A Plain English Guide for UK Charities 

I’ve been running charities for over two decades now, chairing trustees’ meetings across the UK in boardrooms big and small. From grassroots organisations to multi-million-pound national charities. Time and time again I’ve sat in rooms full of dedicated, intelligent trustees watching eyes glaze over whenever SORP is mentioned. Passionate people who run businesses, employ staff and make tough calls every day struggle to make heads or tails of charity accounts.

It doesn’t have to be like this. Charity accounting does follow some unusual rules but at its heart it makes sense if you know how and why they exist. In this guide I explain SORP FRS 102, what trustees need to know about it and include tools you can use to help you perform your financial oversight role effectively.

What is SORP? 

SORP stands for Statement of Recommended Practice. In this context it refers to the SORP which applies when charities prepare their accounts under Financial Reporting Standard 102, known as SORP FRS 102.

But before we get into SORP itself, why can’t charities just use normal commercial accounting practices? Why is charity accounting so different? Let’s start with that. 

Why can’t charities just use commercial accounting practices?

Simply: because they’re not commercial organisations. The key difference between a charity and a profit-making business is purpose. A business exists to make a profit for its owners. A charity exists to deliver public benefit. 

This difference matters when it comes to accounting because it changes the questions that stakeholders will ask about your organisation’s finances.

If I look at your business accounts I want to know: “is this a profitable company? How much profit will I get from my shares?”

If I look at your charity accounts I want to know: “how is this organisation stewarding its funds? How much of my donation will go directly to supporting beneficiaries? Is this charity financially sustainable?” 

These are fundamentally different questions which require different approaches to financial reporting. That’s where SORP comes in. 

SORP FRS 102 tells charities how to report their finances so that users of accounts get a clear picture of how a charity receives money, any conditions which are attached to that money and how it spends money to support its charitable objects.

Fund accounting explained 

Fund accounting is the fundamental difference between commercial accounting and charity accounting. If you’ve ever struggled to understand charity finances it’s probably because this concept tripped you up. So let’s spend some time on it. 

In commercial accounting all of the money belongs to the company. If the company makes a profit, that can be distributed to shareholders (or owners) or reinvested in the business at the directors’ discretion.

Charity accounting is different. Different pots of money (which accountants call ‘ funds ’) can have different rules about how they can be spent. Fund accounting allows charities to track these separate pots of money to ensure that they are spent in accordance with donor requirements and restrictions.

Unrestricted funds 

As the name suggests, unrestricted funds are funds that trustees can use for any lawful purpose that supports the charity’s objects. They’re most similar in concept to profit in a commercial business.

Unrestricted income might include unrestricted donations, trading income, investment income or unrestricted grants.

Unrestricted funds are used to run the organisation; they can be drawn upon to cover core operating costs including staffing, premises and fundraising. They’re often used to cover ‘overheads’ – the proportion of the charity’s budget that isn’t spent directly on delivering its charitable activities but supports the organisation’s ability to do so.

A healthy cushion of unrestricted funds allows your organisation to plan for long-term growth and invest in its infrastructure. Charities that fail to hold sufficient unrestricted reserves are always going to struggle, dragged ever onwards from one restricted grant to the next.

As a trustee you should be asking at every board meeting:

Do we have enough unrestricted reserves? 

Are we taking steps to build organisational sustainability, or are we totally reliant on restricted income?

Restricted funds 

Restricted funds are… well, restricted. Somebody gives your charity money for a specific purpose and you’re legally obliged to use it for that purpose.

For example, you may receive a £10,000 donation from a benefactor “for youth mental health projects in Manchester”. Or you may be awarded a grant from a grant-maker “to run an employability programme for care leavers over two years.”

Fund accounting means that donation or grant becomes its own fund. That £10,000 and its associated restrictions – income and expenditure – are tracked separately to the rest of your finances. If you receive three restricted grants to run three separate projects you’re essentially running three separate charities inside your organisation.

This is why so many UK charities use purpose-built finance software for charities – because when you’re managing multiple restricted funds, spreadsheets don’t allow you to keep on top of things!

Restricted funds are troublesome because rarely will anyone pay you enough to cover full cost. At best a grant will cover the project worker’s salary but what about HR time to recruit them, the office costs to employ them, the IT system they’ll use, the management oversight? Restricted income rarely covers full cost so successful charities will always have strategies in place to grow unrestricted income to support their infrastructure.

As a trustee looking at restricted funds you should ask:

Are we sure we’re tracking all of our restrictions accurately?

Do we have adequate systems and controls in place to ensure we can only spend restricted income on its specific purposes?

Are we sub-consciously subsidising restricted projects from unrestricted income?

Endowed funds 

These are funds where the capital must be maintained – they’re meant to keep coming back year after year. There are two types of endowed funds: permanent endowments where you can only spend the investment income (known as the ‘capital sum’ remaining ‘endowed’) and expendable endowments where the trustees can decide to ‘break the endowment’ (turn capital into income) if they choose to.

Endowments are relatively rare in smaller charities but you’ll see them across universities, schools and hospitals. They’re also common in older charities where estates have been donated in years gone by.

The key trustee question here is to ensure endowed capital is invested responsibly so that it grows (or at least maintains its value) whilst minimising risk to the organisation. You should also ensure any spending restrictions attached to investment income are understood and adhered to.

If your charity holds endowed funds you should have an investment policy agreed by trustees, regularly review investment performance and have solid processes in place to track which of your income is from endowed funds vs other sources.

The Statement of Financial Activities 

The SOFA is the statement that charity accountants promise you at the beginning of the financial year and steal from your desk at the AGM. Officially known as the Statement of Financial Activities, it’s the charity accounting version of the profit and loss account. But unlike a profit and loss account it gives you a much more detailed insight into your organisation’s financial performance.

Let’s look at a simple SOFA below: 

Instead of showing just income minus expenditure equals profit, the SOFA breaks income and expenditure down across your different fund types.

In the example above you can see our unrestricted funds growing over the year, our restricted funds decreasing (we’ve spent some restricted income!) and our endowed funds remaining steady. You’ll also notice that fundraising expenditure is shown separately from charitable expenditure.

Reading a SOFA 

When I review a SOFA I like to look at a few key questions:

Income:

Where does our income come from?

Are we too reliant on one or two sources? Is our income growing, steady or falling year on year?

SORP requires charities to break their income into several categories – donations and legacies, charitable activities, trading activities, investments etc – which makes it easy to see our funding mix at a glance.

Expenditure on charitable activities vs fundraising:

How much are we spending directly on our charitable activities vs how much are we spending raising funds and managing the governance of our organisation?

This is the question donors care about most – “how much of my pound is actually reaching the people I care about?”

There’s no magic ratio but you should understand your cost structure and be able to explain and justify it. For some charities 25% spending on fundraising may be totally appropriate – if you’re investing to build long-term relationships with donors it makes sense your fundraising expenditure will be higher.

But for a charity dependent on grants to deliver its services, spending 25% of its budget on fundraising is a massive red flag.

Transfers between funds: Occasionally you’ll need to move money between fund categories – for example spending unrestricted income to cover the full costs of a restricted project.

Or you may receive a grant which you’ve restricted in your accounting system for a specific project but now that project is finished you want to release the remaining restricted funds for future use.

All of these transfers need to be clearly evidenced and authorised. As a trustee any significant transfers should raise questions – “why do we need to do this? Is this legally permissible? What are the implications?” 

Net movement in funds: Finally, look at the bottom line of the SOFA. Has each fund type increased or decreased over the year?

You’d expect restricted funds to fluctuate significantly from year to year as grants are spent. Unrestricted reserves should (hopefully!) increase year-on-year as your organisation builds resilience and plans for the future.

If you’re seeing a year on year decline in unrestricted reserves that should set alarm bells ringing.

How does a SOFA differ from commercial accounting?

The big difference is that a SOFA doesn’t really have a bottom line like a commercial accounts profit and loss. You won’t see a single surplus or deficit figure for the year because you have multiple funds that serve different purposes. You may have a surplus in unrestricted funds (great – growing your reserves!) and be drawing down restricted funds (also great – spending grant income!) all whilst maintaining your endowed funds at the same level (also good – you’re not touching that capital! ). 

Fund accounting exists for this very reason – to show that money came in, money went out and it all went where it was supposed to!

An Overview of Financial Statements + FAQs for Trustees

Context summary: After working for two UK charities and founding a charity software company, I’ve worked on charity accounts of every size. Now I help trustees understand their charity’s financial statements. These FAQs cover common trustee financial topics, to help you fulfill your role with confidence.

The SOFA shows income and expenditure over the year. The balance sheet shows your charity’s financial position at a point in time. Assets, liabilities and net assets are split into each fund type.

The balance sheet should answer questions such as: “Can we pay our bills? Are we solvent? Do we have enough reserves?” You should be able to explain the significant assets (eg our building, investments or major debtors) and liabilities (loans, pension deficit, lease obligations).

The totals in the fund columns of the balance sheet should tie to your SOFA. For example if your SOFA shows your restricted funds increased by £50,000 over the year then your balance sheet should show £50,000 more restricted fund balances than last year. This helps to assure you the accounts tell the same story.

Practical tips: what should trustees look for in audited accounts?

You should not be checking every transaction, recalculating every figure or tracing every footnote when your audited accounts land on your desk for trustee approval. That is what you pay the auditor to do. But there are things YOU should be checking when you approve your charity’s accounts. Here is my checklist: 

Before your accounts arrive: 

Do you understand how the audit will be conducted? Have you received regular management reports throughout the year? Have any concerns been raised? Has your treasurer or finance team given you a “pre-audit briefing”?

Do you know your charity’s financial story? What were the key financial events during the year? Did you receive any large grants? Did you complete any major projects? Were there any significant expenses? Your charity’s story should be told through the accounts.

Check the trustees’ annual report 

Included with your accounts will be your trustees annual report. This report is important too! It should explain your charity’s purpose, what you did, your achievements and your financial performance, using plain English. As trustees you are jointly and severally liable for the contents of this report. Does it sound right? Does it explain financial performance? Would a donor or beneficiary understand what you do, and how you performed?

Check the accounts themselves 

Look at the auditor’s opinion First off, the audit opinion should be unqualified with no wording other than an opinion that the accounts give a true and fair view. Any qualification, emphasis of matter or other modification to the audit opinion should be queried and explained.

Review the SOFA Do the income and expenditure figures make sense given what you know happened during the year? Are there any unexpected surpluses or deficits in the funds? Can you explain the change in each fund type from last year?

Check the balance sheet Do you have expected levels of reserves? Can you explain all the significant assets and liabilities? Are we solvent with enough working capital to operate?

Read the notes Your attention should now turn to the notes to the accounts. Look out for: 

• Accounting policies. Are they appropriate and applied consistently? 
• Related party transactions. Are all trustee expenses and any other payments to connected parties clearly disclosed?
• Commitments and contingencies. What does the charity have hanging over it?
• Post balance sheet events. Has anything significant happened since year end we should know about?
• Going concern. Has the auditor identified any matters which cause them to doubt the charity can continue?

Questions to ask as trustee 

Trustees should be comfortable asking questions. Even if you feel it is a ‘stupid question’, it could have been asked by another trustee. Some good questions I’ve heard trustees ask: 

“Restricted funds have gone down by £X – but we received a large grant this year. What happened?” 

“Income from fundraising increased but as a % of income it went down – why is that?”

“What is our cash position now compared to the balance sheet?”

“Are we on track budget wise for this year?”

“Do we have enough reserves?” 

Tools Trustee Boards Can Use to Improve Financial Oversight

Quarterly financial review checklist 

• Review management accounts against budget – actual vs budget income and expenditure
• Check cashflow and bank balances 
• Review any restricted fund balances and project progress
• Review progress against fundraising targets 
• Review variances from budget – what is the explanation for any big movements?
• Confirm organisation can meet obligations for next quarter

Annual accounts approval checklist 

• Receive accounts and trustees’ report at least one week before the meeting to approve them
• Receive a briefing from treasurer or finance lead on key points to note
• Review the audit opinion and any recommendations made by the auditor
• Check the SOFA tells the story you expect – does income and expenditure breakdown make sense?
• Check the balance sheet – do you have adequate reserves? Is the organisation solvent? 
• Read ALL the notes to the accounts. Pay particular attention to related parties and commitments.
• Read the trustees’ report. Does it accurately describe what the charity has achieved during the year?
• Are you happy the accounting policies are appropriate?
• Ask questions about anything you don’t understand or expect
• Formal approval of the accounts and trustees’ report by way of a trustee board resolution

Review reserves policy checklist (annually) 

• Calculate current level of reserves (months of spend)
• Understand risks facing the organisation (income volatility, contractual commitments etc)
• Identify appropriate range of reserves given risks 
• If outside target range, create plan to build/deploy reserves to bring within appropriate range
• Document reserves policy in trustees’ report 
• Understand any designated funds (unrestricted funds that we have set aside for a specific purpose)

Systems and software to support financial management 

You cannot run a modern charity on spreadsheets forever. Even if you start that way, you will quickly outgrow them. Choose an effective UK charity CRM that will integrate with your accounting software to help you:

Track donors and relationships 

Fund accounting – keep multiple restricted funds with separate incomes, expenditures and fund balances.

Generate SOFA reports – native SORP compliant reporting? Or are you going to be building SOFA from raw data every year?

Share data seamlessly between your non profit CRM and accounting software. No more double-entry! 

Give trustees appropriate remote access to financial reports. Look for board portals or cloud-based systems. 

Audit trail – can you see who entered or amended a transaction? The auditor will want to know. 

As trustee responsible for finance, invest time in understanding what is available and how technology can support you. Software is not a luxury, it’s an essential tool that will allow you to report accurately, save time and support trustee oversight.

Common trust feeder projects (mistakes) and how to avoid them

I’ve worked in enough charities over the last 20 years to see most of the mistakes made before me. I wanted to capture some of the most common ones here to help you avoid them too:

Running inadequate reserves 

The classic British charity mistake. Funding is spent as it’s received with little or no unrestricted reserves held. Revenue dips, unforeseen costs or investment in development and growth are impossible. Result – fragile charities that constantly live hand to mouth with no resilience. Solution: Set a reserves policy and stick to it.

Poor restricted fund management 

Don’t be that charity! Accurate tracking of restrictions is a legal requirement. Freedom of information requests, inaccurate spending of restricted funds and consequential claims against trustees have happened. Solution: Use systems that allow you to record and report restrictions. Refresh treasurer and trustee knowledge on restrictions. Regular reconciliation of fund balances. 

Overtrading on restricted income 

Taking on restricted projects that do not cover your full costs is robbing your unrestricted reserves. Solution: Know your full cost to deliver a service and develop recovery policies. Try to negotiate grants that at least cover costs.

Trustees lack financial literacy 

If trustees don’t understand the accounts they signed up to oversee, they can’t give proper governance. Solution: Invest in trustee training. Have a culture where questions are encouraged. 

Weak financial controls 

Whilst it’s fine for very small charities to be informal, at what point do you put controls in place? Who authorises what? Who can spend what? Is there any segregation of duties? Basic safeguards should be in place to prevent fraud and promote good governance. Solution: implement the below minimum controls: 

Segregation of duties – Whoever enters transactions should not be the same person approving them.

Authorisation limits – Job descriptions should outline what each trustee and employee can authorise.

Regular reconciliations – Bank accounts, credit cards should be reconciled by someone other than the account holder.

Conclusion: Financial leadership is stewardship 

My number one tip for getting to grips with SORP FRS 102 and charity accounting? Don’t worry about getting bogged down in detail to become a technical accounting expert. Instead focus on learning enough about your charity’s finances to know that you’re fulfilling your responsibilities as a trustee to make sure that your charity is using its resources appropriately and delivering the greatest possible amount of public benefit.

Why? Because SORP and the guidance around it – fund accounting, the SOFA, the comprehensive reporting guidance etc – are all there to help you be a better steward of your charity. They ensure your charity is transparent about how it uses its resources; that it can be held to account; that it can demonstrate to donors, beneficiaries and regulators alike that it is delivering impact.

That’s my twenty-three years of experience talking to you: learn about your charity finances. Ask questions. Don’t be afraid to challenge. Make sure you have the systems in place and the right skills at the top of your charity to manage your finances well. Take enough interest in your accounts to review them and not just sign off on them blindly. Financial management is not ‘done to’ your charity – it is part of how your charity achieves its purpose.

Trustees that take their financial responsibilities seriously will deliver far more public benefit than charities who are constantly firefighting crises or ‘letting their finances run on autopilot’. By taking a proactive interest in how your charity manages its money, builds appropriate reserves and deploys its resources strategically you can ensure that your charity falls into the former category. Use SORP’s reporting framework to demonstrate your charity is being accountable, and focus on what you do best – achieving your charitable purpose.