Differences between business and charity accounts

Navigating the financial landscape can be complex, especially when it comes to managing accounts for different types of organisation. While both business and charity financial reporting is essential for their respective entities, they serve distinct purposes and operate under different regulations and expectations.

In this article, we delve into the key differences between business and charity accounts.

Charity income is accounted in to more than one pot (restricted, endowment and designated)

The first major difference between business and charity accounting is that accounting for income differs significantly, due to the specific regulatory and reporting requirements charities must adhere to. Charity accounting rules state that income must be categorised into three distinct pots: restricted, endowment, and designated (unrestricted) funds.

Restricted funds: Restricted funds are donations or grants given for a specific purpose, and must be used exclusively for that purpose.

Endowment funds: Endowment funds consist of donations intended to be invested, with only the generated income being used for charitable activities.

Designated funds: Designated funds are portions of unrestricted income that the trustees have earmarked for a specific future project.

Ascertaining the classification of funds as important and can be challenging as there are differing rules regarding how these can be utilised and accounted for. These rules can perhaps be confusing for charity trustees that may be used to the normal profit and loss accounts of a business.

Please visit the government website for more information

Normal accounting standards and principles don’t always apply for charity accounts

In business, you generate money by providing a service or product. However, in charity individuals and businesses will donate money and often expect nothing in return which changes the principles.

Different tax considerations

Charities need to consider their primary purpose as this has direct implications on their tax exemptions. In addition, VAT rules can be complex depending on the source of income.

Read our VAT for charities article for more information.

Different terminology

Business and charity balance sheets tend to look very similar. However, the terminology is different. Whilst the top half of the balance sheet is often the same, the bottom half is balanced by the collective total of funds held by the charity. These are split into unrestricted, restricted and endowment. The supporting notes and accounting policies in the accounts also differ considerably, both in terms of their content and terminology.

Summary

To summarise there are significant differences between business and charity accounts. Including, how income is accounted for, tax considerations and differing terminology to name just a few.

To find more information on charity accounts please visit: https://www.gov.uk/government/collections/charity-accounts-financial-reporting-and-tax

More from our charity experts

You can find all of our latest charity sector news and newsletters here.

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About this Author

Simon Bladen is the partner responsible for looking after the firm’s legal clients and has worked at Hawsons throughout his career. For more information or advice on anything covered in this article, please contact Simon on slb@hawsons.co.uk or 0114 226 7141.[/author_info]