Receipts & Payments vs Accruals: Which Your Small Charity Should Use

Most new charity treasurers face this choice and do not know the difference. Here is a simple breakdown.

The simple example: why it matters

Small Charity runs December to November.

December 2025: A major trust agrees to fund their work. £10k grant. The money arrives in January 2026.

Under receipts & payments

In the year ending November 2025, the £10k does NOT appear. It shows in the November 2026 accounts (when the cheque arrives).

So the November 2025 accounts look like they only have £5k, when really, £10k is confirmed and on the way.

Under accruals

In the year ending November 2025, the £10k DOES appear. The invoice was issued; the money is owed. So the accounts show £15k income, which is the truth.

The difference: trustees see the real picture and can make better decisions.

Receipts & Payments: when it works

Receipts & payments is a cash-based method. You only record money that actually moved.

Pros

• Simple: one line per transaction.
• No accruals knowledge needed.
• Easy to audit.
• Works for small charities with simple finances.

Cons

• Does not show invoices outstanding.
• Does not show bills owed.
• Gives a distorted picture if you have grants in the pipeline.
• Funders and Charity Commission prefer accruals above £25k.

Best for

Charities under £25k, with simple income (mostly cash/card donations), and no major grants owed.

Accruals: when it is necessary

Accruals is income/expense-based. You record income when earned, expense when incurred, regardless of cash movement.

Pros

• Shows the true financial picture.
• Trustees can see commitments (money owed to or owed by the charity).
• Better for planning.
• Standard for most charities above £25k.

Cons

• More complex bookkeeping.
• Requires understanding of accruals concepts.
• More entries to track.
• Harder to audit.

Best for

Charities above £25k, with multiple funding streams, or significant grant income.

A real-world decision tree

• <strong>Under £10k annual income?</strong> Use receipts & payments.
• <strong>£10k-£25k with simple income?</strong> Receipts & payments is fine.
• <strong>£10k-£25k with multiple grants?</strong> Switch to accruals.
• <strong>Over £25k?</strong> Use accruals (Charity Commission expects it).

How to switch from receipts & payments to accruals

If you have been doing receipts & payments and need to switch:

1. Pick a date (usually the start of a new financial year).
2. Prepare a list of outstanding invoices (grants owed to you).
3. Prepare a list of bills owed (costs you incurred but have not paid).
4. Calculate restricted funds (money you hold for a specific purpose).
5. Rebuild prior year accounts using accruals method (or just start fresh if year 1 is small).
6. Use the new method going forward.

This is tedious but do it once and you are done. Do not put it off; it gets harder later.

Month-end process: receipts & payments vs accruals

Receipts & Payments (simple)

1. List every cheque/card payment.
2. List every donation/grant received.
3. Total both columns.
4. Difference = cash position.

Accruals (more thorough)

1. List cash received.
2. List invoices issued but not yet paid (add to income).
3. List cash paid.
4. List bills received but not yet paid (add to costs).
5. Calculate: (cash + receivables) - (bills owed) = net position.

The practical tip

If you are using accounting software (like Xero or Wave), just select "accruals" from the settings. The software handles the complexity. There is no reason to stay manual once you exceed £10k.

Accruals are not complicated once you see them in practice. Give yourself one month and it becomes normal.

This guide is part of our Charity Finance hub, where you can explore every practical guide in this area.