Accounting for not-for-profit organizations

Accounting for not-for-profit organizations

Accounting for Not-for-Profit Organisations

Structure of Not-for-Profit Organisations

  • Not-for-profit organisations include entities like charities, clubs, societies, and trusts.
  • Unlike businesses, not-for-profit organisations do not aim to make a profit. Instead, they aim to use all available funds to achieve their purpose or mission.
  • The board of trustees or directors are typically responsible for overseeing the organisation and making key decisions.

Funding and Revenue

  • Not-for-profit organisations can receive funding from various sources, including grants, donations, memberships, and fundraising activities.
  • All received funds must be accounted for and used wisely to fulfil the organisation’s purpose.
  • A key duty of not-for-profit organisations is to ensure that all income and expenditure are consistent with their charitable objectives.

Financial Statements for Not-for-Profits

  • Not-for-profit organisations prepare financial statements comprising a statement of financial activities (SOFA), including an income and expenditure account and a balance sheet.
  • The SOFA provides a summary of all the income received and expenditure incurred during the financial year.
  • The balance sheet outlines the charitable organisation’s assets, liabilities, and accumulated funds at the end of the financial year.

Apportionment of Expenses

  • Expenses in not-for-profit organisations need to be apportioned between direct charitable activities, governance costs, and fundraising costs.
  • Apportionment is done based on an established, logical basis such as direct staff time or floor space.

Restricted and Unrestricted Funds

  • A crucial aspect of not-for-profit accounting is distinguishing between restricted funds and unrestricted funds.
  • Restricted funds are donations or grants given to the organisation for a specific purpose or project.
  • Unrestricted funds commonly come from fundraising activities, and they can be used for any purpose within the charity’s objectives.

Importance of Transparency and Accountability

  • Not-for-profit organisations are expected to operate with a high level of transparency and accountability.
  • Accurate record-keeping and regular financial reporting are vital. Financial statements are often made public to demonstrate how funds are used.
  • Meeting these expectations helps to maintain public trust and confidence in the organisation, encouraging further support and funding.

Regulation and Compliance

  • Not-for-profit organisations are regulated by bodies such as the Charity Commission in England and Wales, and are required to follow certain accounting and reporting standards.
  • Not-for-profits must comply with all relevant laws and regulations, including those related to data protection, employment, health and safety, and tax.