Charity Finance Fundamentals: Receipts to SORP

Many small charity founders treat accounts as a compliance burden. They hand a shoebox of receipts to a volunteer accountant once a year and hope for the best. Better charities use accounts as a management tool.

This guide walks through what charities actually need to know about money: how to record it, how to report it, and how to use accounts to make better decisions.

Three accounting methods and when to use each

1. Cash book (for brand-new charities, first year only)

Record every cash in and out in a spreadsheet. No advanced concepts. Works fine for turnover under £10k and only for year one.

2. Receipts & Payments (small charities, under £25k typically)

An evolution of the cash book. You still only record cash, but you organize it by category: fundraising income, grants, donations, salaries, rent, supplies, etc. At the end of the year you produce a receipts and payments account-a simple one-page summary of cash in and cash out.

Pros: simple, easy to audit, no bookkeeping expertise needed.

Cons: does not show the full picture if you have outstanding invoices or bills owed.

3. Accruals Accounting (medium charities onwards)

You record income when it is earned, not when the cheque arrives. You record expenses when they are incurred, not when you pay. This is more complex but gives a true financial picture.

Example: You invoice a trust for a grant in December but do not receive payment until February. Under receipts and payments, the income does not show until February. Under accruals, it shows in December (when the invoice was sent), which is more honest about that year's performance.

When turnover exceeds £25k, most funders and the Charity Commission expect accruals accounts.

Restricted vs unrestricted funds

This is critical. Money the charity receives often comes with conditions. A donor gives £5k "for the youth programme only." A trust awards £20k "for staff salaries for 18 months." This is restricted money.

Money with no conditions is unrestricted. You can spend it on whatever the charity needs most.

Your accounts must show both, separately.

Why this matters

• Restricted money can only be spent on its designated purpose. If you spend restricted money on something else, that is a breach of trust.
• Trustees need to know: how much restricted money do we have, and when does it run out? If you have £50k restricted money but only £5k unrestricted, you are in a tight spot.
• Funders reading your accounts want to see you have enough unrestricted funds (usually 3 months of running costs minimum).

Building a simple charity budget

A good budget is just a forecast of cash in and out over the next year. You need:

1. Revenue line by line: grants, donations, earned income, etc.
2. Costs by department (or by function if you are small).
3. A monthly column showing when money comes in and goes out.
4. A running cash balance: at the end of each month, how much cash will you have left?

Use this budget to answer: If income drops 20%, can we still run? Do we need to cut costs? Can we save some money for a rainy day?

Restricted funds: managing the complexity

As charities grow, restricted money becomes a real headache. You might have 10 different grants, each with different rules about what can be spent and when.

The answer is a restricted funds register:

• List each restricted fund.
• Record the purpose, the amount, and when it expires.
• Track how much has been spent and how much is left.
• At each board meeting, review which funds are about to expire.

Without this, you will spend restricted money on the wrong thing and have to pay it back.

SORP accounts: what you actually need to know

SORP (Statement of Recommended Practice for charities) is the Charity Commission's rulebook for how charities present accounts. SORP accounts are mandatory if you have a full audit; recommended if you have an independent examination.

A SORP account includes:

• Statement of financial activities (SoFA): a detailed income and expense statement, showing restricted and unrestricted funds separately.
• Balance sheet: what you own, what you owe, and the difference (your fund balance).
• Cash flow statement: where cash came in and went.
• Notes: the details behind the numbers.

You do not need to build this yourself. Your accountant or an independent examiner builds it from your records. Your job is to have good records so they can do their job.

Independent examination vs audit

Once turnover exceeds £25k, you need either an independent examination or a full audit. Here are the differences:

Independent examination

• Less rigorous: the examiner reviews your records and accounts for obvious errors or breaches.
• Cheaper: usually £800-£2,500 depending on complexity.
• Faster: 2-4 weeks.
• Who does it: an accountant or bookkeeper, does not need to be a qualified auditor.

Full audit

• More rigorous: the auditor confirms the accounts are true and fair with high confidence.
• More expensive: £2,000-£10,000+.
• Takes longer: 4-8 weeks.
• Who does it: a qualified auditor (usually chartered accountant).
• Required if: turnover exceeds £500k OR if major funders require it.

For most charities in the £25k-£500k range, an independent examination is the right choice.

Month-end close: a discipline that saves headaches

Get into the habit of closing the books every month. This means: reconcile the bank statement, record any outstanding invoices or bills, and produce a one-page summary of cash, income, and costs.

This takes 30 minutes for a small charity but catches errors early and lets the board make informed decisions based on fresh data.

Charity accounts are not just for compliance. They are a management tool. Use them.

Common finance mistakes in charities

• <strong>No cash reserve.</strong> Charities need 3 months of running costs set aside for emergencies. If you do not have this, one lost grant can shut you down.
• <strong>Restricted money treated as free.</strong> Not tracking restrictions leads to breach-of-trust accusations and funder clawback.
• <strong>No regular reconciliation.</strong> Accounts that are never reconciled to the bank can hide fraud or simple errors until audit time, when it is too late.
• <strong>Mixing charity and personal finances.</strong> If the treasurer uses a personal account for charity business, tax and audit becomes a nightmare.
• <strong>Budget ignored.</strong> A budget that is not reviewed monthly is just paperwork. Compare actuals to budget every month and adjust if needed.

When to move from simple to SORP accounts

As your charity grows, so does the accounting burden. Move to SORP accounts when:

• Turnover exceeds £25k.
• You have multiple funding streams or restricted funds.
• You employ staff and need payroll controls.
• Funders ask for SORP accounts.

The closing principle

Charity accounts reflect trust. Keep them honest, keep them current, and use them to run the charity better.

This guide is part of our Charity Finance hub, where you can explore every practical guide in this area.