Question

"Income and Expenditure Account of a Not-for-profit Organisation is similar to Profit and Loss Account of a business concern". Explain the statement.

Answer 1

Income and Expenditure Account (I&E) is somewhat like Profit and Loss Account. In other words, Profit and Loss Account is prepared as Income and Expenditure Account in case of NPO. The only difference is that profit and loss account is prepared to ascertain the profit and loss of the organisation and income and Expenditure Account is prepared to ascertain surplus or deficit during an accounting period.
Income and Expenditure Account also follows the same rules and regulation as it follows in case of Profit and Loss Account which means all the adjustment will be made on accrual basis.
Just like Profit and Loss Account it also records all transactions of revenue nature that are related to the current accounting year considering the adjustment for outstanding or prepaid as the as the case may be. The debit side of income and expenditure records all the expenses and called Expenditure side and credit side of Income and Expenditure Account records all the income and gains and called the Income side.
Similarities between income and Expenditure Account and Profit and Loss Account
Income and Expenditure Account of an NPO is akin to the Profit and Loss Account of a profit earning business in the following manners.
(i) Nature of Account As far as the nature of both the account both are nominal in nature.
(ii) Basis of Recording Basis for recording the transactions in both the case is similar and recording of revenue expenditure and revenue income is the only concern of both accounts. It means there is no space for capital nature expenditure.
(iii) Current Year Transactions Both the accounts records only current year transaction. Transactions related to previous year and future are excluded.
(iv) Accrual Basis Both the accounts consider treatment of adjustments like, outstanding expenses, prepaid expenses, income received in advance, income due but not received, depreciation, bad debts etc. In this way, both the accounts are prepared on the accrual basis.