In an era in which transparency and accountability are paramount, understanding the complexities of their financial landscape has become crucial for charitable organisations. Whether you’re a trustee, a finance professional, a donor, or simply someone looking to make a difference, the intricate world of charity accounting standards is important to all involved in the NFP sector. So, let’s delve into it.
Basics of charity accounting
Charity accounting stands as a unique and vital subset of finance, requiring specific knowledge and expertise. It's a realm in which financial proficiency intersects with social responsibility, underscoring the importance of financial compliance, transparency, accountability, and strategic management of funds.
Charity accounting is more than just a process of recording transactions; it’s an essential tool that enables charities to demonstrate their financial integrity to donors, regulatory bodies, and the public. It is instrumental in ensuring that every pound donated is effectively utilised towards achieving the organisation's mission.
Financial management practices for both profitable and not-for-profit organisations are similar in many ways. Just like in the corporate realm, maintaining accountabilities for all financial activities, producing accurate financial reports, managing cash flow, and reducing financial irregularities are all crucial.
While your tax status may diverge, the approach to running a not-for-profit organisation should be equally diligent and purposeful, akin to the dedication required in managing a limited company.
On top of that, there are also a few specific measures and processes that are unique to charities.
What information do you have to submit?
The complexity of the law surrounding charities can seem like a legislative minefield. Although there are some basics that apply to all charities, the documents you need to file each year depend on a variety of factors, including how your charity is incorporated and your income.
Regardless of your size and turnover, though, you must maintain accurate records and file accounts on time each year. Records (including Gift Aid details) should be kept for at least six years, or three years in the case of charitable companies. Different charity types must choose a suitable legal structure, ensuring it is in line with the Companies Act and other regulations.
All charities with an annual income of more than £10,000 (and all charitable incorporated organisations regardless of income) must submit annual returns. Charitable incorporated organisations are registered with the Charity Commission but enjoy limited liability without the need to register at Companies House. Registered charities with less than £10,000 income need to submit annual update forms.
You may have to produce trustees’ reports as well, unless you are exempt.
What counts as turnover for a charity?
When it comes to charities, turnover denotes the complete income or revenue generated by the organisation during a defined accounting timeframe. This financial measure is significant as it demonstrates the charity's financial wellbeing and its capacity to maintain its activities.
Revenue for charities can have a lot of different sources. This may include private donations, grants from other organisations, grants from government institutes, and profits accrued from investments.
How to submit charity accounts
Submitting charity accounts is an essential aspect of upholding transparency and accountability within the nonprofit sector. This process requires a comprehensive representation of the organisation's financial activity, presented to the appropriate regulatory body. Here are some things you need to keep in mind when submitting charity accounts:
● Prepare Financial Statements: The first step entails preparing exhaustive Financial Statements, typically comprising a balance sheet, statement of financial activities, and explanatory notes. These documents should accurately reflect the charity's financial situation during the accounting period.
● Audit: Depending on your charity's earnings and the applicable local regulations, you may need to undergo an audit or independent examination. This process provides an extra layer of confidence in the precision and completeness of your financial statements.
● Draft an annual report: In addition to your financial statements, it is mandatory to create an annual report. This document delivers a descriptive overview of your charity's undertakings, accomplishments, and forthcoming plans. It should be crafted in a way that is easily understood by a broad readership, encompassing donors, beneficiaries, and the general public.
● Online submission: With your financial statements and annual report prepared, they must be submitted online. The specific process can vary based on your jurisdiction, but generally speaking, you’ll need to log into a designated portal and upload your documents.
● Record keeping: It’s crucial to submit your accounts by the designated deadline, often within 10 months of the end of your financial year. Late submissions can result in penalties and potential damage to your charity's reputation.
After submitting your accounts, retain a copy of all submitted documents and any confirmation of submission received. This will prove beneficial for future reference and potential audits or queries.
How to file charity accounts and keep proper records
Filing charity accounts and keeping proper records are not only legal mandates but also fundamental elements for demonstrating transparency, accountability , and trust among stakeholders.
A robust system is essential for record keeping within charities. Records should provide basic information to show all the charity's transactions and disclose their financial position at any given time.
Records should fall into four main categories: accounting, contributions, corporate, and activity. It is particularly important that in-kind donations are properly recorded and reported.
It is a must for charities to keep at least six years of accounting records from the financial year they were submitted. However, it is advisable to retain certain documents indefinitely.
If a charity does not file its accounts, this may lead to reduced public trust and lower funding too. In severe cases, they may also lose their charitable status.
Statement of Recommended Practice (SORP) for charities
The Charities Statement of Recommended Practice (SORP) provides guidance for financial reporting and managing accounts. SORP outlines how charities should detail their income and expenditure. It's essential for all of the charity’s income to be clearly disclosed.
This visibility allows stakeholders, including donors, beneficiaries, and regulatory bodies, to understand the charity's financial health as well as how it utilises its resources.
SORP also encourages charities to adopt sector-driven recommendations on financial reporting and auditing practices. These recommendations are developed in the public interest, ensuring charities adhere to high standards of financial management.
Trustees’ annual reports
A trustees’ annual report is defined here as "a concise but comprehensive review of the activities of the charity prepared by the trustees for each accounting year."
If your charity is required to submit an annual trustees’ report (most charities are, but some are exempt), be sure not to outsource this responsibility to a third party.
The idea shouldn’t be for someone else to draft the words so that the trustees simply sign them off. Some of them might be heavily involved in the work of the charity, while others perhaps take more of a backseat role and won’t be fully up to speed with all aspects of the organisation.
Involving them in the process of drawing up the trustees’ report helps to give them clarity, flags any problems, and serves as a fraud check.
It also leads to the enforcement of best practices throughout the organisation. If the trustees make it clear what information they’ll need on an ongoing basis for these reports, it can help to provide focus across different areas of the charity.
Protect your charity with financial account management
Unfortunately, charities and other not-for-profits are very lucrative targets for criminals, who can try to use them for money-laundering or tax evasion.
This is why rigorous financial management is vital. In the event of the authorities asking to see your financial records, properly presented information can quickly prove that everything is above board from your end. You also need to have a handle on your data so that you don’t break data protection laws.
Many charities hold confidential data, and this data can often relate to particularly sensitive issues and vulnerable people. Data integrity and security are important in any organisation, but it’s perhaps even more crucial in the NFP sector.
Make sure you have a watertight data protection policy in place that complies with the likes of General Data Protection Regulation (GDPR), as well as any other legislation you’re affected by. Everyone within your organisation must have an understanding of data protection requirements.
Use the right financial management software
Putting the right accounting software in place can make life a lot easier for charities. It helps them with budgeting and reporting, while giving them real-time visibility of their financial position.
But don’t assume that any software will do the job for you. Although the basics of accounting are the same as regular businesses (such as keeping tabs on cash flow, invoices, payments, and so on), the specific accounting rules for NFP organisations mean that you should have an IT system designed for your specific charity accounting needs.
Even then, the different regulations and the SORP guidance mean that your requirements will vary depending on the size of the charity. It also depends on how it is incorporated and whether you have operations overseas.
Ongoing training in charity account management is essential
The complexity of accounting standards for charities requires them to regularly think about legal obligations. With regular updates that are applied instantly/remotely, our Advanced Financials accounting software allows charities to automatically maintain compliance with the latest standards/regulations.
This financial management solution automates mundane tasks related to data entry and reconciliation, thus reducing instances of human error. This enables charities to allocate more of their time and energy to the activities that really help them with their mission.
Cloud-based accounting software allows organisations to access financial data from any location, making it easier for teams to collaborate and update information in real-time. This digital tool can fulfil tasks like donation tracking, expense management, and financial reporting, boosting transparency and accuracy around financial records.
Ongoing training around charity accounting management best practices, coupled with the use of the right technology, can significantly enhance an NFP organisation’s performance. It also ensures they’re always ready to adapt to regulatory and market changes, so that they can continue serving their cause for the foreseeable future.
