Updated August 2023

Receipts & payments vs accrual accounting

Accounting basis selection for not-for-profits

Charities with a gross income below £250,000 and who are not registered as a company have the option of preparing receipts and payments accounts, as long as their governing document does not require their charity's annual accounts to be prepared as accruals accounts.

In essence receipts and payment is a simpler reporting option only detailing cash transactions during the year whereas accruals accounting considers invoiced income and billed expenditure (whether paid or not). Specific differences from accrual accounts are detailed further down in the page.

Typically, because of the simpler reporting requirement, receipts and payments accounting is used by charities who use manual solutions, e.g. spreadsheets, to record their transactions. It is however generally regarded that accrual accounting provides a clearer picture of the charity's activities and financial affairs.

Changing between one reporting structure and another has, until now, been seen as a difficult task and avoided by those administering a charities financial records.

Changing reporting structure between receipts and payments and accruals accounts

Whichever option is preferred by your organisation, Liberty Accounts provides you with that reporting option – without the loss of any system functionality! For example, you can still run both customer and supplier ledgers and record invoices and bills, due for future payment, which therefore allows for better management of your cash flow.

Switching between receipts and payment and accrual reporting is simply the selection of the appropriate reporting option.

When may accrual accounting by preferable?

There are some occasions where, although the law allows receipts and payments accounts to be prepared, it may be preferable to prepare accruals accounts. The following are examples of such occasions:

  • donors may require accruals accounts to be prepared as a condition of their grant;
  • trustees may need to explain more about the use of their resources than simply cash movements. This may arise when:
    • a charity has significant non-cash assets, or fixed assets which the trustees would like to value and depreciate in the accounts;
    • a charity has received significant non-cash donations (gifts in kind or valuable gifts of services); or
    • a charity operates a total return policy in relation to permanent endowment investments;
  • the charity, despite having an income under the threshold, is growing in size or complexity, for example, the charity may use a trading subsidiary, or the charity is involved in joint operations with other charities.
  • the charity has significant receipts or payments arising from asset and investment sales and purchase, and the trustees consider that the preparation of accruals accounts would explain these transactions more clearly;
  • the charity carries out its activities mainly by making programme related investments by way of equity or loan rather than by making grants to beneficiaries and the trustees consider that the preparation of accruals accounts would explain these transactions more clearly.

In each of these cases, accruals accounts can provide a clearer picture of the charity's activities and financial affairs than receipts and payments accounts.

Differences between receipts and payments accounts and accruals accounts

Receipts and payments accounts include some items that do not appear in accruals accounts. These extra items involve either exchanging cash for other assets or exchanging other assets for cash. Examples include receipts from the sale of fixed assets or investments. Although such items should be included in receipts and payments accounts, they should form a separate category from other items in the accounts as they do not represent resources moving into or out of the charity.

Similarly receipts and payments accounts exclude some items that are included in accruals accounts. These excluded items mainly involve changes in the value of assets, such as investments, buildings, creditors and debtors, which are not accounted for in receipts and payments accounts. This means that receipts and payments accounts will not contain any amounts for depreciation, gifts in kind, bad debts or gains and losses on sales of investments or fixed assets.

A statement listing assets and liabilities is required in receipts and payments accounts (in place of a balance sheet required for accruals accounts). However, no asset valuations are required, unless a valuation is essential to a meaningful description of the asset – such as cash or deposit account balances. Valuations (even approximate ones) may be provided if trustees wish.

Reference – Charity Commission Receipts and Payments Accounts Introductory Notes

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