Differences between charity and business accounting
Charity accounting in the UK is designed to demonstrate that the monies given to a charity by supporters are appropriately managed. For commercial enterprises accounting is more for demonstrating the success of the owners/directors in managing the business, providing reassurance for those that trade with it as well as identifying tax liabilities.
Essentially charities are dealing with other people’s money given voluntarily to provide help and support to others, but businesses build income for the owners.
The importance of being able to show that the donations given are used appropriately, and as expected, drive many charity accounting rules.
Fundamental to those accounting rules is the notion of Funds and Fund Accounting. Derived from the requirements of Trust Law in both the legal jurisdictions of England & Wales and Scotland, proper accounting for funds is a legal requirement to prevent a possible breach of trust.
Directly resulting from the critical requirement for proper fund accounting and reporting Regulators recognised that the usual business-type profit and loss presentation fell short of fully explaining all a charity's activities and some years ago introduced the Statement of Financial Activities (SOFA) as the major financial schedule for Charities.
The details of this schedule and other important requirements for charity accounting are laid out in the Charities SORP (Statement of Recommended Practice); which in itself is based upon Financial Reporting Standards (FRS) applicable in the UK and Republic of Ireland that have as key requirement that the accounts provide a “true and fair” view.
Typically commercial activities will use an accounting basis known as Accrual Accounting in which the existence of revenue, assets, expenses and liabilities are recorded in accounting systems when they are known, not necessarily when paid.
Charities (but not charitable companies) that have an income below a certain threshold can chose not to use the accruals basis but a supposedly more simple method known as “Receipts and Payments” consisting of a summary of cash received and paid during the financial period. Unlike the Income and Expenditure basis there is no statutory requirements for Receipts and Payments reporting, although the Charity Authorities offer some guidance notes. As a Receipts and Payments SOFA is not prepared in accordance with accounting standards it does not necessarily offer a 'true and fair' view.
Are you a small business or charity? Discover why you need a budget to thrive and make lasting change. Learn the essentials now!
Charities with a gross income below £250,000 and who are not registered as a company have the option of preparing receipts and payments accounts, as long as their governing document does not require their charity's annual accounts to be prepared as accruals accounts.
Employee cost allocation is the process of distributing staff costs across various aspects of a business. This helps in understanding how employees are used in different projects, allowing for accurate budgeting, enabling full costing for projects and better management control.