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6 Differences between charity accounts and company accounts.

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In the latest UK200Group blog, Helena Wilkinson from the specialist team of Charity Accountants at UK200Group member firm Price Bailey, examines the differences between charity accounts and company accounts.

There are major differences between regular business accounts and charity accounts that an uninitiated accountant would struggle to understand. The reason for this being that, unlike companies, charities are not run for making a profit and do not necessarily receive monies in return for goods and services. This makes things very different in the appearance of the accounts.

Here, we look at the key differences:

1. Income can be accounted for in more than one pot – restricted, endowment and designated

There is a need to account for multiple sources of funds. For example, if funds were raised for a particular purpose only, then these funds need to be accounted for in one pot and show how they were applied to that purpose and another purpose would go to a different pot. These are known as restricted funds. Generally, endowments are where the monies are given as capital and may not be spent – only income can be spent (or to complicate matters expendable endowments can be spent if the trustees can determine so!). It is vitally important to keep track of each individual fund as Trust law puts obligations on the Trustees to be able to demonstrate detailed reporting on how this income has been appropriately applied. Designated funds are those created at the discretion of Trustees and therefore can be created or removed dependent on their views.

2. Accounting for funding can be tricky

Funding is the most difficult area to consider when recognising income and its classification. Above was mention of the types of funds that could be created – restricted, designated and endowment – which have rules around how these can be utilised and accounted for. For a start, regardless of whether you have spent the income received or not, you may need to recognise it in full and carry it forward as an unspent balance in your restricted funds, or sometimes you don’t. It all depends on interpretation of the agreements in place and understanding of the nature of the transactions involved and the periods to which they relate. Charity accounts aren’t instinctive because you may have income one year and expenditure the other – so a ‘loss’ can purely be a timing difference due to income recognition. The matching principle does not apply. This can potentially confuse charity trustees who might be used to the usual profit and loss accounts and seeing profits and losses in this light.

3. Income - normal standards don’t apply

In a typical business, you will get money in return for providing something, like goods or services, which will in turn generate a profit. This doesn’t translate for charities because often people or trusts or corporates donate money for nothing in return. This turns the accounting a bit on its head and means that you need to look at how and when you account for things. Talking about donations follows nicely on to Gift Aid on donations to which charities can benefit from tax relief. When donors hand over their money they can sign a Gift Aid declaration allowing the charity to claim back from HMRC. The charity can claim 25p for every £1 received with valid declarations.

4. Charities need to know more about tax

Charities need to consider what they do – as primary purpose (which is activity undertaken to directly fulfil their objectives) falls into tax exemptions, however other ‘trade’ may not - like selling Christmas cards which may give rise to tax in a charity of certain limits are exceeded or complicate matters by having to use trading subsidiaries who gift aid their profits to the charity. Furthermore, VAT can also be very difficult as dependent on its income sources – giving rise to exempt, outside the scope, standard, reduced rate and zero rated supplies! Therefore charities may not be able to recover all of their VAT and so may need to run a business/non-business and partial exemption method – which involves detailed understanding of their input VAT and as you can tell is complex.

5. The terminology is very different

Other than the balance sheet looking very similar (apart from the section about funds at the bottom half of the balance sheet) the rest of things may be a bit like learning a new language! For example, turnover doesn’t exist; and instead, you analyse income through various means such as donations, legacy, grants, charitable activities and more. With expenditure you don’t have administration and operational costs, instead you have raising funds and charitable activity – with support costs and governance costs thrown in. Therefore it means learning and understanding new terminology, what it means and how to apply it in your charity circumstances.

6. FRS 102 has changed the rules

With the introduction of the new accounting standards known as FRS 102 the game has completely changed again. The basics may be the same; however there have been many technical changes that make it dangerous to rely on old knowledge.

Even though all this all may sound quite scary, it does eventually become more natural to you. Once you get the jargon and the understanding of different terminology and interpretations then you’re back to being a more confident accountant.

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