Read the following statements and mark the correct answer.

Assertion (A): The income and expenditure account is prepared on the cash basis of accounting.
Reason (R): The income transactions related to the current year are added and those related to the previous or following year are to be subtracted while preparing Income and Expenditure account.

Assertion (A) is false but Reason (R) is true

The correct answer is option 4- Assertion (A) is false but Reason (R) is true.

Assertion (A): The income and expenditure account is prepared on the cash basis of accounting. This is false as income and expenditure account is made on accrual basis.

Reason (R): The income transactions related to the current year are added and those related to the previous or following year are to be subtracted while preparing Income and Expenditure account. This is true.

Income and Expenditure Account is the summary of income and expenditure for the accounting year. It is just like a profit and loss account prepared on accrual basis in case of the business organisations. It includes only revenue items and the balance at the end represents surplus or deficit. The Income and Expenditure Account serves the same purpose as the profit and loss account of a business organisation does. All the revenue items relating to the current period are shown in this account, the expenses and losses on the expenditure side and incomes and gains on the income side of the account. It shows the net operating result in the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess of expenditure over income), which is transferred to the capital fund shown in the balance sheet. The Income and Expenditure Account is prepared on accrual basis with the help of Receipts and Payments Account along with additional information regarding outstanding and prepaid expenses and depreciation etc.