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This "Thought" was first published on Charity Connect in April 2023
Choosing between Accruals reporting and Receipts & Payments reporting
is a "Between the Devil and the Deep Blue Sea" dilemma.
is a "Between the Devil and the Deep Blue Sea" dilemma.
Receipts & Payments accounting is a lousy choice for charities.
It's just a re-badged (to make it sound different) version of "Cash" accounting for small unincorporated business. "Cash" reporting is a HMRC concession to small businesses to help them manage the cash-flow problems they can encounter when, under Accruals accounting, corporation tax and VAT become due from the date that invoices are issued. So if customers are slow in paying their bills, small businesses have to pay the taxes out of their own pockets before receiving payment (big companies often being the worst offenders).
"Cash" reporting avoids that problem !
But most small charities aren't liable for corporation tax and VAT - so R&P reporting is a solution to problems that they don't have 😕. And to make it worse R&P reporting is notorious for it's tendency to distort reports when the "Cash Date" for a transaction falls in a different reporting period from the date of the activity to which it refers (eg: bills arriving late, payments made in advance).
Accruals account is the other lousy choice for small charities.
Commercial companies are in the business of making profits for the benefit of their shareholders. Accruals accounting is designed to show off how wealthy companies are to attract investors. So charities, large or small, which adopt accruals accounting have to comply with the 400+ pages of Financial Reporting Standard FRS-102, which is so complicated it needs another 200 pages of the Charity SORP to explain how to apply it to charities. (The CC17 Charity Commission template for charity accruals report contains around 30 worksheets of notes, in addition to the Statement of Financial Activity and Balance Sheet 😲).
Commercial companies are in the business of making profits for the benefit of their shareholders. Accruals accounting is designed to show off how wealthy companies are to attract investors. So charities, large or small, which adopt accruals accounting have to comply with the 400+ pages of Financial Reporting Standard FRS-102, which is so complicated it needs another 200 pages of the Charity SORP to explain how to apply it to charities. (The CC17 Charity Commission template for charity accruals report contains around 30 worksheets of notes, in addition to the Statement of Financial Activity and Balance Sheet 😲).
ie: Accruals accounting is another solution to problems that small charities don't have.
Because charities are in the business of spending donors' money for the benefit of their beneficiaries not making profits for shareholders.
Fortunately there is a simple "no-brainer" solution to the dilemma.
The practical reality is that every organisation has to keep records of both the Accrual-date (the date on which the transactions was committed - ie: agreed to) and the Cash-date (the date on which the money actually changed hands) of transactions. Because without both you have no way of knowing and managing which bills have and haven't been paid.
While your annual income is less than £250K, you can use the Cash-date records to prepare your Trustees Annual Report & Accounts on the much simpler R&P basis to meet your statutory obligation to deliver them to the Charity Commission.
But for the rest of the year you can use either, or both, the Cash-date and Accrual-date records to manage and report your day-to-day finances - budgets, cash-flows, etc - on the more effective accruals basis but without having to produce the full "all the bells and whistles" accruals report for the Charity Commission.
When the Accrual-date and the Cash-date occur in the same financial reporting period there is no difference between the "real money" accounts prepared on an Accruals or on the R&P basis. And if you have a few financial activities which are split over more than one financial reporting period, you can prepare a separate note to the accounts on an accruals basis (ie: with all the relevant transactions reported together regardless of which finance year they fell in) to give readers a clearer picture of the financial outcome of those activities.
For a more detailed justification of "To Accrue... or Not To Accrue" (with all the gory evidence - and some pragmatic tips to avoid some of the problems) click HERE to download the Small Charity Support leaflet of the same title. (but beware ! it's 20 pages long !)