ACCRUALS BASIS, CASH BASIS AND RECEIPTS AND PAYMENTS
These terms are used to describe a method of accounting. The accruals basis is the double entry method of recording the dual aspect concept of all transactions. The Receipts and Payment is a method of merely recording cash and bank transactions; it does not use the double entry method of recording. Cash basis means accounting only for the cash and bank transactions – regardless of whether a single or double entry method is used. Cash basis has particular relevance when accounting for taxes – income tax and Value Added Tax. An individual may account for their income tax on a cash basis rather than an accruals basis. A limited company, for example, must by law produce accounts based on the accruals basis but may, if VAT registered and eligible, account for VAT on the cash basis.
Preparation of a Receipts and Payment statement or account is more simplified than preparing accounts using the accruals basis. It follows that Receipts and Payments meets the cash basis definition, but it does not follow that cash basis is a more simplified basis. This is so when the same accounts are used to prepare the financial statements on an accruals basis as well as being used to produce a VAT Return using the cash basis.
Accounting software caters for the double entry method of recording transactions, whether restricted to cash transaction only or not. Such software is not suitable for single entry recording. Whilst it is possible to use it for the purpose by just looking at the cash account(s) there is a mistaken tendency by both bookkeepers and accountants alike to start including non-cash entries for “completeness”.
A receipts and payment account is accompanied by a Statement of Assets and Liabilities. This is an assessment of the assets and liabilities held at the date the receipts and payment statement is prepared. These are the statement being referred to when the term “a more simplified method of reporting” is used. This can be a problem for charities when over enthusiasm leads to a Receipts and Payment Account being accompanied with a Balance Sheet. A Balance Sheet is only the product of a double entry system of the dual aspect concept of Assets = Capital + Liabilities. The Charities Act requires that accounts produced in this way must be compliant with the Statement of Recommended Practice for Charities (SORP). This is an enormous undertaking compared to the Receipts and Payments account with Statement of Assets and Liabilities.