Does my charity need to follow SORP?

It depends on your size and how you keep your accounts. Charities that prepare accruals accounts must follow the Charities SORP. Smaller unincorporated charities below the income threshold can usually prepare simpler receipts and payments accounts and are not required to apply the full SORP, though many still follow its principles. Charitable companies must prepare accruals accounts and therefore apply the SORP.

What is the difference between receipts and payments and accruals accounting?

Receipts and payments accounting simply records money in and money out as it happens, which is straightforward but incomplete. Accruals accounting recognises income and costs when they are earned or incurred, not just when cash moves, and includes assets and liabilities. Accruals gives a truer picture of financial position, which is why the SORP is built around it.

What does the Charities SORP cover?

The SORP sets out how charities should recognise income and expenditure, account for different fund types, value assets, and present the trustees annual report and accounts. It exists to make charity accounts consistent and comparable, so a funder or regulator reading two sets of charity accounts can understand them on the same basis.

Charity SORP Accounting: What It Is and Who Follows It

The Charities SORP is the framework that governs how charities prepare their accounts. What it is, who has to follow it, how accruals accounting differs from receipts and payments, and what the latest edition changes.

SORP is one of those acronyms that appears in trustee meetings, gets nodded at, and is rarely explained. It stands for Statement of Recommended Practice, and for charities it is the framework that decides how your accounts are put together. Trustees do not need to be able to apply it line by line, but they do need to understand what it is, whether it applies to their charity, and why it matters. This guide provides that, without the jargon.

What the Charities SORP actually is

The Charities SORP is a set of rules that sits on top of the general UK accounting standards and adapts them to the way charities work. General accounting standards are written mainly for businesses, and charities are different in important ways: they hold restricted funds that can only be spent on particular purposes, they receive donations rather than earn all their income, and they exist to deliver public benefit rather than profit. The SORP translates the accounting rules into a form that captures those differences.

Its purpose is consistency. When every charity following the SORP prepares its accounts on the same basis, a funder, regulator or member of the public can pick up two different charities accounts and read them the same way. Without it, every charity would present its finances however it liked, and comparison would be impossible.

Who has to follow it

Whether the SORP applies to your charity comes down to how you prepare your accounts, which in turn depends largely on your size and structure. The key distinction is between two ways of doing accounts.

Charities that prepare accruals accounts must follow the SORP. This includes all charitable companies, and unincorporated charities above the income threshold at which accruals accounting becomes required.
Smaller unincorporated charities below that threshold can usually prepare simpler receipts and payments accounts, and are not required to apply the full SORP.

So a small volunteer-run charity with modest income and no company structure may legitimately keep simple accounts. A charitable company, or any charity above the threshold, will be applying the SORP whether the trustees have heard of it or not. If you are unsure which camp you are in, your income figure and your legal structure are the two things to check first.

Receipts and payments versus accruals

To understand why the SORP matters, you need to understand the two accounting bases, because the SORP is built around the more demanding one.

Receipts and payments

This is the simple approach. You record money as it comes in and as it goes out, and that is essentially it. It is easy to keep and easy to read, and for a small charity with straightforward finances it is perfectly adequate. Its weakness is that it only shows cash movement. It does not show money you are owed, bills you have not yet paid, or the value of assets you hold, so it can flatter or mislead about your true position.

Accruals

Accruals accounting recognises income when it is earned and costs when they are incurred, regardless of when the cash actually moves. It brings in assets and liabilities, so the accounts show what the charity owns and owes, not just what passed through the bank. It is more work and usually needs professional help, but it gives a far truer picture of financial health, which is exactly why the SORP requires it for anything but the smallest charities.

Receipts and payments tells you what moved through the bank. Accruals tells you what the charity is actually worth and actually owes. The SORP exists to make sure the second question gets answered.

How the SORP handles funds

One of the most important things the SORP does is require charities to account clearly for different types of fund. This is where charity accounting genuinely differs from business accounting, and where trustees most often get caught out.

Unrestricted funds, which the charity can spend on any of its purposes.
Restricted funds, which a donor or funder has said can only be used for a specific purpose.
Endowment funds, where the capital must be retained and only the income, or a defined portion, can be spent.

The SORP requires these to be shown separately, so that anyone reading the accounts can see that restricted money has been used only for its intended purpose. A charity that spends restricted funds on general running costs has committed a serious breach, and clear fund accounting is what makes that visible rather than hidden.

Keeping up with changes

The SORP is reviewed and updated periodically to keep pace with the underlying accounting standards and with how the sector operates. A new edition changes some of the detail of how income is recognised, how the report is structured, and what disclosures are expected, and it typically applies to accounting periods beginning on or after a set date. The practical point for trustees is simple: if your accounts are prepared on an accruals basis, make sure whoever prepares them is working to the current edition, and ask them to explain in plain terms anything the latest version changes for you.

What trustees actually need to do

You do not need to master the SORP. You need to do three things. First, know whether it applies to your charity, which comes down to your size and structure. Second, make sure the people preparing your accounts, whether an in-house finance person or an external accountant, are competent and current. Third, be able to read the resulting accounts well enough to ask sensible questions, particularly about reserves and restricted funds. Get those three right and the SORP stops being an intimidating acronym and becomes what it is meant to be: the reason your accounts can be trusted.