An essential guide to accounting for non-profit organisations
Artwork by Sara Regal
A non-profit organisation has aims other than profit, such as social, cultural, philanthropic welfare. They do not possess external shareholders who provide capital, they source finance through charitable donations. If you are a member of a non-profit organisation, then you must be aware that it will be eligible for tax exemptions.
Accounting
Accounting for non-profit organisations must take place when there are any monetary transactions. This needs to be recorded as non-profit organisations are answerable to society for such money collected and spent by them.
Why should non-profit organisations maintain accounts?
· To avoid malpractice and misappropriation
· Have control over monetary transactions
· To comply with provisions of laws applicable
· To know the net worth of the organisation
· To know the source of incomes and heads of expenditure
· To know the surplus or deficit of the organisation during a particular period
Financial statements for non-profit organisations
Income and Expenditure:
This account records any income and expenditure, whether it is received or not. The result of the Income and Expenditure account will be a surplus (if income is greater than expenses) or deficit (if expenditures exceed income) rather than profit or loss.
If surplus, this will be carried forward as capital into the organisation, used for the welfare of the society.
Balance Sheet:
Similarly, to a for-profit organisation, a non-profit organisation will require a balance sheet, displaying the assets and liabilities of the organisation.
However, as there are no owners of the organisation, there will be no owner’s equity, and therefore the accounting equation for a non-profit organisation is as follows:
Net Assets= Assets-Liabilities
A non-profit organisation balance sheet has capital fund (amount contributed by its members) rather than the owner’s capital. Other funds may be found on the balance sheet, such as charity fund, prize fund etc.
Receipts and Payments Account:
This is a summary of all cash and bank transactions. It records all receipt revenue and capital receipts.
Capital Receipts and Expenditure
Capital Receipts and Expenditures are non-recurring and do not form part of the regular flow of the organisation. These are expenses and revenues which occur rarely and are long-term. For non-profit organisations, these may include
· Life membership fees
· Donations
· Sale of fixed assets
· Purchase of assets
· Investments made
Revenue Receipts and Expenditure
Revenue receipts and expenditures are recurring and are part of the regular flow of the organisation. These occur regularly and are usually short term. For a non-profit organisation, these may include:
· Subscriptions received
· Rent received
· Interest on investment received
· Wages and salaries
· Electricity expenses etc.
Trustees' Annual Report
As a non-profit organisation, you must file a trustees’ annual report. This contains information about the charity, how it is run, its achievements and activities and helps to explain the numbers in the corresponding accounts.
The sole purpose of the trustees’ annual report is to ensure that the charity is accountable to stakeholders for any funds received and spent.
The trustees’ annual report explains its outputs, outcomes and its impacts and benefits.
You will need to complete a trustees’ annual report if the charity’s income is below £500,000[3]. The report should include:
· Charity name, registration, address, and names of trustees
· Structure of the organisation and how it is managed
· Activities and objectives in the year
· Achievements and performance in the year (including reporting on its public benefit)
· Financial review including any debts, details of reserves policy (if necessary)
· Details of any fund held as a custodian trustee
For a large charity, income above £500,000, a full report needs to be prepared, following the Statement of Recommended Practice (SORP).
Tax for non-profit organisations
Your non-profit organisation may have to pay tax if you have received income that does not qualify for tax relief and/or income has been spent on non-charitable purposes. Therefore, non-profit organisations pay tax on:
· Dividends received from UK companies
· Profits from developing property
· Purchases (VAT rules for non-profit organisations apply)
· Business rates in non-domestic buildings (80% discount applies)
Tax exemptions for non-profit organisations
As a non-profit organisation, you do not need to pay tax on your charitable expenditure – the income and gains you utilise for charitable purposes. This includes:
· Donations (Gift Aid)
· Profits from trading (if applicable)
· Rental or investment income (bank interest)
· Profits when you sell an asset (property)
· When you buy property
VAT for non-profit organisations
As a non-profit organisation, registering for VAT is the same as a for-profit organisation; you must register for VAT if your taxable turnover is above the threshold (£85,000).
To claim VAT relief as a non-profit organisation, you must give your supplier evidence that you are not for profit, for example, your Charity Commission Registration Number
If you are VAT registered, you are required to send a return every three months.
As a non-profit organisation, you will pay VAT on goods and services bought from a VAT registered business. VAT registered businesses can sell particular goods and services at reduced or the zero VAT rate.