In some countries such as the United Kingdom and Australia, income and expenditure accounts are the nonprofit equivalent of for-profit business income statements. At the end of the year, the nonprofit income and expenditure statement shows whether it took in more money than it spent on services.
TL;DR (Too Long; Didn't Read)
Record all your income transactions for the year, with certain exceptions, on one side of the income and expenditure statement. Record expenditures on the other side. Add them together to see whether you have a surplus or a deficit and then transfer the balance into your capital fund account.
One of the many ways that U.K. law divides up organizations and corporations is by distinguishing trading from non-trading concerns. Trading companies engage in business such as investing, lending money, leasing property or buying and selling goods. Non-trading concerns are nonprofit organizations that derive revenue from government and public donations and grants. These concerns exist to make society a better place:
- Sports clubs
- Public hospitals
- Government schools
A trading company that goes "dormant" also becomes non-trading but in a different way. If for some reason it stops engaging in business activities but doesn't dissolve, the company becomes dormant. It therefore has no income to state.
Income and Expenditure Accounts
A non-trading company isn't a for-profit venture, but it's still important to know whether it spends more revenue than it receives in revenue. Making out the income and expenditure statement at the end of the year gives management, auditors and donors that information.
The information you use to draw up the statement comes straight out of your general ledgers. The ledgers may not divide transactions into income and expenditure accounts but rather break them down into office-supply expenditures, services provided to clients, utility expenses, staff salaries and so on. At year's end, you pull them all together into the income and expenditure accounts.
Things to Ignore
Income and expenditure accounts are drawn up using the accrual basis. If you run up a $500 bill in December but don't pay it until January, you record the bill as a $500 expense for December when you accrued it. That can complicate making out your income and expenditure statement.
For example, when you make out your statement for this year, you see the concern paid out $500 in January. However, as you already recorded that expenditure in December of last year, recording it as another expense would throw off your accounting. You have to ignore all income and expenditures that went into the ledger last year.
There are other entries in the general ledger you'll have to exclude. Capital expenditures on fixed assets, for example, don't go into the income and expenditures accounts. You also disregard the opening balance in any of your general ledger accounts. When you make out your income and expenditure statement for the year, you always start from zero.
Crunching the Numbers
To draw up the income and expenditure accounts, record payments into and out of the concern except for those you're required to exclude. Income entries go on one side of the statement and expenditures on the other. Include depreciation on any of the concern's fixed assets.
For example, suppose your small Australian charity has received $15,000 in donations during the year. You've spent $11,000 providing free medical care to people in need and $3,000 on operating expenses. You record a total of $15,000 in income and $14,000 in expenditures for a $1,000 end-of-year balance.
On the income and expenditure statement, you report your revenue and spending and then total them. Transfer the surplus or deficit to the capital fund account to zero out the income and expenditure accounts. That's why they start every year without an income or expenditure balance.