What is special about charity accounting in the UK?

0
0

In what ways is charity and non-profit accounting different from other business accounting?

Marked as spam
Posted by al-fn (Questions: 36, Answers: 44)
Asked on 6 June 2020 11:16 am
2 views
0
Private answer

Charities and non-profits do not run for the basis of making a profit, but in order to pursue a goal. These organisations do not have commercial owners and depend on funds from contributions, membership fees, events, and investment income, among other things. Therefore, there are basic ways in which accounting for chartities and non-profits differ from other business accounting, some are listed below:

Account preparation

All charities must maintain accounting records and prepare annual accounts. Charities whose gross yearly income exceeds £25,000 need to file accounts and the annual report.

Charity accounts may be prepared either on the receipts and payments basis or the accruals basis. Which of these is needed will depend on the income of the charity and whether or not it has been set up as a company.

  •  Receipts and payments: The simpler of the two methods. Can be adopted where a non-company charity has a gross income up to £250,000 yearly. It involves of an account summarising all money received and paid out by the charity in the financial year, and a statement giving details of its assets and liabilities at the end of the year. Charitable companies are not allowed by company law to adopt this method.
  •  Accruals: Requirement for non-company charities with gross income of over £250,000 yearly, and all charitable companies. Must be in accordance with the applicable Statement of Recommended Practice (SORP). It involves of a balance sheet, a statement of financial activities and explanatory notes. Must show a ‘true and fair view’.

Tax-exempt status

Non-profit organisations registered in the UK can benefit from some reliefs and exemptions. Specifically, they may be exempt from corporation tax, can claim tax back, as well as the trustees being exempt from income tax. For the exemption to apply, the organisation must be recognised by HMRC, which can be done online through the HMRC website.

Income recognition - restricted, endowment and designated

Normal accounting standards cannot apply to charities as they are not profit oriented. Income needs to be accounted for in multiple streams, with each stream being restricted to be spent in a specific way. 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. Money might also be given by funders as capital and have specific requirement not to be spent. These are known as endowments. And designated funds are those created at the discretion of Trustees and therefore can be created or removed dependent on their views.

Terminology

The balance sheet of charities and non-profits might look similar to a company’s, however there is an additional section about funds. Turnover does not exist, as income is analysed through various means such as donations, grants, charitable activities and more. Expenditure does not include administration and operational costs, instead there are two categories of expenditure: raising funds and charitable activity.

Marked as spam
Posted by al-fn (Questions: 36, Answers: 44)
Answered on 6 June 2020 11:16 am