A Guide to Non-Profit Accounting

Non Profit Organisations are created in order to pursue a goal for a particular cause. In doing so, all the proceeds go towards this cause rather than being paid to shareholders. These organisations rely on funds from membership fees, grants, and fundraising, and all the money made is spent on the running costs to help them achieve the aim of the company.   Whilst some areas of non-profit accounting can be simpler than a for-profit organisation it can still be challenging.

There are several things charities, community groups, and other non-profit organisations must consider and adhere to when completing their bookkeeping.

Types of Non-Profit

Charities

When it comes to non-profits, charities are the first thing you think of, however, they are not the only type of non-profit organisation out there. If a company is a charity or a community group then they will have to keep accurate accounting records regardless of their size and income. Receipts and grant records are just some of the items that will need to be kept to prepare annual accounts.

If a charity earns more than £5000 per year, they have a legal obligation to become registered with the Charity Commission. In addition to this, a trustee’s annual report will need to be created and produced when requested.

If a charity earns more than £1000 per year, it will need to submit an Annual Return to the Charity Commission within 10 months after the end of the previous financial year.

Larger charities that earn more than £1million per year will need to carry out an audit. If the income is less than this, an independent examination will be acceptable.

Social Enterprises

Different from charities, social enterprises can include co-operatives, housing associations, and more. These are all businesses that make money by selling goods and services and then have the profits from the enterprise reinvested into the business and/or the local community. What makes them different from a charity is the fact that social enterprises can be owned and run by paid employees.

What financial legislation do Non-profits require?

Non-profit businesses need to prepare the following:

• A set of accounts
• An annual return
• A Trustees’ annual report

All three of these documents ensure that people have a thorough understanding of what the non-profit does and what they are trying to achieve. It needs to be visible how the enterprise is performing financially to ensure that the money is being reinvested into the business and helping with the running costs rather than going anywhere else.

All accounting records for non-profits (such as invoices, receipts, Gift Aid information, etc) must be kept ideally for 6 years and be available for the public if and when requested.

Whilst it may be time-consuming to create these documents, having them up to date not only provides clarity for the public but they can also be used internally to gain more funding and help the enterprise run more effectively, efficiently, and used to plan.

Tax Exemptions for Non- Profits

One of the benefits of being a UK-registered non-profit organisation is the fact that there are several tax reliefs and exemptions that can apply.

To start with, non-profits and charities are exempt from having to pay Corporation tax. The Trustees are also exempt from paying income tax on the money they have invested in the organisation. In order to benefit from this, the non-profit must be recognised by the HMRC. Fortunately, this is relatively easy to do and just involves filling out the relevant form.

Gift Aid is also available for non-profits which means that tax can be claimed back from bank interest or donations.

What taxes apply to non-profits?

There are some instances where tax will still need to be paid. For example, if some of the income is not directly related to the charity. These expenses are known as non-charitable expenditures. If your charity is a limited company then a Company tax return will be required. If the non-profit is a trust, then a Trust and Estate Self Assessment tax return will be needed instead.

Non-Profit Accounting Software

As with most business sectors and industries, non-profit organisations can also benefit greatly from using accounting software and there are tools that can specifically help these types of businesses. Non-profit accounting can be tricky and accounting software is here to help.

Not only can non-profit accounting software help keep all the required records organised and together in one place, but it is also great for knowing what the income and expenditure are each month in real-time. The software can predict cash flow and help you forward plan which is vital for all companies but especially non-profits that rely so heavily on donations.

Having specific software capable to deal with non-profits will also allow you to monitor contributions and donations from any grants and fundraising. Whilst also helping you plan future initiatives for the charity.

What is the difference between non-profit and for-profit accounting?

Whilst there are a lot of similarities between the two types of organisations there are some subtle differences that non-profits should be aware of.

For-profit organisations will need to provide a balance sheet which states the net equity for owners and shareholders. Non-profits on the other hand do not need to do this due to having no shareholders. Instead, a financial statement will need to be produced to show their assets and financial position.

When companies are trying to generate profits, they produce income statements that show the revenue, expenses, gains, and losses. As a non-profit does not have a bottom line and is intentionally not aiming for profit, they need to instead produce a detailed statement of activities that outlines the revenue and expenses of each initiative they are running.

One of the key similarities between both types of organisation is the need to produce cash flow statements. It is vital for all businesses to ensure their expenditure does not repeatedly exceed its income and therefore this needs to be updated regularly to ensure the business remains viable.

As this article suggests, there are several things that non-profits must do when preparing their accounts. In addition to this, there are exemptions and tax relief opportunities that should be used when aiming for the most efficient tax planning. If you run a non-profit and need help with accounting or business advice, then please get in touch. We have an experienced team who will be able to help.