All you need to know about Charity Accounting

Charities are organisations that exist for the public benefit, and they have to comply with certain legal and regulatory requirements. One of these requirements is to report annually to The Charity Commission. The annual report consists of two main parts: a trustee’s report and a set of accounts. These documents provide information on the charity’s purposes, activities, achievements, governance, finances and fund types. In this article, we will explain the main features and differences of the charity’s report and accounts, and how they differ from a limited company’s accounts.

What are the reporting requirements for charities?

All charities have to report annually to The Charity Commission, the regulator of charities in England and Wales. The Charity Commission ensures that charities are accountable, well-run and meet their legal obligations.

The charities report consists of two main parts: a trustee’s report and a set of accounts.

• The trustee’s report is a narrative document that explains the membership of the charity and what its purposes are, also known as its charitable objects. The report also describes what the charity has done during the year to carry out those purposes, such as the activities, achievements and outcomes of the charity. The report should also include information on the charity’s governance, structure, policies, risks, plans and financial performance.

• The accounts are a financial document that shows where the funds have come from and whether they are general or specific funds, also known as unrestricted or restricted funds. Unrestricted funds are funds that can be used for any of the charity’s purposes, while restricted funds are funds that can only be used for a specific purpose or project, as specified by the donor or the terms of the fund. The accounts also show what expenditure is against each fund type and how much of that fund remains at the end of the year. The funds can be further split into three categories: unrestricted, restricted and endowment. Endowment funds are funds that are held permanently or for a fixed period by the charity, and only the income generated from the fund can be spent. There may be more than one class of restricted and endowment funds depending on the nature of the fund. The charity only has to report on the type of funds it has.

Why the charity reporting is different to the usual limited company’s accounts?

The charity accounts are different from a limited company’s accounts as they have to follow a different accounting framework, known as the Statement of Recommended Practice (SORP) for charities. The SORP sets out the principles and methods of accounting and reporting that are relevant and appropriate for charities.

Within the accounts, the terminology is different from that used in a limited company accounts. For example:

• Turnover, which is the total amount of money received by a business in a given period, would be described as income or incoming resources in a charity’s accounts. Income or incoming resources can come from various sources, such as donations, sponsorships, legacies, grants, contracts, fees, sales, investments or events.

• The Statement of Financial Activity (SOFA), which is the main statement in a charity’s accounts, replaces a profit and loss account, which is the main statement in a limited company’s accounts. The SOFA shows the income and expenditure of the charity for the year, as well as the net movement of funds and the balance of funds at the end of the year. The SOFA also shows how the income and expenditure are allocated to the different fund types (unrestricted, restricted and endowment).

• The balance sheet, which is a statement that shows the assets, liabilities and equity of a business at a given point in time, is similar to a charity’s accounts, but with some differences. For example, equity, which is the owner’s claim on the assets of the business, is called funds or reserves in a charity’s accounts. Funds or reserves are the accumulated surplus or deficit of the charity over time, and they represent the net assets of the charity that are available to carry out its purposes.

In the charity accounts, there are usually more disclosures informing the reader about the charity and how the accounts were prepared. For example, the accounts may include:

• A summary of the main accounting policies adopted by the charity, such as the basis of accounting, the recognition of income and expenditure, the valuation of assets and liabilities, the treatment of funds and the estimation of uncertainties.

• A breakdown of the income and expenditure by source, activity, fund type and category, such as voluntary income, charitable activities, governance costs, raising funds, etc.

• A description of the nature and purpose of each fund, and the movements in and out of each fund during the year.

• A note on the tax status of the charity, such as whether it is exempt from taxation on its income and gains, or whether it can claim tax relief or refunds on its donations or expenses.

The annual report and accounts of a charity are important documents that provide information on the charity’s purposes, activities, achievements, governance, finances and fund types. They are different from a limited company’s accounts as they have to follow a different accounting framework, use different terminology and provide more disclosures. The report and accounts help the charity to demonstrate its accountability, transparency and impact to its stakeholders, such as the public, the donors, the beneficiaries, the regulators and the auditors. They also help the charity to plan and manage its resources effectively and efficiently, and to fulfil its legal and regulatory obligations.

To produce the right reporting required for charities, your accountant should possess the right skills, as expertise is essential. Your accountant should be able to:

• Understand and apply the relevant accounting standards and guidance for charities, such as the SORP, the Charities Act, the Companies Act, the FRS 102, etc.

• Prepare and present the accounts in a clear, accurate and consistent manner, following the recommended formats and layouts for the SOFA, the balance sheet, the cash flow statement and the notes.

• Explain and justify the accounting policies, estimates and judgments made by the charity, and disclose any significant uncertainties or risks that may affect the accounts.

• Analyse and interpret the financial performance and position of the charity, and provide useful insights and recommendations to the trustees and the management.

• Ensure that the accounts comply with the legal and regulatory requirements, and that they are subject to appropriate audit or independent examination.

• Communicate and collaborate effectively with the trustees, the management, the auditors, the regulators and other stakeholders, and respond to any queries or feedback on the accounts.

In addition, a good charity accountant can add value to the charity by ensuring that the report and accounts are of high quality, reliable and relevant, and that they reflect the true and fair view of the charity’s activities and finances. A good charity accountant can also help the charity to improve its financial management, governance and accountability, which in turn should assist achieving its charitable objectives and mission.

If you need help with your charity reporting please feel free to reach out to Cannon Accountants for further advice and guidance. We’re always here to help.

‍