Charities work a little different to everyday businesses as they are not run for the basis of making a profit. So when it comes to charity accounts there are some major differences that will seem odd even to a trained accountant. There are a few. Firstly there is a need to account for your income in more than one pot – with each pot being constrained to be spent in a specific way. A company just does its income and expenditure, but a charity has to look at income to put it into these separate pots and explain why you have each pot and what it’s for. They are called restricted and endowments. Even then, within a pot you could have lots of small pots. As an example, you could effectively have your hands tied behind your back in five different ways because five funders gave you five different requirements on what to do with the money.
Another aspect is that normal accounting standards don’t really apply because if you look at a normal accounting standard for a business you’re getting money in return for something whether its goods or services, something by which you generate profit. In the charity world that doesn’t work because you’re quite often given money by people who get nothing in return – a donation. So there’s this whole concept of being given something for nothing and then accounting for how you spend it. This means that you need special guidance on this and that changes the concepts behind accounts completely.
Funding is most difficult when thinking about recognising income. It’s incredibly difficult, because sometimes you recognise it when you receive it regardless of whether you’ve spent it or not; and sometimes you don’t. So you can end up carrying unspent monies as balances in funds and that can confuse the trustees a lot because you can have the income one year and expenditure the other, and if they’re used to profit and losses they can see it as a bad thing when they get a loss, when actually it’s not a loss it’s a timing difference. So the way that charity accounts are put together is not instinctive for most business people and it needs some understanding to interpret the numbers and what they actually mean.
Tax law contains an official definition of a charity: “a body of persons or trust… using all its income and assets for its stated charitable purpose”. One of the key tests to determine the status of a charity is whether or not it exists to benefit the public as all charities have to satisfy the public benefit requirement. In addition, the people running the organisation must be judged “fit and proper”, though there is no prescribed set of criteria for exactly what this means. Because this rule is intended to counter “sham charities and fraudsters”, it is kept deliberately vague to give the Charity Commission room for manoeuvre. For example, though, it would typically prevent people who have already been thrown out of one charity from taking up a trustee position elsewhere.