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Jargon busters

Accountants are known for using jargon that many people need to look up in a dictionary before they can reply.

Here is some that are used often and you will come across in charity accounts that have been explained in simple and meaningful words. For answers to other Common Questions please check out the ‘Common Question’ article

Accruals accounts
record the income and expenditure of the charity and the increase or reduction in its assets and liabilities. All income and expenditure relating to the accounting year is taken into account irrespective of the date of payment or receipt. Therefore, accruals accounts are compiled on a ‘true and fair’ basis in accordance with accounting standards and the SORP.

For example, a gas bill may not be paid until after the year end but if the gas was used before the end of the year that bill will be added into the accounts as though it had been paid before.

Balance sheet
is a statement of the assets, liabilities and funds of the charity at the end of the reporting period (accounting period).

Community Interest Company (CIC)
is a limited company which operates as a business to provide a community benefit rather than provide profits for shareholders.

Deferred income
consists of monies received by a Charity but relates to a future period of use. Therefore, deferred income is not recognized in the SoFA until the charity is entitled to the income. Instead, deferred income is shown as a liability in the balance sheet.

For example, a Charity may have received a grant for the year 1 December 2021 to 30 November 2022 but its year-end is the 31 March 2022. In this case, the proportion of the grant relating to the period 1 April 2022 to 30 November 2022 would be deferred into the following financial year. 

Designated fund
is a portion of the unrestricted funds of the reporting charity that has been set aside for a particular purpose by the trustees. For example, an amount of money may be shown as a separate designated fund if the Charity is putting money aside for a specific project in the future. Designated funds continue to count as part of the unrestricted funds of the charity, but the trustees may choose to exclude designated funds from the calculation of the charity’s reserves. The trustees can also decide, at any time, to undesignated the funds.

Endowment funds
are resources received by the charity that represent capital. Endowment funds are required by charity law to be invested or to retain and use it for the charity’s purposes. Hence, the term endowment applies to permanent endowment, where the trustees have no power to convert it into income and apply it, and to expendable endowment where the trustees do have this power.

Funds
is a legal term for the money and other assets held on trust. A fund may be unrestricted and available to apply or spend on any of the purposes of the charity or it may be restricted to a specified purpose or purposes.

Restricted funds may be either endowment or restricted income funds, depending on
the nature of the restriction. Where the fund is not endowment and is held on trust for
spending on specific purposes, it is known as a restricted income fund. Each fund is a
pool of resources that is held and maintained separately from other pools to ensure it is used the way in which the resources were originally received, or the restrictions on that fund, which determine the way, those resources are subsequently to be treated.

Governance costs
are the costs associated with the governance arrangements of the charity. These costs will normally include internal and external audit, legal advice for trustees and costs associated with constitutional and statutory requirements. For example, the cost of trustee meetings and preparing statutory accounts.

Any costs associated with the strategic as opposed to day-to-day management of the charity’s activities are included within governance costs. These costs will include any payments made for trusteeship, the cost of charity employees involved in meetings with trustees and the cost of any administrative support provided to the trustees. 

Related parties
is a term used by the SORP that combines the requirements of charity law, company law and the Financial Reporting Standard for Smaller Entities (the FRSSE). The term is used to identify those persons/entities that are closely connected to the charity or its trustees.

Reserves
are that part of a charities income funds, which are freely available i.e. not restricted or designated in any way.

Restricted funds
may be either endowment or restricted income funds, depending on the nature of the restriction. Where the fund is not an endowment fund and is held on trust for spending on specific purposes, it is known as a restricted income fund.

The resources (the assets and liabilities) of each restricted fund are held and maintained
separately from other funds. This is in recognition of the circumstances in which the
resources were originally received, and/or the restrictions on that fund that determine the way those resources are subsequently to be treated.

Statement of financial activities (SoFA)
shows the charity’s income, expenditure, gains and losses and transfers between funds during the financial year. The statement reconciles total funds brought forward and total funds carried forward at the end of the financial year.

Statement of recommended practice (SORP)
is the official recommendation on the way a charity should report annually on its resources and activities.

Unrestricted fund
It is a legal term for the surplus (unspent income) held by a charity. This is comprised of money and other assets that can be used for any of the charitable aims of the charity. The use of unrestricted funds is not restricted to any particular charitable purpose of the charity.