Fundraising Company – How to handle and process charity money

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Hello, we are a limited company which raises money for charity by selling our products with a portion of the sale price going to charity.

We have a contract with different charities which outlines that the money we raise is held in our bank account temporarily and later transferred to them.

We would like to make sure we are managing this as appropriate in our accounts and bookkeeping. This charity money that comes into our accounts should be exempt from VAT.

For example: We sell a product for £500.

£100 goes to charity.

£400 goes to our company.

In our book keeping, this is logged as £400 vatable, £100 vat exempt.

From a legal perspective and for easier management, would it be better to have two separate bank accounts (one for charity money, one for our money)?

I’m not sure whether this just over complicates things unnecessarily because we take payments by card terminal and either way (based on example above) the £500 would be going into our bank account to then be separated later.

It would be great if we can have some professional advice on this and whether this setup would be required or are we just overcomplicating our bookkeeping by splitting the bank accounts and transferring funds across the two bank accounts?

It would also be good to know if there are any other legal requirements for us to be processing charity money in this way.

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Posted by al-fn (Questions: 36, Answers: 44)
Asked on 6 June 2020 10:38 am
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Private answer

In order for cash in bank to be recognised as an asset in the company’s balance it must meet the criteria of an asset laid down in the IASB Framework. Those criteria are:

  • control by the company
  • risks & rewards of ownership 
  • future economic benefits are expected to flow to the entity

 Money held in your bank accounts which, under contract, are charity money does not meet those criteria. Therefore, such amounts must be excluded from your bank balance on the company’s balance sheet.

 There is no specific guidance in IFRS on applying these definitions to cash arrangements.

The treatment of such money depends on the extend, contracts and arrangements between the company and the relevant charities.

 Keeping a separate bank account for each cash stream is a good idea in terms of financial control. At any point you need to ensure that there is a clear distinction between money to be treated as cash and cash equivalent and those amounts for charity.

At the year-end financial statements any such amounts still held must be excluded from the Cash and Cash Equivalent balance of the company, and a separate disclosure must be made.

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Posted by al-fn (Questions: 36, Answers: 44)
Answered on 6 June 2020 11:08 am