

Explain Trial Balance
A trial balance is a worksheet, which also can be described as a book-keeping system in which the balance of all the ledgers is recorded under the debit and credit account column. A company that prepares a trial balance periodically, usually does this at the end of every reporting period. The purpose of producing a trial balance is to ensure that the entries in a company's bookkeeping system are mathematically correct and appropriate.
Preparing this trial balance for a company detects any mathematical errors that have occurred in the double-entry accounting system. The total of the debits is required to be equal to the total of credits, then the trial balance is considered to be balanced, also it confirms that there are no mathematical errors in the ledgers. Well, this does not mean there are no errors in a company's accounting system.
Income and Expenditure Account based on Trial Balance
Different types of organizations be it - a non-trading firm or a non-profit organization is involved in providing services to its customers. To provide their specialized services, the organization may incur expenses and then earn some revenue by providing the services. The details of Income and expenditure that are generated in such an organization should be accounted for, and that’s why an income and expenditure account is required to be created.
The necessity of creating an income and expenditure account is to calculate that deficit or surplus that is generated by the difference between the current income and the expenditure of the organization.
The Income and expenditure account is prepared from the Payments and Receipt account, while this at times is prepared from the trial balance.
The income and expenditure account is quite similar to the Trading and Profit and Loss Account that is prepared by the trading organizations.
The format of an income and expenditure account based on a particular trial balance is as follows:
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What is an Income and Expenditure Account?
The role of a non-trading firm is to provide services to its members. Also, to do the same, it needs to earn some revenue and incur required expenditures. Thus, when these types of firms do so, it requires to prepare an income and expenditure account, that will help in ascertaining the surplus that is earned or the deficiency which is incurred during a period.
The Income and Expenditure Account is a summary of all the items of income and expenses which are related to the current accounting year. This is prepared with the objective of finding out the surplus or deficit that is arising out of the current incomes over the current expenses. This is more or less similar to the Trading and Profit and Loss Account of a trading firm.
How is the Income and Expenditure Account prepared?
The Income and Expenditure Account is prepared on an accrual basis method. All incomes and expenses relating to the current accounting year, whether they are received and paid or not, are taken into consideration here. The expenses of the firm are recorded on the debit side and then the income is recorded on the credit side. An accurate distinction is made between the capital and the revenue items in this case.
Income and Expenditure Account – is a Nominal Account
Income and Expenditure Account is a type of nominal account, and thus the rule of a nominal account which is to debit all expenses and losses and credit all the incomes and gains is followed here at the time of preparing this account. Only the items of revenue nature are recorded and all the items of capital nature are ignored here. For example, the profit which is earned or loss that is suffered on the sale of an asset is to be recorded in it but the amount that is received from the sale of an asset will not be recorded in this.
The closing balance of this account will show a surplus or a deficit for the year. When the credit side exceeds the debit side, it gives rise to a surplus. While, if the debit side exceeds the credit side, then there is a deficit. The surplus is added to the Capital Fund and the deficit is deducted from the Capital Fund.
Preparation of Income and Expenditure Account
For preparing the income and expenditure account, the following are the steps used:
Include all the items of the revenue receipts and expenses, on the respective side of the account.
Also, ensure that no items of capital incomes and expenses are included in this type of account.
Adjustment is required for the amounts that are prepaid and are outstanding, with respect to each item.
Further, items that are included are the receipts, payment account, depreciation, provisions, profit, and loss on the sale of assets are to be included in this account.
After putting down all these items of revenue and expenses, we get a balance. This balance represents the surplus or deficit for the period.
FAQs on Income & Expenditure Accounts from Trial Balance
1. What is the primary purpose of preparing an Income and Expenditure Account from a Trial Balance for a non-profit organisation?
The primary purpose is to determine the financial result of the organisation's activities over an accounting period. It calculates whether the organisation has a surplus (income exceeding expenditure) or a deficit (expenditure exceeding income) for the current year, based on the accrual principle. This is similar to a Profit and Loss Account for a for-profit business and provides a true picture of operational performance.
2. What are the key steps to prepare an Income and Expenditure Account using a Trial Balance?
The main steps for preparing an Income and Expenditure Account from a Trial Balance are as follows:
- Start with the given Trial Balance of the non-profit organisation.
- Identify and list all items of a revenue nature, which include incomes and expenses for the current accounting period only.
- Post all revenue expenses to the debit (Expenditure) side and all revenue incomes to the credit (Income) side of the account.
- Incorporate all necessary adjustments mentioned outside the Trial Balance, such as depreciation, outstanding expenses, prepaid expenses, and accrued incomes.
- Completely exclude all capital items like assets (e.g., furniture, buildings), liabilities, and the main Capital Fund, as these belong in the Balance Sheet.
- Calculate the final balance to determine the surplus or deficit for the period.
3. Why is the Income and Expenditure Account considered a nominal account?
The Income and Expenditure Account is classified as a nominal account because its sole purpose is to gather all incomes, gains, expenses, and losses related to the current accounting period. It strictly follows the rule of nominal accounts: “Debit all expenses and losses, Credit all incomes and gains.” The final result, a surplus or deficit, represents the net outcome of these revenue transactions for the year.
4. How does the accrual basis of accounting affect the preparation of the Income and Expenditure Account from a Trial Balance?
The accrual basis is a fundamental concept which dictates that all incomes and expenses relating to the current accounting year must be included, regardless of whether cash was actually paid or received. For instance, if a Trial Balance shows 'Salaries Paid' and there is an adjustment for 'Outstanding Salaries', the total salary expense in the Income and Expenditure Account will be the sum of both, ensuring the true expense for the year is recorded.
5. How are capital and revenue items from a Trial Balance distinguished when preparing an Income and Expenditure Account?
This distinction is critical for accurate accounting. Revenue items are recurring and relate to the day-to-day operations of the current period, like salaries, rent, and subscription fees. Only these items are included in the Income and Expenditure Account. In contrast, capital items are non-recurring and provide long-term benefits, such as the purchase of fixed assets or specific-purpose donations. These are excluded from the Income and Expenditure Account and are shown in the Balance Sheet. However, any profit or loss arising from the sale of a capital asset is a revenue item and must be recorded.
6. What does the final balance of an Income and Expenditure Account represent for a non-profit organisation?
The final balance reveals the net result of the organisation's financial activities for the year. The two possible outcomes are:
- A Surplus: This occurs when the total on the income side (credit) is greater than the total on the expenditure side (debit). This surplus is then added to the Capital Fund in the Balance Sheet.
- A Deficit: This occurs when the total expenditure (debit) exceeds the total income (credit). The deficit is then deducted from the Capital Fund in the Balance Sheet.
7. What is a key advantage of using a Trial Balance over a Receipts and Payments Account to prepare an Income and Expenditure Account?
A key advantage is that a Trial Balance is already prepared on an accrual basis, containing ledger balances that often include adjustment-related accounts (like accruals and prepayments). This makes it more direct to prepare an Income and Expenditure Account by simply separating revenue items from capital items. In contrast, a Receipts and Payments Account is based on cash transactions and includes both capital and revenue items from various periods, requiring more complex adjustments to convert it to an accrual basis.

















