The "Income and Expenditure" account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizatiRead more
The “Income and Expenditure” account lists all the income and expenses incurred by the entity throughout the year. This account is very identical to the profit and loss account and is generally prepared on an accrual basis irrespective of whether the amount is received or paid. Non-profit organizations (NPO) prepare this type of account to ascertain surplus earned or deficit incurred by them during the period.
Talking about the format of income and expenditure accounts we generally see that all the expenses are recorded on the debit side while all incomes are recorded on the credit side. One important thing to note is that items so recorded are revenue items while capital nature items are generally ignored because only current period items are recorded in this statement.
Since it is a Nominal account, we follow the golden rules to prepare this, stating “debit all expenses and losses and credit all incomes and gains”. The closing balance at the end shows the surplus or deficit for the year. If the balancing figure appears on the debit side it is surplus and if the balancing figure appears on the credit side it is a deficit for the entity.
Following is the format of income and expenditure account
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Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as draRead more
Whenever the proprietor/owner of a business withdraws cash or goods from the business for his/her personal use, we call it drawings. For example, Alex, proprietor of a soap manufacturing company, takes 50 pack of soaps costing 30 each for his personal use. So, 1,500 (50*30) will be considered as drawings of Alex. One important thing to note here is whenever goods are withdrawn for personal use they are valued at cost.
Drawings are not an asset/liability/expense/income to the business. The drawings account is a contra-equity account. A contra-equity account is a capital account with a negative balance i.e. debit balance. It reduces the owner’s equity/capital.
Drawings being a contra-equity account has a debit balance, reducing the owner’s capital in the business. This is because withdrawals for personal use represent a reduction of the owner’s equity in the business.
Drawings are not shown in the Income Statement as they are neither an expense nor an income for the business. However, the following journal entries are passed to record drawings for the year:
Drawings A/c is debited because it reduces the owner’s capital. Cash/Purchases A/c is debited as a withdrawal reduces the assets of the business.
At the end of the year, drawings A/c are closed by transferring it to the owner’s capital A/c. We post the following entry to close the drawings A/c at the end of the year:
In the balance sheet, drawings are shown by deducting it from the owner’s capital A/c.
Let us take our earlier example of Alex. He withdrew soaps worth 1,500. At the end of the year, his capital was worth 5,500. The journal entry for recording the drawings is as follows:
In the balance sheet, drawings worth 1,500 are shown as follows:
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