Financial accounting and reporting: The

essentials
Accounting Methods: An Overview
KEY ACCOUNTS
Keeping accounts is simply the way that financial information is stored so that
an organization can track where its money comes from and how it has used it.
Financial data can either be kept in a manual system using physical books of
account, or in a computerized format, using one of the many different
accounting software packages.
There are two main methods for keeping accounts:

- CASH ACCOUNTING
- ACCRUALS ACCOUNTING

When reading a financial report, it is important to know what financial activity

the figures include or exclude. The method of financial accounting used to
report the figures has a direct impact on this. Let's have a look at each of these
two different methods in turn, starting with cash accounting.

What is cash?

A cash transaction is one where payment is settled immediately for the goods
or services being transacted. This is different to a credit transaction which is
one that is settled at a later date. A cash payment or receipt can be made by
a wide range of methods, such as by cheque, bank transfer, online payment
service (e.g. PayPal), mobile phone, debit or credit card, and of course,
physical notes and coins.

**TIP**: It is best to think about cash and credit transactions in terms

of WHEN they were paid, rather than HOW they were paid.
Cash accounting is the simplest way to keep accounting records. It does not
require special bookkeeping skills. It is often used by smaller organizations, so
you are likely to see this in some of your partners. The main features of cash
accounting are:

Feature Description
These are called payments, they are
Outgoing transactions recorded in the accounting records (the
Cash Book) on the DATE PAID OUT.

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 Feature Description
These are called receipts; they are recorded
Incoming transactions in the accounting records (the Cash Book) on
the DATE RECEIVED.
The system does not account for a
transaction until the CASH IS PAID OUT or
RECEIVED. So, if there is A TIMING
DELAY between receiving the goods or
services and paying for them, as in a credit
Transactions in process
transaction, the system does not
automatically track unpaid bills or invoices
owed to suppliers (liabilities), or any money
that is contractually owed to the organization
(assets).
The system treats valuable assets (such as a
car) in essentially the same way as
consumable supplies (e.g. stationery). All
payments are recorded as expenses on the
Valuable assets
date paid. This means that fixed assets are
not recognized in the books as being owned
and used by the organization for a longer
period, and having a longer lasting value.
Because the system can only recognize
actual cash exchanges, it does not record
'non-cash transactions' like in-kind donations
(such as a gift of a laptop), or the impact of
Non-cash transactions
depreciation (wear and tear) on valuable
equipment. This means that the accounting
records may not give a true picture of all
operations.
When summarized, the records produce
a Receipts and Payments report for a
specified period of time, e.g. month, quarter
Financial report or year. This shows the movement of cash in
and out of the organization, and the cash
balances at the start and end of the
reporting period.

Overall, the cash accounting method is simpler but provides a narrower view
of the organization's transactions, and cannot automatically track what it owns
(assets) and owes to others (liabilities).

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What is an accrual?

An accrual is an adjusting entry in the accounting records to recognize when

a not-yet-recorded financial transaction belongs to a particular accounting
period. This is typically used for credit transactions - e.g. expenses that have
been incurred but are not yet recorded in the accounts, and income that
has been earned but is not yet received.

For example, at the end of January the electricity bill for that month has not
yet been paid, so the January accounts are adjusted to include an amount
for the electricity consumed. The figure to accrue is estimated if the invoice is
not yet received.

Accruals accounting is a more advanced accounting method (it requires

what is known as double entry bookkeeping) and so needs skilled staff to
maintain it. The main features of accruals accounting are:
Feature Description
These are called expenditure, and are
recorded in the accounting records (the
general ledger) on the date incurred -
that means when the goods are received
or the service is provided - which could
be different to when the bill is actually
Outgoing transactions
paid. For example, you hire a meeting
room for a training event in January but
do not pay the invoice until March. The
cost of the room is recorded as January
expenditure because this is when the
activity happened.
These are called income, and are
recorded in the accounting records (the
general ledger) on the date 'earned' - i.e.
when goods or services were provided -
rather than when the money is actually
Incoming transactions received**. For example, you have a
contract to rent out part of your office
space, but your tenant is a month late in
paying. The income due can be
recognized (accrued) even though it has
not yet been received.
As the system accounts for transactions
when they occur, there are no timing
delays in recognizing income and
Transactions in process expenditure. As well as tracking all cash
transactions, it also tracks credit
transactions such as unpaid bills owed to
suppliers (liabilities), and any money that

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 Feature Description
is contractually owed to the organization
(assets). This gives a truer picture of the
financial position.
The system is able to distinguish between
day-to-day expenditure and items that
have a significant value and long term
Valuable assets use (called capital expenditure), such as
a vehicle. These items are accounted for
as fixed assets and recognized as part of
the organization's wealth.
The system can record all transaction
types so can easily account for 'non-cash
transactions' such as a gift in kind, and
Non-cash transactions the calculated cost of depreciation on a
vehicle. This gives a more
comprehensive and true picture of
operations.
When summarized, these accounting
records produce the financial statements
which include these two main reports:

• Income and expenditure

statement (also referred to as a
Statement of Comprehensive
Income or Statement of Financial
Activities) - showing income
earned and expenditure incurred
Financial report
during a specified period, and the
overall result (a surplus or a deficit
of funds)
• Balance sheet (also referred to as a
Statement of Financial Position) -
showing assets, liabilities and funds,
and giving a picture of what the
organization is worth on one given
day.

**Grant income accounting rules are a

bit more complicated. Nearly all donors
Footnote on grant income
require grant income to be recognized
on a cash rather than an accrual basis.

In summary, the accruals accounting method provides a broader and truer

view of the organization's transactions, and its assets and liabilities, because it
makes adjustments to take account of all transactions that 'belong' in any
particular period.