How to read charity accounts

by | Mar 31, 2022 | Blog

By law, charities over a certain size must publish their annual accounts and submit them each year, but there is little use in charity accounts if you don’t know how to read them.

English and Welsh charities send them to the Charity Commission, but there are also the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland for charities based elsewhere in the UK.

While charities have to report the same basic information as businesses, they have to provide much more on a broader range of issues.

Needless to say, reading charity accounts and taking everything on board can be difficult. It really is a different beast compared to business accounts.

So, to help, here are some tips so you can make the most out of your charity accounts.

What do charity accounts include?

All the extra information charities must include in their annual accounts is laid out in the statement of recommended practice (SORP).

For instance, charities have to include the recruitment of trustees and the state of financial reserves in their accounts.

They also have to separate income between the four types of funds they can receive – restricted, unrestricted and designated funds as well as endowments.

An important part of charity accounts is to pay attention to the statement of financial activities, too, which shows total income, expenditure and levels of essential reserves.

Make sure you read the accompanying report, too, which will clarify figures that look strange at first glance. 

Common charity accounting pitfalls

When it comes to the type of funds a charity can receive, you need to pay special attention to two in particular. 

First, there are unrestricted funds, which can be spent however the charity sees fit, and then restricted funds, which can only be spent on the purpose the money was given.

Being able to spot the types of funds your charity receives and whether they are being used correctly is essential for compliance purposes, but will also ensure you can avoid a funding crisis because the money in the bank is restricted in some way.

Charities must also provide an ‘annual report and accounts’ document outlining key activities from the last year, as well as financial figures. 

Just note they can also produce a shorter ‘annual review’ with some, but not all financial information. The point is, before you interrogate your accountant, make sure you’re reading the full annual report and accounts document, rather than the shorter version.

Be wary when you’re reading the accounts of a charity shop, too, because if it receives over £50,000 worth of donated goods, it will appear alongside the ‘cost’ of running the shop.

So, if you see a huge amount of money going towards the running of the charity, stop and look at the value of donated goods, first.

Context matters

It’s also essential to read charity accounts through the right lens, taking context into account.

For charities right now, that means the COVID-19 pandemic and its aftermath, so remember that what you might expect to see may or may not match up to reality.

It sounds simple, but just keeping that in mind will help you understand what you’re looking at.

The best place to start is with the trustees’ annual report to understand more about the impact of the pandemic and other significant events.

Talk to us about accounting for charities.

What can we do for you?

If there’s anything you’d like to know about Dunkley’s, we’d love to hear from you.