Full accrual accounts
In full accrual accounts:
- Income is recognised in the accounts when it is earned
- revenue - or when it is due - gifts, donations, or grants
- rather than when it is actually received.
- Expenditure is recognised when it is incurred, not when
it is paid. This introduces the concept of debtors and creditors
into the accounts.
- Income matches expenditure as far as their relationship
can be established. Both should be included in the SOFA
for the period to which they relate.
For instance, if a charity pays its rent in advance on the
last day of its accounting year, the receipts and payments
basis would show the payment as a cost of the year in which
it was paid. This can be misleading as the period to be covered
by the payment is in fact the next year. Under full accruals
accounting this would be adjusted by carrying forward the
payment in the balance sheet as a prepayment, rather than
charging it as a cost for the previous year.
Unincorporated charities with an income less than £100,000
have the choice of which basis to use. Charities formed as
companies must use the full accruals accounting basis, no
matter the level of income.
Under accruals accounting it is recognised that fixed assets
(computer equipment for example) will normally last for more
than one year. Therefore to write them off in the year of
purchase is not matching income and costs, because future
periods will benefit from their use. The purchased fixed assets
will therefore be included in the balance sheet and be written
off or depreciated over their useful life. So the SOFA produced
on an accruals basis will include a charge for depreciation,
which will not appear on a receipts and payments account.
Example
A covenant of £75 has been received from an individual
and the tax repayment of £25 has not been received by
the end of the financial year. In this system the £25
would be accrued for or included in the accounts as a debtor,
i.e. owing money to the organisation. The figure shown in
the annual accounts would be £100.
Find out more about other accounting issues and examples
in the In more depth section.
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