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Key Synopsis on Receipts and Payments and Income and Expenditure Accounts

Key Synopsis on Receipts and Payments and Income and Expenditure Accounts

This article covers the benefits, summary and differences between the income and expenditure account and the receipts and payment account.

The Income and Expenditure Account is a summary of all income and expense items for the current fiscal year. It is created to determine the surplus or deficit resulting from current incomes over current expenses. It is created in the same manner as the Trading and Profit and Loss Account of a trading company.

A non-trading firm’s role is to provide services to its members. However, to do so, it must generate some money and incur some expenses. When a non-profit organisation does so, it must prepare an income and expenditure account to determine the surplus earned or deficit experienced over a given period. 

Let Us Learn More About an Income and Expense Account Generated

This type of account is prepared on an accrual accounting basis. 

  • All revenue and costs related to the accounting year are considered, whether they are paid or not. The income is recorded on the credit side of the ledger, while the expenses are on the debit side. 
  • This account distinguishes between capital and revenue items, and only revenue items are included.
  • The Income and Expenditure Account is a temporary account. As a result, when preparing it, the rule of nominal account (debit all expenses and losses and credit all profits and gains) is followed. Only revenue items are recorded while preparing the account, and all capital items are eliminated. For example, the profit or loss made on the sale of an asset will be recorded in it, but the amount received from the sale of an asset will not be.
  • This account’s ending balance indicates whether it had a surplus or deficit for the year. There is a surplus if the credit side surpasses the debit side. On the other hand, a deficit exists when the debit side surpasses the credit side. The surplus is added to the Capital Fund, while the deficit is subtracted from it.

Follow the Steps Below to Create an Income and Expenditure Account

Step 1: Include all revenue receipts and expenses on the appropriate side of the account

Step 2: Ensure that no capital income or expense items are recorded in this account.

Step 3: In addition, adjustments for amounts prepaid and overdue must be made for each item.

Receipts and Payments Account 

A receipts and payments account is a summarization of actual cash receipts and payments retrieved from the cash book for a given period. This account includes all funds received and paid during the time, whether capital or revenue. Receipts are recorded on the receipts and payments account’s debit side. 

This is how receipts are recorded in the cash book:

Entrance fees, annual subscriptions, lifetime memberships, gifts, interest, and other receipts are all categorised under headings.

  • Salary and wages, printing and stationery, office expenses, rent, rates, and taxes are all recorded on the credit side.
  • The opening cash balance is used to initiate the receipts and payments account. In the end, it shuts with the cash balance.
  • The receipts and payments account does not cover outstanding revenue or expense because it is only a summary of cash transactions. It fails to represent the real revenue or expenditure for the period covered.

Benefits of a Receipts and Payments Account

A receipts and payments account displays total receipts and total payments under several areas at a glance. It can be used to verify the cash book. The account keeps track of numerous types of receipts and payments and summarises them with accuracy and also makes the data readily available for the preparation of an income and expenditure account.

Steps to Create a Receipts and Payment Account

Step 1: Write the account’s title.

Step 2: At the top of the left-hand side, write the opening cash and bank balances.

Step 3: Add up all of the receipts with different dates that are filed under the same heading.

Step 4: Add up all payments made on various dates under the same heading. You can alternatively do this on a different sheet.

Step 5: Write the total sum of each category of receipts on the left side and the total sum of each category of payments on the right side.

 Step 6: Subtract all payments from all receipts to arrive at the closing balance.

Difference between an Income and Expenditure Account and a Receipts and Payments Account

A receipts and payments account mainly reveals cash transactions, whereas an income and expenditure account shows the net surplus or deficit for an accounting period. As a result, the income and spending account follows the double-entry system, although the receipts and payments account does not.

Conclusion

So, it can be concluded that the Receipts and Payments Account and Income and Expenditure Account differ in that the former provides a summary of the cash book, whereas the latter replaces the Profit & Loss Account in non-trading businesses.