Income and expenditure account is based on which of the following methods of accounting?

Accrual basis of accounting

The correct answer is option 3- Accrual basis of accounting.

The accrual basis of accounting is a method where revenues and expenses are recorded when they are earned or incurred, regardless of when the actual cash transactions occur. This approach provides a more accurate picture of a company’s financial position and performance during a specific period.

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.

OTHER OPTIONS

• Cash basis of accounting- The cash basis of accounting is a simpler method where revenues and expenses are recorded only when cash is actually received or paid.

• Management basis of accounting- It is not any basis of accounting. Management accounting is a branch of accounting.

• Corporate basis of accounting- It is not any basis of accounting. Corporate accounting is a branch of accounting.