Q.Distinguish between the Receipts and Payments Account and the Income and Expenditure Account of a not-for-profit organization. (Any four points)

The Receipts and Payments Account is simply a rearranged cash book, while the Income and Expenditure Account is an accrual-basis Nominal Account prepared to find the year's result.

The two statements are prepared from the same underlying cash book but serve entirely different purposes, so a not-for-profit organization's accountant must keep the distinction clear at every step of finalizing accounts.

1. Nature of account. The Receipts and Payments Account is a Real Account — it is nothing more than a summary of the cash book, opening with the cash/bank balance brought forward and closing with the balance carried forward. The Income and Expenditure Account is a Nominal Account, on the same footing as a Profit and Loss Account.

2. Basis of recording. The Receipts and Payments Account is prepared strictly on a cash basis — an item is recorded only when cash or bank is actually received or paid. The Income and Expenditure Account is prepared on the accrual (mercantile) basis — an item is recorded because it relates to the year, whether or not cash has moved.

3. Period covered. The Receipts and Payments Account includes cash flows relating to the previous year, the current year, and even the next year (for example, subscription received in advance). The Income and Expenditure Account includes only the amount of income and expenditure that actually relates to the current year.

4. Type of items. The Receipts and Payments Account records both capital items (purchase/sale of assets and investments, capitalized donations) and revenue items (salaries, rent, subscriptions). The Income and Expenditure Account records only revenue items, and additionally includes non-cash items such as depreciation and any profit or loss on sale of an asset, which never appear in the Receipts and Payments Account at all.

5. Balances. The Receipts and Payments Account has an opening and a closing balance of cash/bank. The Income and Expenditure Account has no opening or closing balance; it ends in a surplus or a deficit, which is transferred to the Capital Fund in the Balance Sheet.

A common error is to assume that the Receipts and Payments Account itself shows the organization's profit or loss for the year — it only shows the change in cash/bank balance. Another is forgetting that capital items (like purchase of a fixed asset) appear in the Receipts and Payments Account but must never appear in the Income and Expenditure Account.