Receipts and Payments vs Accruals accounts
Charities with a gross income below £250,000 and who are not registered as a company have the option, as long as their governing document does not require their charity’s annual accounts to be prepared as accruals accounts, of preparing receipts and payments 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.
Now things are different
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:
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 from 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.
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