How to Prepare Income and Expenditure Account

Income and Expenditure Account (I&E A/c, hereafter) is prepared with the help of the Receipts and Payments Account that is given to us in a question. It is prepared by following the rule of Nominal Account i.e. debit all the expenses and losses; credit all the incomes and gains. In order to prepare I&E A/c from a given R&P A/c, we transfer all the expenses (only of revenue nature) from the ‘Payments’ side of the R&P A/c to the ‘Expenditure’ side (or the Debit side). On the other hand, we transfer all the incomes (only of revenue nature) from the ‘Receipts’ side of the R&P A/c to the ‘Income’ side (or the Credit side) of I&E A/c. The given below are various steps to prepare an Income and Expenditure Account (I&E A/c).


Steps to Prepare Income and Expenditure Account


The given below are various steps to prepare an Income and Expenditure Account (I&E A/c).

Step 1: Firstly, transfer all the revenue expenses of the current year from the Payments Side of R&P A/c to the Expenditure Side (i.e. Debit side) of I&E A/c.

Step 2: Similarly, transfer all the revenue incomes of the current year from the Receipts Side of R&P A/c to the Income Side (i.e. Credit side) of I&E A/c.

Step 3: Then, we adjust the outstanding and the prepaid expenses for the current year to the concerned expenses (that we have recorded in Step 1).

Step 4: Similarly, adjust the accrued income and the income received in advance of the current year to the concerned income (that we have recorded in Step 3).

Step 5: Now, we show the non-cash payments such as depreciation, loss on sale of an asset, etc. on the Expenditure Side (i.e. Debit side) of I&E A/c.

Step 6: Next, all the non-cash receipts, for example, profit on the sale of assets are recorded on the Income Side (i.e. Credit side) of I&E A/c.

Step 7: Lastly, we tally both sides. If the total of the Income Side (or the Credit side) is more than the total of the Expenditure side (or the Debit side), then the balancing figure is regarded as Surplus. On the other hand, if the total of the Income Side (or the Credit side) is less than that of the Expenditure side (or Debit side), then the balancing figure is considered as Deficit.


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Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.

What is Operating Profit?

Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.

Balance Sheet

The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period

Profit and Loss Account

A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.

What are Adjusting Entries?

In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.