Receipt and Payment Account – SS2 Book Keeping Lesson Note (Third Term)

A receipt and payment account is a classified summary of the cash book of a not-for-profit organisation, showing all cash and bank receipts and payments in a period.

• Basis: it is kept on a cash basis, not on the accrual basis.
• Content: it records receipts and payments of capital and revenue nature.
• Time: it includes cash settled in the period, whether it relates to the current, previous or next year.
• Grouping: items are grouped under suitable account heads.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define a receipt and payment account;
2. state the features of a receipt and payment account;
3. list the steps in preparing a receipt and payment account;
4. state the differences between a receipt and payment account and a cash book;
5. prepare a simple receipt and payment account from given information.

What is a not-for-profit organisation?

A not-for-profit organisation is a body formed to provide service to its members or the public, not to make profit.

• Social clubs: members pay subscriptions to enjoy facilities.
• Religious bodies: churches and mosques depend on offerings and donations.
• Professional associations: members pay entrance fees and annual dues.
• Parent-teacher associations: funds come from levies and donations.
• Community and charity groups: funds come from donations and grants.

How does a receipt and payment account work?

A receipt and payment account records all cash received on the debit side and all cash paid on the credit side.

• Debit side: opening cash balances and all receipts.
• Credit side: all payments and the closing cash balances.
• Opening balances: cash in hand and cash at bank at the start of the period.
• Closing balances: cash in hand and cash at bank at the end of the period.
• Result: the account shows the cash position of the organisation fairly.

What are examples of receipts and payments?

Receipts are cash inflows and payments are cash outflows of the organisation.

What are the features of a receipt and payment account?

A receipt and payment account has six main features.

1. Nature: it is a real account and a classified summary of cash receipts and payments.
2. Basis of recording: all transactions and events settled in cash are recorded on a cash basis.
3. Recording of transactions: it records capital and revenue items together, without separating them.
4. Period: it is prepared for a specific period, such as a month or a year. It does not separate current, previous or later periods.
5. Adjustments: it is not based on the accrual system, so only cash transactions are recorded.
6. Purpose: it gives a fair idea of the cash position, showing opening and closing cash in hand and cash at bank.

What are the steps in preparing a receipt and payment account?

There are five steps in preparing a receipt and payment account.

1. Write the opening balances of cash in hand and cash at bank on the receipt (debit) side. If there is a bank overdraft at the start, write it on the payment (credit) side.
2. Write all cash and bank receipts on the debit side, whether of capital or revenue nature.
3. Write all cash and bank payments on the credit side, whether of capital or revenue nature.
4. Leave out accrued incomes and outstanding expenses, because they cause no inflow or outflow of cash.
5. Compare both sides. Write the difference on the credit side as the closing balance of cash in hand and cash at bank.

What is the format of a receipt and payment account?

The format is a two-sided account with receipts on the debit side and payments on the credit side.

The asterisk (*) shows that cash at bank can be positive or negative.

• Receipts greater than payments: the difference is a positive balance of cash at bank.
• Payments greater than receipts: the difference is a bank overdraft, a negative balance of cash at bank.

What are the limitations of a receipt and payment account?

The account shows only cash movements, so it does not give the full financial position.

• No surplus or deficit: it does not show whether the organisation earned more than it spent.
• No accruals: it ignores accrued incomes and outstanding expenses.
• No assets and liabilities: it does not show the value of assets owned or debts owed.
• Mixed items: capital and revenue items are together, so it is hard to judge the year’s performance.

What is the difference between a receipt and payment account and a cash book?

A receipt and payment account is a summary of cash transactions for a period, prepared by a not-for-profit organisation.

A cash book is the book in which every cash and bank receipt and payment is recorded daily, in date order.

How do we prepare a receipt and payment account? (Worked example)

From the following information, prepare a receipt and payment account of Nisha Foundation for the year ended 31st March 2021.

Balance at the beginning of the year:

• Cash in Hand $5,500
• Cash at Bank $24,000

Other information:

• Subscription for the year is $92,000.
• Petty cash payment of $870.
• Sundry expenses:
  • Printing and stationery expenses $2,300
  • Advertisement expenses $1,700
  • Audit fees $10,500
• Purchase of furniture $21,000.
• Sale of old newspaper $1,200.
• Entrance fees received $80,000.
• Donation received from Mr. Rajesh Kumar for building $30,000.
• Insurance paid $37,000.
• Taxes paid by the organisation are $1,400.

The closing balance of Cash in Hand at 31st March 2021 was $7,000. Find the closing balance of Cash at Bank also.

Solution

Working

1. Total receipts: 5,500 + 24,000 + 92,000 + 1,200 + 80,000 + 30,000 = $232,700.
2. Total payments before closing balances: 870 + 2,300 + 1,700 + 10,500 + 21,000 + 37,000 + 1,400 = $74,770.
3. Closing cash in hand: $7,000 (given).
4. Closing cash at bank: 232,700 − 74,770 − 7,000 = $150,930.

Evaluation

1. Define a receipt and payment account.
2. On which side of the account are receipts written, and on which side are payments written?
3. State three features of a receipt and payment account.
4. Why are accrued incomes and outstanding expenses not included in the account?
5. State three differences between a receipt and payment account and a cash book.

Assignment

List the five steps in preparing a receipt and payment account, and explain how a bank overdraft is shown in the account.