Receipts and Payments accounts are a great option for smaller charities.
In England and Wales, unincorporated charities and Charitable Incorporated Organisations (CIOs) with a gross income of £250,000 or less a year can choose to prepare receipts and payments (cash) accounts, rather than accruals accounts under the Charities Statement of Recommended Practice (SORP).
Receipts and payments accounts are simpler to prepare than accruals accounts, summarising all the cash (or cash equivalents) received and paid out by a charity over the course of the financial year. Charities with less complex financial activities might find this simpler presentation easier to prepare and read.
This article will explore the different features of receipts and payments accounting…
Why not?
Whilst it may be simpler, preparing receipts and payments accounts may not offer the insight of an accruals approach under the SORP, which includes income and expenditure incurred rather than just received or paid during the financial year in question. Accruals accounts may demonstrate more comprehensively the financial position of a charity, with regard to past and future investments, expenditure and funding.
If you are considering preparing receipts and payments accounts, it’s worth checking your charity’s governing document first. Some organisations will be required to prepare ‘true and fair’ accounts, which means that you will need to use the accruals basis.
Other situations where preparing accruals accounts may be preferable include where:
- Trustees must outline their use of resources in more detailed terms than cash movements, for example regarding significant non-cash assets or donations (although a charity preparing receipts and payments accounts can always choose to add additional narrative disclosure to explain such information)
- A charity, despite having an income under the threshold, is growing or its activities are becoming more complex
- A donor may require accruals accounts as a condition of their grant
What’s involved?
Although there is no statutory format or formal requirements around preparing receipts and payments accounts, they typically include four elements:
- Trustees’ annual report: Offers information to funders and beneficiaries about the charity’s operations and related finances over the course of a year.
- Receipts and payments account: Summarises incoming and outgoing cash for the year.
- Statement of assets and liabilities: Lists the main assets and liabilities at the end of the year, including the cash balances. No asset valuations are required, unless a valuation is essential to meaningfully describing the asset.
- Independent examination statement (or audit report): Prepared by the examiner in question. Most smaller charities who opt for receipts and payments accounting will have an independent examination, not an audit. Charities in England and Wales below £250,000 gross receipts do not require any form of external scrutiny at all.
Make your receipts and payments accounts useful
Unlike a cash book, receipts and payments accounts do not report all individual transactions, but group similar items, such as wages paid or voluntary donations received. More significant individual items may be differentiated for clarity.
As there are no specific requirements in England and Wales regarding what must be included in these accounts (although CIOs must disclose any guarantees they have given, or any debt owed by the CIO, which is secured by a charge on the assets of the CIO). Therefore, charities should consider what readers will want to find out from them. The impact of your fundraising and investment on your charitable purposes should be integral to the information you are presenting. Make it as clear and logical as possible.
Receipts and payments accounts include some items that do not appear in accruals accounts, where either cash is exchanged for other assets, or other assets are exchanged for cash. These transactions should form a separate category.
Conversely, receipts and payments accounts exclude some items that are detailed in accruals accounts, predominantly concerning the value of assets, such as investments movements, buildings, creditors, and debtors. Consequently, receipts and payments accounts do not contain any amounts for depreciation, bad debts, or gains and losses on sales of investments or fixed assets. Gifts of assets or services are also omitted.
A column for ‘last year’s figures’ is usually included in the receipts and payments accounts form (see below). Whilst it is not compulsory to include this column, it can be useful in better understanding the current year’s figures.
The closing cash balance to report in the accounts is the cash balance held plus any outstanding lodgements, less any outstanding payments made (e.g. cheques).
Notes need not be included in the accounts, unless they are required to assist the reader in understanding the figures better. Alternately, these clarifying notes could be included as part of the trustees’ annual report.
Restricted & unrestricted funds
An important part of receipts and payments accounting is knowing the difference between:
Restricted funds: Where their use is specifically defined by the donor
Unrestricted funds:
- General funds: Money that can be spent on charitable objects at your discretion
- Designated funds: Formally earmarked by the trustees for a particular purpose
Trustees must account separately for each restricted, endowment (capital assets held in trust and used to benefit the charity over time), and unrestricted funds they manage. Different bank accounts are not required, as long as the bookkeeping and accounts preparation is suitably defined.
When preparing year-end accounts, trustees may prepare a separate receipts and payment account for each fund that they manage, or combine all types of fund in a single statement, showing each type of fund in a different column.
There are some particular considerations when recording endowment funds in the receipts and payment accounts; please look at the guidance for specific details.
Analysis
Payments and receipts are normally analysed in two ways, by:
Nature:
- For payments: Wages, rent, utilities, etc.
- For receipts: Donations, trading income, etc.
Activity:
- For payments: Costs of raising funds, costs of activities, governance costs, etc.
- For receipts: Generated funds, proceeds from charitable activities, etc.
Sometimes payments are made or receipts received for more than one activity (e.g. stationery used for both fundraising and charitable purposes), or for more than one fund. In these cases, the payment or receipt should be reasonably apportioned to the different activities or funds. If payments are analysed by ‘activity’ rather than ‘nature,’ it’s likely that payments will often require apportionment.
Pro forma
The Charity Commission has provided a pro forma (CC16), to simplify the preparation of receipts and payments accounts.
There is no statutory format for receipts and payments accounts in England and Wales. Completed appropriately, alongside the other related documents, the pro forma will help ensure the accounts are clear and useful to readers.
This might be suitable for trustees who don’t wish, or don’t have the confidence, to design their own annual accounts.
Need some guidance?
Even if the trustees do not prepare their accounts and related documents, they are responsible for their contents, not just the treasurer or outsourced expert.
Beyond this, having a thorough understanding of this information will mean you have a more comprehensive picture of your organisation’s finances. Consequently, you can be more involved in debate and make better decisions on how your resources can be managed.
Burton Sweet has a longstanding commitment to charities and civil society organisations, offering practical, professional and passionate support. We want to assist you, so you can deliver effectively for the communities you serve and show the good you do.
If you need some guidance preparing or understanding your charity accounts, please contact us and our team will be happy help…
