Which one of the following statements is correct about Income and Expenditure Account ?

Correct — C, (c) It is a Nominal Account. Under the traditional classification every ledger account is personal, real or nominal, and nominal accounts are the ones that record expenses, losses, incomes and gains — the flows of a period rather than the things a business owns or the persons it deals with. The Income and Expenditure Account is made of nothing else. It carries the revenue expenses of the year on its debit side and the revenue incomes of the year on its credit side, following the golden rule for nominal accounts, debit all expenses and losses, credit all incomes and gains. It carries no asset, so it is not real; it stands for no person, so it is not personal; and it is closed at the end of the year rather than carried forward, its balance going out as a surplus or a deficit to the Capital Fund, which is exactly what a nominal account does. The cleanest way to hold the answer is by its parallel: the Income and Expenditure Account is to a non-trading concern what the Profit and Loss Account is to a business, and the Profit and Loss Account is a nominal account for the same reasons. The contrast with the statement asked about in the question immediately before this one is just as useful — the Receipts and Payments Account is a summarised cash book and therefore a real account, so a single pair of statements from the same organisation contains one real account and one nominal account, and knowing which is which is the whole of both questions.

Why the others are wrong

• (a)It is a Real Account. — Real accounts are the accounts of assets, tangible ones such as cash, stock, furniture and buildings and intangible ones such as goodwill, patents and trademarks, and their balances are carried to the Balance Sheet rather than closed off each year. The Income and Expenditure Account holds no asset at all. The real account in a non-trading concern's set of statements is the Receipts and Payments Account, which is a summarised cash account — which is precisely why this option is placed first in a pair of questions that asks about both statements one after the other.
• (b)It is a Personal Account. — Personal accounts are the accounts of persons and entities the concern deals with — natural persons such as a debtor, and artificial persons such as a bank, a company or a club. The name of this account refers to income and expenditure, not to anybody. The personal account nearby is the Capital Fund, which stands for the members collectively and is where the surplus or deficit of the Income and Expenditure Account is transferred, so the two accounts are adjacent in the closing entries and easily confused if the classification is learnt by proximity rather than by content.
• (d)It is a Representative Personal Account. — A representative personal account is still a personal account; it simply stands in for a person or a group of persons instead of naming them — Outstanding Salary Account represents the employees who are owed, Prepaid Insurance Account represents the insurer who owes, Rent Received in Advance represents the tenant. A non-trading concern has several of them, Subscriptions Outstanding and Subscriptions Received in Advance being the obvious pair, and both appear in its Balance Sheet. None of that describes the Income and Expenditure Account, which represents no person and closes each year. This is the most sophisticated wrong option in the set, and it catches a candidate who knows the term exists without knowing what it is for.

The traditional or British classification divides ledger accounts into three kinds, each with its own rule of debit and credit. Personal accounts are those of persons and entities, and they subdivide into natural persons, artificial persons such as companies, banks, firms and clubs, and representative personal accounts such as outstanding and prepaid items that stand for a group of persons; the rule is debit the receiver, credit the giver. Real accounts are those of assets, tangible and intangible; the rule is debit what comes in, credit what goes out, and their balances are carried forward to the next year through the Balance Sheet. Nominal accounts are those of expenses, losses, incomes and gains; the rule is debit all expenses and losses, credit all incomes and gains, and they are closed at the end of the period by transfer to the Trading and Profit and Loss Account, or in a non-trading concern to the Income and Expenditure Account. That last point is what settles this question. The Income and Expenditure Account is prepared on the accrual basis and contains only the revenue items of the current period: subscriptions earned rather than received, expenses incurred rather than paid, plus non-cash charges such as depreciation on the concern's assets. Its balancing figure is a surplus where income exceeds expenditure and a deficit where it does not, and it is transferred to the Capital Fund in the Balance Sheet, in the same way that a business transfers net profit to capital. Capital receipts and capital payments — a legacy, the purchase of furniture, the repayment of a loan — never enter it; they belong to the Receipts and Payments Account and to the Balance Sheet.

Key facts

• Traditional classification: personal accounts (persons and entities, including representative personal accounts), real accounts (assets, tangible and intangible), nominal accounts (expenses, losses, incomes and gains).
• Golden rules: debit the receiver and credit the giver; debit what comes in and credit what goes out; debit all expenses and losses and credit all incomes and gains.
• The Income and Expenditure Account is a nominal account — the not-for-profit counterpart of the Profit and Loss Account, which is also a nominal account.
• It is prepared on the accrual basis and contains only the revenue items of the current period, including non-cash charges such as depreciation.
• Its balancing figure is a surplus or a deficit, transferred to the Capital Fund rather than carried forward within the account.
• The Receipts and Payments Account, by contrast, is a real account — a summarised cash book showing opening and closing balances.
• Representative personal accounts of a non-trading concern include Subscriptions Outstanding and Subscriptions Received in Advance, both of which appear in the Balance Sheet.
• Nominal accounts are closed at the end of each accounting period; real and personal accounts carry their balances forward.

Common traps

• Choosing 'Representative Personal Account' because the term is familiar from a club's subscriptions in arrear and in advance. Those are representative personal accounts; the Income and Expenditure Account is not.
• Assuming the account is real because it belongs to a set of statements that begins with cash. The Receipts and Payments Account is the real one in that pair.
• Confusing surplus with net profit in the classification. The name of the balancing figure changes with the type of organisation; the type of account does not.
• Putting capital items into the Income and Expenditure Account. Only revenue items of the current period belong there.
• Forgetting that nominal accounts are closed each year. An account whose balance is carried forward to the next year's books is not nominal.

• practice — not a real PYQ

  According to the traditional classification of accounts, Outstanding Salary Account is a :

  • (a)Real Account
  • (b)Nominal Account
  • (c)Representative Personal Account
  • (d)Natural Personal Account

  Answer(c) Representative Personal Account

• practice — not a real PYQ

  The balance of the Income and Expenditure Account of a non-trading concern is transferred to :

  • (a)The Receipts and Payments Account
  • (b)The Capital Fund
  • (c)The Trading Account
  • (d)The Cash Account

  Answer(b) The Capital Fund