On the record

The point of a non-profit organisation is to spend money on its charitable objectives and the aim of charity accounting is to show the movements of the organisation's funds: how have incoming resources been used, and how have the net resources changed? There are two main types of financial accounts, receipts and payment accounts and full accrual accounts.

A crucial difference between businesses and non-profit organisations is fund accounting - essentially keeping track of the various types of charity funding. It is important to distinguish between restricted - money that can only be used for a specific purpose - and unrestricted funds. Try the fund accounting exercise.

New and improved

Charity accounting has undergone a major makeover in recent years. New regulations have made the accounts of charities more understandable, transparent and comparable. This is required of registered charities, though other voluntary organisations should consider adopting it as best practice.

The voluntary sector now has its own internally produced comprehensive guide on accounting - the Statement of Recommended Practice or SORP. It was updated in 2001 - see resources.

According to SORP there are four essential components of charity accounts:

1. The trustees' annual report

Non-profit organisations with gross income and expenditure of more than £100,000 have to submit a narrative report which restates the aims and objectives and outlines all the activities and achievements during the year. The report should be dated and signed by one or more of the charity trustees.

There should also be a statement setting out all your organisation's legal and administrative details:

• The full name of the organisation.
• A list of all the trustees and principal officers.
• The address of the registered office.
• The names and addresses of principal advisers.
• Details of specific restrictions and a summary of any specific investment powers.

Report checklist:

• Objectives, policies and organisation.
• Developments, activities and achievements.
• Financial activities and position.
• Funds held on behalf of others.

2. Statement of Financial Activities - SOFA

The main purpose of the SOFA is to bring together all transactions in a single statement to give a true and fair view of an organisation's financial activities during the year. Essentially it combines an income and expenditure account with an analysis of the changes over the year in the funds held by the charity.

Income and expenditure are grouped under standard headings so it is clear what the organisation is doing and how much it is spending on its various activities.

The SOFA must also include a statement of gains and losses, both realised and unrealised, on fixed assets and investments. You need to make sure that all transactions are entered correctly in the restricted and unrestricted columns - for details see the SOFA format.

3. Statement of assets and liabilities or balance sheet

This statement or balance sheet gives a snapshot of:

• Assets - what the charity owns.
• Creditors - what the charity owes.
• Funds - what resources the organisation has available.

In the case of a balance sheet, this integrates with the SOFA if it is prepared on the full accruals accounting basis. See the specimen balance sheet and glossary.

4. Supporting notes

These should help explain and provide more detail behind the figures in the SOFA and balance sheet. They should include an explanation of the accounting policies - the rate at which assets are written off or depreciated, and why certain money has been treated as restricted.