Which accounting basis might a charity use for its financial statements?

Which accounting basis might a charity use for its financial statements?

• A. Cash basis only.
• B. Accruals only.
• C. Receipts and payments or accruals.
• D. Tax-based accounting.

Answer: (C)

Charities have flexibility in how they prepare their financial statements. They can use receipts and payments, which is a cash-based approach recording income when cash is received and expenses when cash is paid, or they can use accruals, recognizing income when earned and expenses when incurred (including related accruals). Because either basis is acceptable for charity reporting, the option that includes “receipts and payments or accruals” best reflects how these statements can be prepared. The other choices are too restrictive—cash basis only or accruals only—and tax-based accounting isn’t the standard basis for charity financial statements, even though tax rules may affect reporting in other ways.

Charities have flexibility in how they prepare their financial statements. They can use receipts and payments, which is a cash-based approach recording income when cash is received and expenses when cash is paid, or they can use accruals, recognizing income when earned and expenses when incurred (including related accruals). Because either basis is acceptable for charity reporting, the option that includes “receipts and payments or accruals” best reflects how these statements can be prepared. The other choices are too restrictive—cash basis only or accruals only—and tax-based accounting isn’t the standard basis for charity financial statements, even though tax rules may affect reporting in other ways.