Tim Wyatt is an independent examiner at Wyatt & Co Chartered Accountants. In this blog, Tim shares three of the most common fund accounting mistakes that churches and charities make and gives tips on how to avoid them.
Mistake #1: accounting for income incorrectly
Accounting for income correctly is particularly important for charities with an income of over £250,000. They must account for income following the guidelines set out within the Charities (SORP). SORP stands for ‘Statement of Recommended Practice’.
Common mistakes include:
- Income that is wrongly offset against expenditure (sometimes known as ‘netting off’). For example, if you purchase books which you then sell, both the income and the expenditure relating to the purchase and sale of the books should appear within your accounts.
- Income that is allocated to the wrong financial year. For example, a grant that is awarded upfront is received over multiple financial years.
Income must only be recognised in the accounts of a charity when all of the following criteria are met:
- Entitlement – control over the rights or other access to the economic benefit has passed to the charity.
- Probable – it is more likely than not that the economic benefits associated with the transaction or gift will flow to the charity.
- Measurement – the monetary value or amount of the income can be measured reliably and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
TOP TIP: If you are unsure, you could start by looking at the income accounting policy in your accounts as this should tell you exactly when and how you should be accounting for income. It’s also worth checking that your accounting policy is in line with the Charities SORP guidance. If you are unsure, you should ask your independent examiner for advice.
Mistake #2: using funds incorrectly
Without a good understanding of what fund accounting is, churches and charities often find it hard to:
- Set up needed funds within their accounts correctly.
- Ensure income and expenditure is assigned to the correct fund.
For many churches and charities, most of the income and expenditure takes place within the ‘General’ unrestricted fund. However, if you have restricted income, you must handle it differently, which this blog post explains further.
Common mistakes include:
- Restricted income not being assigned to an appropriate restricted fund.
- Expenditure of a restricted fund not being assigned to that restricted fund.
- Making fund transfers out of restricted funds.
Mistake #3: accounting for assets incorrectly
For people not trained in accountancy, what assets are and how they work within accounting can be confusing. This is partly because the words ‘asset’ and ‘asset register’ are words that also have different ‘non-accounting’ meanings.
Furthermore, if you create accruals-based accounts, you need to account for the assets which you purchase differently than if you create accounts on a receipts and payments basis.
Common mistakes when creating accruals-based accounts include:
- Not capitalising asset purchases that need capitalising. As a result, on the balance sheet, the asset balance is understated.
- Capitalising purchases that don’t need capitalising. As a result, on the balance sheet, the asset balance is overstated.
- Wrongly depreciating assets.
TOP TIP: If you are unsure, look at the asset accounting policy in your accounts. It will tell you how you should be accounting for assets and the threshold your organisation has set for capitalising assets. Or, ask your independent examiner for advice.
ExpensePlus is a fund accounting package that is designed for churches and charities and enables you to track and account for different funds with ease. To find out more, click here.