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A faulty income statement, or not?


Or a profit and loss account if you like the older term. Below is simple income statement (which has been published in the public domain), or more precisely an income and expense account, which is a term often used in clubs and charities. So, this example if not IFRS based, but the basic principles are the same. To be fair to the preparer of the statement below, it is quite detailed and transparent. But there is one problem – can you spot it? (“Einahment und Ausgaben” could translate as income and expenses or receipts and payments, but I will come back to this below).

IMG_0282

Just to remind you, accounts are generally prepared using the accruals concept, but in smaller organisations like churches and charities, using a cash basis is common. Have you spotted what is seemingly incorrect? It is under the “expenditure heading”. Got it? It is the “repayment of loan”. This is a repayment of a capital item, or capital expenditure. Remember that only revenue expenditures appear as expenses in an income statement, so in the case of a loan only the interest on the loan would be included.  So is the above statement incorrect? The answer is probably not, but now back to the nuances of language. The statement above is probably best described as a “receipts and payments” account, as it seems to be more representative of cash coming in and going out. We would need to have a chat with the preparer to be sure. However, including the loan repayment is a pointer that the above is not an income statement/profit and loss. This fits too with the nature of the organisation (a church).

You might also notice “reserves” on the income side of the statement above. Again, this is likely a capital item, and maybe should not be included as income. We would need more detail to be sure.

 

 

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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

One response to “A faulty income statement, or not?”

  1. Desmond says :

    Hi Martin, I see that they spent precisely (to the last cent!) the money taken in! It would be interesting to see if they had also prepared some type of balance sheet. Desmond

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