Yesterday, as shared in the  Learning & Development group, I had explained the concept of the trading account and a manufacturing account. I had left you with a thought “What about income and expenditure account / the receipt and payment account?”

http://faoblog.com/final-accounts-understanding-3/

Before I go on to explaining what this is all about, I will ask you another question.. Are organizations limited to only either trading or manufacturing entities?

The obvious answer is no…

Entities can be formed for non-business purposes, for charitable purposes, for the benefit of a group of people and for hundreds of reasons.

Citing some examples:

  • A housing society may be formed for the betterment of living of all members / residents of a housing complex. It will not be made for earning profit.
  • A charitable hospital may be formed for benefiting the community.
  • An NGO (Non-government organization) may be formed to help the blind get eye donations

So, a housing society may just prepare an income and expenditure account, they are not formed for earning profit, as it is a mutual benefit body. So they are only interested in accounting for the incomes and expenditures.

The charitable hospital will run on donations. They may charge a nominal fees to run the hospital for various services. For the entities giving the donation, this hospital may only need to show if the the amount was spent as per the donor’s requirements. They may prepare a receipt and payment account, either for the entire operations or specific to the donor’s contributions. Same may apply for the NGO as well.

Under various laws, there may be different requirements, like a body under the societies act may need to prepare an income and expenditure along with a balance sheet, whereas, under the foreign exchange regulations they may need to file only a receipt payment statement.

Thus the nature of the organization, along with the laws applicable to them will actually lead to the determination of type of financial statements they would need.

Mohit Gupta