

To check, make sure every capital item has been removed, depreciation has replaced the cash cost of assets, and every expense matches the period and not the payment. If the club has a bar or shop, show only its trading profit, not gross takings.

Common mistakes: treating life membership fees as ordinary income when they should be spread over future years, and calling a deficit insolvency. Another is bringing in an opening balance again (an amount owing at the start was already income last year).

A deficit only means the accumulated fund fell. Donations for a named purpose, such as a building appeal, usually go to a separate fund.

If you lose marks on club accounts through the subscriptions workings, one of our teachers can practise these with you until the adjustments feel routine. Book a trial class

Related skills

• How to prepare a receipts and payments account
• How to record accruals and prepayments

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.