Running a charity is an exciting prospect, but charity accounting can be a little tricky to understand. They have different rules and regulations compared to ‘normal’ businesses – especially when it comes to managing things like restrictive funds.
For context, if you run a charity with one or more restrictive funds, you need to show proof in your bookkeeping that all expenses have been properly allocated – down to the very last penny.
We understand this can get complex, especially if you have multiple funds and grants – so ensuring you’re organised with efficient bookkeeping software is vital.
What’s the difference between a charity and a not-for-profit?
It’s normal to be confused between the two (as they’re often used interchangeably), but there are differences.
The phrase ‘not-for-profit’ describes an organisation set to deal with an issue in the public interest, and they’re more about benefitting the wider community rather than making money for their own gain. Their principles are different than that of a regular business – and that’s what makes it a non-profit organisation.
As an example, a limited company could be a not-for-profit because it’s decided that rather than paying dividends to shareholders, it’ll use any profits to meet its charitable aims.
If you want to register as a charity, you’ll need to meet the Charity Commission’s rules and regulations. In short, charities tend to be a lot stricter and have more conditions than a not-for-profit.
Is it important for charities to keep on top of their bookkeeping?
Since The Charities Act 2011, it’s a legal requirement for charities to keep detailed accounting records for at least six years. Even if the charity shuts down, trustees of the account will need to preserve the charity accounts until this period is up.
The Statement of Recommended Practice (SORP) is a reporting standard used by registered charities when it comes to reporting their activities. (SORP takes into account that charities differ from profit-motivated businesses, as this usually affects the reporting requirements.)
Charities need to meet these requirements, whereas businesses must follow the Financial Reporting Standards (FRS).
Because lots of charities receive restricted funds (these are funds that are given for a specific thing, such as for office supplies or a fundraising event) it’s a legal requirement for you to:
- Show exactly what your funds are for
- Report any restricted funds
- Account for any expenses in charitable organisations
What type of records does my charity need to keep?
As a charity, you’ll need to keep a record of the following things:
- The money your charity receives, and how it’s spent on a day-by-day basis (this includes restricted and unrestricted funds)
- Any assets and liabilities
- Up-to-date financial records
- A statement of account in line with regulations
As we’ve mentioned previously, it’s important as a charity to show exactly what the funds you’ve received are for, and how they’ve been spent. Reporting on these funds is arguably the biggest difference between a business and a charity.
This is because if, for example, you run a homeless charity and ask for donations to go towards socks in the winter, legally you must only purchase socks with the donations.
How can I organise my restricted funds?
When running a charity, you’ll have various fundraising events on the go, along with other projects – which can get a little hectic.
Using something like Pandle Projects will mean you can separate tasks, so you don’t lose track of how much you’ve raised for an event, or how much you’ve been given for specific projects (for example, a grant for office supplies). This helps you manage your budget balance for each area, ensuring that everything goes where it’s supposed to.
One is a grant to host a fundraising and awareness event, and the other is to buy beds and food for the animals in your care.
Rather than recording the donations as one single transaction coming into your charity, you could create two separate projects, and record any transactions under the appropriate project. That was you know how much money is left from each budget, and what it’s already been spent on.
Projects are also great for people working on different things.
Setting up separate projects in your accounts means people can work on their tasks without the risk of crossover or confusion. And if you want to make things even more simple, setting up User Permissions means you can restrict members’ access to the projects they’re working on.
If you’re a charity looking for bookkeeping software, you’ve come to the right place! Create your free account with Pandle today.