Financial accounting in human resource management involves careful oversight of the organisation’s financial transactions related to employee activities, benefits, and obligations. Maintaining accurate receivables and payables ledgers ensures that the organisation tracks amounts owed by clients and amounts owed to suppliers or employees effectively. In the Kenyan human resource context, managing these ledgers is crucial for maintaining financial integrity, especially when dealing with payroll deductions, employee advances, or supplier payments. This chapter focuses on one critical aspect of ledger management: handling bad debts written off, a necessary process when certain receivables become irrecoverable.

8.1 Income and expenditure

Income is the money or money's worth that an organisation earns or receives in a period, and expenditure is the money it spends or the costs it incurs in the same period. Comparing the two shows whether the organisation has made a surplus or a deficit, and the comparison is the starting point of the final accounts. Not-for-profit bodies such as schools, clubs, churches and SACCOs often prepare an income and expenditure account instead of a profit and loss account, and it is built from the receipts and payments account together with adjustments for amounts owed and amounts paid in advance. Example: a youth sports club in Nyeri collects Ksh 480,000 in subscriptions and spends Ksh 410,000 on running the club, so it has a surplus of Ksh 70,000 for the year.

The year-end adjustments of accruals and prepayments are covered in 8.2 to 8.4, provisions in 8.5, and the final statements in 8.6 to 8.8. This topic deals with the nature of income and expenditure, the receipts and payments account, and the income and expenditure account.

8.1.1 Meaning and classification of income

Income is the amount earned in the period, whether or not it has been received in cash, and it increases the owners' interest or the accumulated fund. It follows the accruals principle, so it belongs to the period in which it is earned.

• Revenue income: Income from the main activities, such as school fees, sales, membership subscriptions and service charges.
• Other income: Income from side activities, such as interest received, rent received, donations and profit on disposal of assets.
• Capital receipts: Money from sale of non-current assets, loans or capital contributions. These are not income, and they are shown in the statement of financial position.
• Income received in advance: Money received for a later period, which is a liability until earned.
• Income receivable: Income earned but not yet received, which is an asset.

8.1.2 Meaning and classification of expenditure

Expenditure is the cost incurred in the period, whether or not it has been paid.

• Revenue expenditure: Costs of running the organisation, such as wages, rent, electricity, repairs and depreciation. These are charged to the income and expenditure account.
• Capital expenditure: Spending on assets lasting more than a year, such as a vehicle or a building. It is shown as an asset.
• Deferred revenue expenditure: Large items of revenue nature whose benefit lasts several years, spread over those years.
• Expenses payable: Costs incurred but not yet paid, which are liabilities.
• Expenses prepaid: Costs paid for a future period, which are assets.

8.1.3 Receipts and payments account

A receipts and payments account is a summary of the cash book for the period. It lists all cash and bank receipts on the debit side and all payments on the credit side, with the opening and closing cash balances.

• Cash basis: Items are entered when money is received or paid, and not when earned or incurred.
• Includes capital items: Receipts such as loans and payments such as purchase of equipment appear here.
• No adjustments: It makes no allowance for accruals, prepayments or depreciation.
• Source of the income and expenditure account: The revenue items are taken from it and adjusted.
• Balance: The closing balance is the cash and bank at the end of the period.

Example: a school in Kitale has these figures for the year.

Check: payments = 1,200,000 + 180,000 + 90,000 + 300,000 = Ksh 1,770,000

Closing balance = 2,480,000 − 1,770,000 = Ksh 710,000

8.1.4 Income and expenditure account

An income and expenditure account is the equivalent of the profit and loss account for a not-for-profit body. It lists the income earned and the expenditure incurred in the period, and the balance is a surplus when income exceeds expenditure, or a deficit when expenditure is higher.

Formula: surplus or deficit = total income − total expenditure

• Accruals basis: Items are adjusted so that they relate to the period, not to the cash moved.
• Excludes capital items: Purchases of equipment and loans are left out.
• Includes non-cash items: Depreciation is charged as an expense.
• Surplus: Added to the accumulated fund, in place of retained profit.
• Deficit: Deducted from the accumulated fund.

8.1.5 Steps in preparing an income and expenditure account

1. Prepare the receipts and payments account: Summarise the cash book.
2. Identify the opening assets and liabilities: Use them to find the accumulated fund.
3. Remove capital items: Leave out purchases of assets, loans and other capital receipts.
4. Adjust for accruals and prepayments: Add amounts owed and deduct amounts paid in advance, using the methods in 8.2 to 8.4.
5. Calculate depreciation: Charge it on the non-current assets.
6. Group the income: List subscriptions, fees, donations and other income earned.
7. Group the expenditure: List salaries, repairs and other costs incurred.
8. Find the surplus or deficit: Subtract expenditure from income.
9. Transfer to the accumulated fund: Add the surplus or deduct the deficit.

8.1.6 Worked example

Example: using the Kitale school's receipts and payments for the year, the following extra information is available.

• Fees outstanding at the end of the year: Ksh 120,000, and at the start: Ksh 90,000.
• Electricity owing at the end of the year: Ksh 20,000, and at the start: Ksh 15,000.
• Depreciation of equipment for the year: Ksh 60,000.
• The Ksh 300,000 spent on equipment is capital expenditure.

Fees earned: 2,100,000 + 120,000 − 90,000 = Ksh 2,130,000

Electricity expense: 180,000 + 20,000 − 15,000 = Ksh 185,000

Income and expenditure account

Surplus: 2,360,000 − 1,535,000 = Ksh 825,000

8.1.7 Special items in not-for-profit accounts

• Subscriptions: Income is the amount that relates to the year, found from cash received, plus amounts owed at the end, less amounts owed at the start, adjusted for advance payments.
• Life membership fees: Treated as capital, or spread over the expected membership period.
• Entrance fees: Capitalised or treated as income, according to policy.
• Donations: General donations are income, and donations for a specific purpose, such as a building, are capital.
• Profit from trading activities: A canteen or bar is dealt with in a separate trading account, and only the net profit is shown.
• Legacies and grants: Included according to their purpose.
• Accumulated fund: The equivalent of capital, equal to assets less liabilities.

8.1.8 Comparison of the accounts

8.1.9 Importance and use

• Performance: It shows whether the organisation can cover its costs.
• Accountability: Members and donors see how funds were used.
• Budgeting: The surplus or deficit guides planning of subscriptions and fees.
• Compliance: Many regulators of schools, SACCOs and societies require it.
• Comparison: Results can be compared between years and with budgets.

Chapter Summary

This chapter covered essential procedures for maintaining receivables and payables ledgers accurately within financial accounting. It began by explaining the process of writing off bad debts, highlighting how uncollectible amounts are removed from the books to reflect true financial position. The concept of provision for bad debts was then discussed, showing how businesses estimate potential future losses to ensure realistic asset valuation. Adjusting receivable balances was examined next, focusing on correcting errors and updating records for accurate customer account status. Similarly, adjusting payable balances involved ensuring supplier accounts are current and correctly stated. The chapter concluded with a detailed look at control accounts, specifically the sales ledger control account and the purchases ledger control account, which serve as summary accounts to reconcile individual ledger balances and maintain overall accuracy in the accounting system. These topics collectively emphasize the importance of diligent ledger management for reliable financial reporting.