This account is prepared to find out whether income exceeds expenditure or vice versa. The amount of difference is called as 'Surplus' when income exceeds expenses and 'Deficit' when expenses exceed income.

Why we have to prepare income and expenditure account?

- The income and expenditure account is prepared to analyze the financial performance of an organization or entity over a specific period of time, usually one year.
- It helps in determining the surplus or deficit of income over expenditure, which is essential for understanding the financial health and sustainability of the organization.
- The income and expenditure account provides a summary of all the revenues and expenses incurred by the organization, allowing stakeholders to assess the financial viability and effectiveness of its operations.
- This statement is particularly important for non-profit organizations, charities, clubs, societies, and other similar entities that do not aim to generate profits but rather focus on accomplishing their objectives while managing their resources efficiently.

How to Prepare Income and Expenditure Account?

1. Record all the income:
- Start by listing all the sources of income received by the organization during the given period.
- This includes membership fees, donations, grants, sponsorships, event revenues, rental income, interest earned, etc.
- Each source of income should be recorded separately, along with the amount received.

2. Record all the expenses:
- List all the expenses incurred by the organization during the same period.
- Categorize the expenses into various heads such as administrative expenses, salaries and wages, rent, utilities, maintenance, program expenses, etc.
- Each expense head should be recorded separately, along with the amount spent.

3. Calculate the net income or deficit:
- Subtract the total expenses from the total income to calculate the net income or deficit.
- If the income exceeds the expenses, it represents a surplus. If the expenses are greater than the income, it indicates a deficit.

4. Include non-operating items:
- If there are any non-operating items such as gains or losses from the sale of assets, investments, or any extraordinary income or expenses, they should be included separately.

5. Prepare a summary:
- Finally, prepare a summary of the income and expenditure account, presenting the total income, total expenses, and the resulting surplus or deficit.
- This summary helps stakeholders understand the financial performance and sustainability of the organization.

Overall, the process of preparing an income and expenditure account involves accurately recording all the income and expenses, calculating the net income or deficit, and presenting a summary to provide a clear financial picture of the organization's operations.