Income and expenditure account

A profit and loss account (usually called an income and expenditure account in the case of non-profit making organizations) shows what has happened to an organization s financial position over a period of time—usually, again, the organization s financial year it records the money received and the money spent. Table 3.8 shows such an account for our imaginary student. It is important to observe that the excess of expenditure over income, that is, the amount that the student has overspent, is the same as the difference in his net worth between 1998 and 1999. This will usually be the case in simple situations where there has been no capital investment. In more compUcated cases, particularly with commercial organizations, other items enter into the relationship. 

The most important of the new statements is the cash flow statement. As we have already pointed out, the income and expenditure account does not show expenditure on capital items, only their depreciation capital expenditure affects the balance sheet but the balance sheet does not give sufficient information to deduce how much this expenditure amounts to and how it was funded. The link which ties the balance sheet and the profit and loss account to the capital expenditure is the cash flow statement. A moment s examination of our student s financial statements will reveal that, because there is no cash flow statement, there is no explanation of where the money to purchase his CD player came from. 

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