What are the accounting procedures for non-profit organisations?

Why are non-profit organisation accounting standards important?

Accounting standards for non-profit organisations help regulate activities and encourage the proper use of funds. They also help management teams and external auditors to prepare accounts and financial statements in a fair and consistent manner. This makes it easier to compare organisations across the sector. Following these accounting procedures for non-profit organisations also helps to protect donors. At the same time, this fosters greater confidence and public engagement in the activities of the sector as a whole. The management team and the board of trustees are responsible for knowing and implementing the accounting standards for their non-profit organisation and understanding the wider requirements of the charity sector.

What are the non-profit organisations accounting standards?

Non-profit organisations in the UK and Ireland have specific reporting and accounting rules. These are codified in the Statement of Recommended Practice (SORP) and apply across the sector. They help charities to report and explain their activities to the public, management teams, donors, trustees and regulators.

Read our blog about  Not-For-Profits’ reporting requirements.

The SORP provides non-profit organisations with a framework for accounting practices for. They are designed to:

• Help charity trustees meet their legal requirement for their accounts to give a true and fair view
• Encourage consistency in charity accounting standards
• Give recommendations for charity annual reporting.

All charities must use the SORP to prepare their accounts unless:

•  The trustees have opted to prepare receipts and payments accounts and their charity is a non-company charity which had an income of £250,000 or less in the reporting period
• A more specific SORP applies (such as with the further and higher education sector).

Accounting practices for non-profit organisations are stipulated by SORP FRSSE (for smaller non-profits) or SORP FRS102 (for larger, more complex non-profits).  The regulations are complex; they also differ from the standards established for corporations. For example:

• The key purpose of the SORP accounting format is to give a complete view of the total incoming resources for the year, how they have been expended and the overall financial position at the year end.
• The traditional “Profit and Loss Account” is replaced by “Statement of Financial Activity” (SoFA).
• The structure of the Balance Sheet specified by SORP is similar to the balance sheet structure of a general business, except that the funds of the non-profit, which finance the net assets of the organisation, are split between restricted, unrestricted and designated funds.
•  Other smaller differences apply in special cases, such as the disclosure of heritage assets separately from general fixed assets.

The SoFA is designed to show income from various sources, such as unrestricted and restricted funds. All expenditure during the year should be applied against either restricted funds, unrestricted funds or designated funds. Expenditure is normally accounted for under three main headings:

• Cost of generating funds
• Charitable Activities
• Governance Cost.

Under certain circumstances, funds can be transferred from one category to another. For example from unrestricted funds to cover a deficit on restricted funds. All such transfers must be shown separately on the SoFA.

These SORP accounting standards for non-profit organisations stipulate that non-profits must provide detailed analysis of their income and expenditure activities. Every activity and source of funds must be presented and disclosed. Many non-profit organisations carry out multiple activities, and they must track all these in their accounting procedures.

Many non-profit organisations also need to deal with other more complex accounting requirements, such as gift aid reporting, partially-exempt VAT calculations and multi-entity consolidation (often including trading subsidiaries).

Our Handling SORP  report goes into greater detail on the challenges of SORP for non-profit organisations.

Find out more about Not-for-Profit Accounting Software.