How to structure your charity’s chart of accounts – part 2

Conducting finances
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Your charity’s Chart of Accounts (COA) is the collective term for your list of nominal ledger accounts, which can be grouped in to certain categories – such as income, expenditure, assets, liabilities and funds – forming the basis for your organisation’s financial reporting.

Last time in How to structure your charity’s chart of accounts Part 1, we looked at how often you might review your COA and hints and tips for a Statement of Financial Activities (SoFA) COA - income and expenditure categories.

Part 2 explores the balance sheet – including:

  • Best practice codes to account for routine transactions such as payroll and timing differences;
  • Accounting for funded capital spend
  • Accounting for transfers between charity funds

Your COA – Balance Sheet headings

Where a charity’s SoFA looks completely different to a typical commercial profit and loss account, a charity’s balance sheet looks similar – with some obvious exceptions, namely heritage assets and funds.

Click here to see the SORP 2015 balance sheet, as extracted from the full SORP (FRS102).

Click here for a downloadable balance sheet COA example.

The file is in an Excel file format for you to download, tailor, and maybe even import to your own accounting system if compatible.

Keep an eye out for next month’s article (Jen’s FAQs) where I tackle common accounting errors around payroll and timing differences, with reference to the COA structure suggested above.

Accounting for funded capital spend

Over the years, I have found that one of the trickiest things for our clients to try and account for, in their management accounts, is funded capital spend - for example, the acquisition of a tangible fixed asset.

Upon receipt of the grant, bookkeeping principles requires us to:

  • Debit bank
  • Credit grant income
  • The grant income temporarily boosts the charity’s surplus for the accounting period.
  • However, upon spending the grant, the bookkeeping would be:
  • Debit tangible fixed assets
  • Credit bank

The problem here is that the grant income is still showing in a charity’s SoFA reports with no subsequent ‘expenditure’ of the grant being matched against that income, due to capital spend being accounted for in the balance sheet and not as a revenue (SoFA) spend. This can cause anomalies in reporting for charities.

For example, in this situation, if SoFA reports are used solely to try and track the balances on unspent funds, the unspent funds could appear overinflated. Alternatively, some charities choose to account for funded capital spend in the SoFA as an expense heading, moving the capital spend to the balance sheet at the end of the year for annual accounts purposes.

Clearly not ideal as there is always need for adjustment and explanation to see the true picture in the charity’s management accounts.

What is needed is a double entry adjustment which recognises that the grant has been spent (in the SoFA reports) at the time that the corresponding asset is acquired.

The simplest way to do this is via a ‘transfer between funds adjustment’ (see below).

Transfers between funds

Another area which poses problems is transfers between charitable funds, the need for which commonly arises from:

  • Capital spend from a grant (above)
  • A deficit on a restricted fund, where a decision has been made to fund from general funds
  • Core cost contributions received as part of a grant where the income has been analysed under a restricted department and that department is now showing a false ‘underspend’

The above examples tend to crop up in planning conversations with our clients, prior to collating the year-end financial statements; “this happened during the year, but we don’t know how to account for it in our software package”.

The simplest way to deal with any of the above is to be clever with your COA and class or department reporting – as follows:

1. Create a new nominal code called “Transfers between funds”

I usually recommend that this should sit below the surplus/deficit line in a charity’s reporting structure so as not to distort performance reporting in each period. Most computerised packages will default to a commercial COA structure and therefore you may find that there is a SoFA COA code for ‘tax’ or ‘other expenditure’, which can be repurposed. It should then get flagged in the right place for reporting purposes.

2. Process a double entry journal:

Debit Transfers between funds £x

Allocate against the class or department that the funds are coming from

Credit Transfers between funds £x

Allocate against the class or department that the funds are going to:

3. Capital spends

Of course, the above journal can sometimes cause confusion when it comes to class, fund or department allocations.

The debit is fine – we know that we want to reduce the ‘pot’ held under a particular restricted fund to demonstrate acquisition of the asset concerned, so therefore we allocate the debit against that restricted fund, reducing the balance unspent accordingly.

The credit however: where should this be allocated to?

There are two possible answers depending upon the original restrictions stipulated by the funder – being:

The restriction of the funds is released once the asset has been acquired.

For example, you received £20,000 for the purchase of a minibus – once purchased you have fulfilled the grant terms and spent that money in accordance with the original restriction. The asset itself (and its ongoing use) is not restricted.

In this situation, the credit moves against general funds.

Total funds held at an accounting period end are analysed across the net assets of a charity and so part of the charity’s general funds now pertain to the asset value on the balance sheet.

The asset acquisition does not release the restriction.

For example, the minibus (above) is acquired yet the funder stipulates that that minibus may only be used within certain projects/activities of the charity. Furthermore, when the asset is sold on or disposed of, any proceeds must be reinvested in a specified manner.

In this situation, the credit moves against a new restricted class/ department (fund) for reporting purposes. Depreciation of the asset each year will also be restricted when expensed to the SoFA and should therefore be allocated against this new fund. 

The balance on this restricted fund at each accounting period end should now correspond to the asset carrying value on the balance sheet and the charity’s fixed asset register.

Remember that your accountant will need to split your total annual depreciation expense (in the SoFA) between restricted and unrestricted funds in the annual accounts, in addition to the asset values.

4. Checks and controls

As you are simply utilising the transfers code as a contra (in and out) account, the balance on this account should always be nil in total when the organisational SoFA is viewed. Any balance on this account should be investigated and resolved as part of the management accounts process.

You will see individual deductions and increases against this line when viewing individual class or department (fund or project) reports, which is precisely what you need. It is only the aggregate balance per the trial balance which needs monitoring.

Keeping on top of transfers between funds throughout your accounting period, rather than leaving it to your accountant at the year end, could make a significant difference to your charity – both in terms of accountancy preparation fees but also to management accounts clarity. After all, decisions made are only ever as good as the information used to make them.

Should you have any queries around how to structure your COA or nominal coding then drop me a line and I’ll be happy to advise.

 

About Jen Gerrard

Jen Gerrard

Jen is a Fellow of the Association of Chartered Certified Accountants (FCCA) and the founder and managing director of Gerrard Financial Consulting, a specialist accounting firm for the charitable sector. She has over 17 years’ experience working in accounting and finance and has also worked as an accountancy tutor for a leading training provider.

Jen has been a trustee of the Southville Community Development Association (2014 to 2017), Self Injury Self Help (SISH) (2013-2016), the Oswestry Food & Drink Festival and Impact AAS (2007 to 2010). In addition to being a current Trustee of Women’s Aid Federation of England, Jen has been a registered volunteer with Volunteer Bristol for four years and is a Member of the ICAEW Charity & Voluntary Sector Specialist Group.

Jen sits on the South West & Wales Regional Engagement Forum of the Charity Finance Group and makes regular contributions to articles in national publications – most recently AccountingWEB and Charity Finance Focus (produced by the CFG). She is also a regular speaker on charity finance and governance matters.

Her firm is a corporate member of the Charity Finance Group and was shortlisted in two categories for the AccountingWEB Practice Excellence Awards 2016. This is in recognition of the company’s innovative work with charities and NFPs to streamline their finance functions through adoption of new technology.

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avatar
08th Nov 2017 15:13

I am not sure that this is a 100% solution, though it's a good start.
When assessing funds available for spending, the 'pot' will include brought forwards funds. So if at the end of the prior year I had £100k sitting in unrestricted funds as cash, I would want to know that this was available for spend in the current year. A P&L report would not include it, and a balance sheet report would include fixed assets which are not available to spend.
The solution may be to have two classes of every fund -
cash and assets. Eg, unrestrictred asset fund / unrestricted cash fund. Then follow the steps above to post your fixed assets.

Thanks (1)
to jeremy28
12th Nov 2017 20:49

Thanks for your comments Jeremy28. You are absolutely right, of course, about the further detail needed around capital v revenue restricted/ unrestricted funds.

I touched upon brought forwards in my Part 1 article in October - https://www.accountingweb.co.uk/business/finance-strategy/how-to-structu....

I always recommend that clients set up fixed asset 'funds' (i.e. departments or classes) - for example 'unrestricted fixed assets' as one fund and each individual restricted fixed asset category separately. That way, you can run income and expenditure reports from the software which show the b/f, the depreciation charge for the period and the c/f - which ties in with the Carrying Value of the asset per the register.

With some clever report tailoring and filtering so as to only include revenue funds - perhaps separating unrestricted and restricted reports - it allows (at a glance) the reader to see the 'free reserves' (i.e. cash) available.

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avatar
09th Nov 2017 16:08

Regret the "Clicks" were not accessible.

Thanks (1)
to nrslater
12th Nov 2017 20:51

nrslater - thank you for noting this - I have asked the team to resolve this for me. In the meantime, if you drop me an email to [email protected] I can send you the files directly, if this would be helpful?

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