Specialist in Small Charities, Not for Proft, Businesses and Startups.

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CHARITY ACCOUNTING

Charities work a little differently from everyday businesses as they are not run on the basis of making a profit.

 

The main differences between Charity Accounting and that for other types of Organisation are:

  • they need to account for their income in more than one pot;

  • with each pot being restricted to be spent in a specific way.

 

Charities are not the only ones that use SORP accounting as there are other Institutions that use their own SORP which only means they each have their own way of laying out their account i.e.Statement of Recommended Practice. These include - Education, Housing Associations, Investment Trust Companies etc.

Link to Charity Commission website page for Organisations

Video Explanations of Processes & Terms

This sector is driven by people with amazing vision and a passion to make a difference.

There’s not always someone in their team that has the skills or mindset to deal with the mass of regulations and hence, it can be overwhelming for small organisations.

Without that person, it is all too easy to be confused by the many possible organisational structures, the different regulatory bodies, various reporting requirements, and tax issues.

Let me relieve you of this burden.

 

I WANT TO HELP YOU:

 

  • Free up your time so you can spend it on what YOU want,

  • Reduce your stress levels and ensure professional accounting.

The basic principles of Charity Accounting are the same as other businesses. The main difference is the emphasis on restricted and unrestricted funds and the expenditure that goes along with it.

 

The point about the record-keeping is that you need to keep records that enable the trustees to follow the requirements of the Charities Act, so those requirements are:-

  • To provide basic information so that you're able to show and explain all of the charity's transactions.

  • You must be able to disclose, at any point in time, with reasonable accuracy, what it says, the financial position of the charity and,

  • Basically, the ultimate is for the trustees to be able to prepare a set of accounts.

Charity Record Keeping & Accounting

Cost recovery comes into play in Charity Accounting when money has been received from a funder who has restricted the type of expense the money can be spent on. It can also be used in Job Cost Processing but that is another topic entirely.

 

Full Cost Recovery = the total cost of expenditure can be included;

Absorption Costing = only a portion of the cost can be allocated.

Deferred income is used often in Charity Accounting in order to ensure that only the element of the income received that relates to the actual months within the Financial year are accounted for in the Financial Statements.

The money is deferred (removed from the profit & loss) and put into the balance sheet as a current liability (debt) which will be released back into the profit & loss within the next 12 months.

The video explains the situations when this happens.

Full Cost & Absorption Costing

Deferred Income

In Charity Accounts there are 4 types of fund that can appear on a set of Financial Statements:

 

  • Restricted, where the funder has specified the money be spent on specific expenses or activity;

  • Endowment, where the money is to be spent on a long term asset such as a building, and the Endowment is released into the P&L account at the same rate as the depreciation on the asset;

  • Designated, Funds that were originally unrestricted but the Board have voted for it to be shown on the Financial Statements as designated, put aside, for a project they wish to fund in the future. This can be undone by the Board at any time and the money fall back into the Unrestricted pot.

  • Unrestricted, anything that can be used against any type of the businesses expenditure.

Restricted & Unrestricted Funds

What are the key differences for charities when you’re preparing accounts?

 

Firstly there is a need to account for your income in more than one pot – with each pot being constrained to be spent in a specific way. A company just does its income and expenditure, but a charity has to look at income to put it into these separate pots and explain why you have each pot and what it’s for.

 

They are called restricted and endowments. Even then, within a pot, you could have lots of small pots. As an example, you could effectively have your hands tied behind your back in five different ways because five funders gave you five different requirements on what to do with the money.

 

Also, normal accounting standards don’t really apply, because if you look at a normal accounting standard for a business you’re getting money in return for something, whether its goods or services, something by which you generate profit. In the charity world that doesn’t work because you’re quite often given money by people who get nothing in return – a donation.

 

So there’s this whole concept of being given something for nothing and then accounting for how you spend it. This means that you need special guidance on this and that changes the concepts behind accounts completely.

 

What are the things to look out for regarding regulations for charities?

There is a view that charities don’t pay tax, but, in fact, they have to know more about tax and VAT than most other businesses, because although they don’t pay tax on their profits there are exceptions, so they have to make sure they fall into the permissible activity.

 

VAT can be complicated because most charities cannot recover all of their VAT but they have to recover some of it. So they have to work out what bits and how much.

 

How complex is the area of funding for charities?

Funding is most difficult when thinking about recognising income. It’s more complicated than a normal business, because sometimes you recognise it when you receive it regardless of whether you’ve spent it or not; and sometimes you don’t. So you can end up carrying unspent monies as balances in funds, and that can confuse the trustees a lot, because you can have the income one year and expenditure the other, and if they’re used to profit and losses they can see it as a bad thing when they get a loss, when actually it’s not a loss it’s a timing difference. So the way that charity accounts are put together is not instinctive for most business people and it needs some understanding to interpret the numbers and what they actually mean.

 

Do you need extra specialist training as an ordinary accountant to prepare charity accounts?

Yes. When you enter the sector and you pick up a set of charity accounts they can be frightening. There will be so much terminology they’ve never heard of before.  For example, your income and expenditure account is called a SOFA (Statement of Financial Activities). There is just so much jargon that goes with the reporting. 

 

So the terminology is very different?

For a start most of your income streams in businesses use of the word “turnover” – this doesn’t appear in charities. So you analyse your income by various categories which relate to donations, legacy, grants, other trading activities, charitable activities, investment income – they’re your main income sources.

With your expenditure, you don’t have admin and operational costs as you would for a company. You have two categories of expenditure: raising funds and charitable activity. So they’re not usual terminology that anyone would’ve come across and you need to understand what goes where, and how. 

 

On that side of things, it is predominantly around income & expenditure, and because the expenditure fits in those categories you then have something called support costs, which no one will have ever heard of before. This is like overheads that have to be apportioned.

 

The balance sheet is pretty much a balance sheet apart from the fact that you’ve got funds, which will appear at the bottom. The rest of the balance sheet will look like you’d usually expect and there isn’t that much of a difference. 

 

Does this give charities an unfair advantage or is it just a different way of doing things?

For anyone coming into the sector, it will take time to get used to the terminology and the jargon. Therefore they’ll take a while to get up to speed on what the accounts look like and how to interpret them because the profit or loss for a company means how well or badly that organisation has done. Profit or loss in a charity doesn’t mean anything.

 

This is why the narrative is so important and that’s why charities need to focus on that narrative. That’s why they need to go into so much detail with the information they put into a trustee's report to try and make the numbers make sense to someone who picks them up with no knowledge.  

 

What final tips would you give to someone involved in charity finance?

Don’t run away! It can look really daunting. It is accessible, you just need to put some effort into some of the jargon and the different way of recognising income, then you’re fine. 

 

Helena Wilkinson