The basic principles of bookkeeping, etc. for charities are the same as other businesses. The main difference is the emphasis on restricted and unrestricted funds and the expenditure that goes along with it.
The point about the record-keeping is that you need to keep records that enable the trustees to follow the requirements of the Charities Act, so those requirements are:-.
Like any business, there are a number of ways that you can use to record your bookkeeping records, and it mostly depends on the size of the organisation.
So, for instance, you know, you can be totally and completely manual. You literally record in and outs. Obviously, that would be if you are particularly small, not a lot of transactions, etcetera.
The next level on that is spreadsheets. If you know how to use a basic spreadsheet, then it's relatively straightforward. You can set it up so it will work out your calculations for you, add up columns, etc., so there's a little bit less human error in there and it can be cheap.
The main difficulty there, for charities anyway, or organisations that have restricted funds. It is a bit difficult, once you start getting a bit bigger, to be able to adapt your spreadsheet when you're trying to start putting in which funders, have which expenditures, and try to keep a record of the projects or each of the different funders, etc.
Not only do you want the category, but you want the funding, you want the project, etc. So it gets a little bit more awkward. It's still prone to errors because there's a lot more human interaction with it and what it doesn't do is, the invoicing and the accruals, etc that kind are actually separate from your transactions. It really is just your cash and bank movements that you usually record on the spreadsheet. There's nothing wrong with that, it's just that, as I said, it has a few limits.
In the next stage, as you get a bit bigger and you get a bit more complex, you'll probably want to look for accounting software and there are lots of packages out there.
You can have the software on one desktop or you can use it on the cloud. If it is cloud-based, it is a lot easier for different authorised people, to be able to see the records as and when they require it and you can share them with your accountants easier.
Accounting software packages are set up specifically to understand the accounting rules and how to use that information. There are very standard-reports usually built into most of them and most of them integrate your sales invoicing into the whole package so you can keep a record of who owes you and who's already paid, etc. The negative of that is that you will almost definitely need extra training and possibly ongoing support for that, and, depending on which package you go for, it can be expensive. There are some free ones. Some of them are a bit more limiting. It does depend on what you're looking for.
That's more about the actual physical ins and outs, transaction side.
There's more to your charity records than that. You need to make sure that you keep all the evidence for the transactions. So, for your receipts, for example,
you've got grants, you need to keep your confirmation letter, what the grant conditions are, remittances of what you've received. If you do room hire, you need to be able to keep a copy of the invoice that you've sent out, evidence that the money has been received, donations.
Some of this depends on what depth you're going to. In particular, if you're going to be claiming gift aid back, you need all your gifted declaration forms, all signed, etc.
Most donations, if nothing else, will come with some kind of email confirmation saying I'm sending you this and, you know, thank you or whatever.
If you are holding fundraising and you're actually using cash, you need to make sure that you control that correctly. It's counted by at least two people, They sign it off. So you're backing each other up, you've got cash sheets proving that so many of each coinage or notes, and it comes up to the total with what's actually in the tin.
On your payment side -
similar thing. You need to make sure you keep all your invoices from your suppliers, you need to keep even your small receipts from shops or, if its market stalls, handwritten receipts, something that's properly authorised, showing you, what you bought, how much you've spent, where you've spent it and what you've spent it on.
Volunteers expenses –
you need to keep all the claim forms, they should have receipts attached if they are reclaiming for something that they bought for the organisation, you need to make sure you keep those receipts and the forms, that they are all properly signed by someone properly authorised that that person is allowed to make the expenditure.
When the person gets the money, they sign to say, yep, I've got the money.
If there's a ticket involved, obviously that needs to be kept. If it's to do with a number of miles, they're claiming so much per mile, they need to record where they've been, how many miles for each journey. It's all about making sure you've got all the backing information that you can prove someone else is claiming it from you, and they can prove that they're claiming the right amount, but also you can prove,
So that is the record keeping. It is not just about keeping the ins and outs. It's about making sure you've got all the paperwork and things behind it. And that's very basic. But the main difference with the charities is the fact that if it's an expenditure, for example, you get a grant and it's specifically for something like a daycare centre, then you need to mark whatever expenditure is specifically for the daycare. You need to be able to record not only is it whatever kind of expenditure, such as rent, stationery, or whatever, but you need to be able to record that it was spent out of a specific fund. And possibly, because you want to know how profitable, or not, each kind of different project was, you might also want to record which project it relates to.
This will mean, at some point, you can get –
It helps you make decisions on each of the different kinds of projects that are there.
I hope that has been good for some kind of introduction into charity recordkeeping.
The basic principles of Charity Accounting are the same as other businesses. The main difference is the emphasis on restricted and unrestricted funds and the expenditure that goes along with it.
The point about the record-keeping is that you need to keep records that enable the trustees to follow the requirements of the Charities Act, so those requirements are:-
To provide basic information so that you're able to show and explain all of the charity's transactions.
You must be able to disclose, at any point in time, with reasonable accuracy, what it says, the financial position of the charity and,
Basically, the ultimate is for the trustees to be able to prepare a set of accounts.
Deferred income is used often in Charity Accounting in order to ensure that only the element of the income received that relates to the actual months within the Financial year are accounted for in the Financial Statements.
The money is deferred (removed from the profit & loss) and put into the balance sheet as a current liability (debt) which will be released back into the profit & loss within the next 12 months.
The video explains the situations when this happens.
In Charity Accounts there are 4 types of fund that can appear on a set of Financial Statements:
Restricted, where the funder has specified the money be spent on specific expenses or activity;
Endowment, where the money is to be spent on a long term asset such as a building, and the Endowment is released into the P&L account at the same rate as the depreciation on the asset;
Designated, Funds that were originally unrestricted but the Board have voted for it to be shown on the Financial Statements as designated, put aside, for a project they wish to fund in the future. This can be undone by the Board at any time and the money fall back into the Unrestricted pot.
Unrestricted, anything that can be used against any type of the businesses expenditure.
Cost recovery comes into play in Charity Accounting when money has been received from a funder who has restricted the type of expense the money can be spent on. It can also be used in Job Cost Processing but that is another topic entirely.
Full Cost Recovery = the total cost of expenditure can be included;
Absorption Costing = only a portion of the cost can be allocated.