The steps are the following:

1. Ignore the opening and dosing of cash and bank balances that appear in the collection and payment account.

2. Eliminate all items of collections and capital payments.

3. Determine the income for the corresponding financial year by subtracting from the total income those received on account of previous and future financial years and adding the income accrued and due in the financial year not received and those received in the previous financial year but corresponding to the current one.

4. Determine the expenses of the relevant period by deducting the expenses related to the previous period and the next period from the total payments and adding the outstanding expenses at the end and the prepaid expenses at the beginning.

5. Make adjustments, based on additional information such as depreciation, bad debts, etc., if any.

6. The income and expense account, when balanced, will reveal a surplus (if the credit side is higher) or a deficit (if the debit side is higher). If there is a surplus, that is, an excess of income over expenses, add it to the capital or accumulated fund. However, if there is a deficit, that is, excess spending over income, deduct it from the accumulated capital or fund.

Distinction between receipt and income

“Receipt” means the total cash received during the current year. But “income” means the total income earned during the current year.

The points of distinction between the two are given below:-

receipt

1. Any cash received in considered as a receipt.

2. Not limited to any accounting year. In other words, you can include cash received for any year past, present or future.

3. It can be both capital and income.

4. In case of receipt, the cash increases equal to the amount of the receipt.

5. An item cannot be called a “receipt” unless an equivalent amount of cash is received.

6. It is recorded on the debit side of the cash book.

7. Not included in final accounts. In other words, it is not considered when determining the result of concern.

Entry

1. The largest cash received may not be considered income. Cash received for the current year is considered income only.

2. It is limited only to the current accounting year.

3. It only has a tax character.

4. In case of income, the money in cash may not increase equal to the amount of the income.

5. An item can be “income” even though no cash has been received.

6. It is credited to the income and expense account.

7. It must be considered in the final accounts.

Distinction between payment and expense

Payment means the total cash paid during the current year. But expense means total expenses incurred for the current year only.

The points of distinction between the two, are as follows:-

Payments

1. Any cash entered considered as payment.

2. It is not limited to any accounting year, that is, it can include cash paid for any past, present or future year.

3. It can be both capital and income.

4. In case of payment, the cash decreases equal to the amount of the payment.

5. An item cannot be called “payment” unless an equivalent amount is paid in cash.

6. It is recorded on the credit side of the cash book, that is, it is credited to the cash account.

7. Not included in final accounts. In other words, it is not considered when determining the result of concern.

Spent

1. Any higher paid in cash may not be considered an expense.

2. It is limited only to the current accounting year.

3. It only has a tax character.

4. The greater cash may not decrease in the same amount of the expense.

5. An item can be an “expense” even if it was not paid for in cash.

6. It is charged to the income and expense account.

7. It must be considered in the final accounts.