Non-Profit Accounting: What You Need To Know

Non-profit organisations are created to help fund social, educational, religious, cultural, or other charitable activities. While some non-profits might offer products or services to generate revenue to supply these activities, most of the funding comes through donations, grants, membership fees, and fundraising events. Instead of hiring employees, they often rely on the support of volunteers and donors. 

However, just like any other organisation or business, non-profits need a way to control their finances, too. That’s where accounting services come into play. But what does not for profit accounting involve, and how important is it? Here’s everything you need to know in this seamless guide. 

What is non-profit accounting?

Non-profit accounting works in the same way as any other form of accounting. It involves using a specialised accountant to record, report, and manage the organisation’s financial transactions. There are two main types of non-profit organisations, and each of them requires different accounting needs: 

The types of non-profits

Charities

People’s minds often go straight to charity if a non-profit is ever brought up in conversation. Even as a charity, you must still keep accurate accounting records. This is regardless of how big the charity is and how much income it generates for its cause. Receipts and grant records must be kept to help your accountant prepare annual accounts whenever a donation is made, or any money comes into the organisation. 

There are some rules in place too, that your accountant will help you follow. For example, if your charity earns more than £5000 per year, you need to register your organisation with the Charity Commission under legal obligation. Similarly, if your charity earns more than £1000 per year, you must still submit an Annual Return to the Charity Commission within 10 months after the end of the last fiscal year. 

Some charities are much larger and you might be earning well over £1 million per year. If this is the case, you’ll need to carry out an audit. If you are earning less than this amount, you won’t have to worry about an audit, but you can still ask your accountant to carry out an independent examination to ensure everything is straight and narrow. 

Social enterprises

The other form of non-profit organisation that differs from charities is social enterprises. These include things such as co-operatives and housing associations. Instead of relying on the goodwill of donors and grants, these enterprises generate income by selling goods and services and then putting the profits into their cause or the local community. It is different from a charity mainly because social enterprises can have an owner, and it often pays employees out of some of its profits. 

What financial legislation do non-profits need?

Whenever you have a business or organisation, and you are working with an accountant, there are various documents and financial legislation you must prepare and have ready. These are the three you must have in place for your non-profit organisation:

• A set of accounts
• An annual return
• A Trustees’ annual report

Each form of financial legislation offers both the accountants and those interested in working with your non-profit a better idea of your goals and what you’re doing to achieve them. It shows how well your organisation is performing financially and that you’re using money to help the business run rather than wasting it elsewhere. 

Whenever you receive an accounting record, whether it’s invoices, receipts, Gift Aid information, or anything else, you should keep it for at least six years. They should also be available to the public whenever requested. 

It might seem like a hassle to try and gather all of these documents for your accountants or even the public, but they all have an important role in helping you gain more funding. They also ensure you’re running your non-profit more effectively in order to meet your goals. 

What taxes apply to non-profits?

Even if you’re running a non-profit instead of a usual business, you might still need to pay taxes in certain situations. For example, if you’re running a charity and some of the income isn’t directly related to it, these are called non-charitable expenditures, and you must pay taxes on them. Similarly, you must submit a company tax return if your charity is a limited company. A Trust and Estate Self Assessment tax return will be needed if your organisation is a trust. 

Tax exemptions for non-profits

Non-profits in the UK often benefit from a wide range of tax reliefs and exemptions. You don’t have to pay Corporation tax if you’re a non-profit or charity. Trustees are also exempt from paying any income tax when they’ve invested money into a non-profit organisation. 

However, you can only use these exemptions when you’ve been recognised by the HMRC. It’s not a long process, and instead, you just need to fill out the relevant form, which an accountant can help you do. 

There is also Gift Aid, which allows non-profits to claim tax back from bank interest or donations. 

The best practices for non-profit accounting

If you want to take control of your non-profit accounting yourself, there are various ways you can ensure you’re following all the right rules and that everything is in place. Here are the best practices you should implement:

Implementing internal controls

Fraud is always one of the biggest concerns when running a business, even when you’re running a non-profit. By putting internal controls in place, you can limit this and also have a better eye for catching errors. Regardless of how many employees your organisation has, even if it’s just two, you should have a ‘checks and balances’ system in place. 

You can implement a few internal controls. One of the main ones is sharing your financial duties. For example, have a bookkeeper to record all revenue and someone else to handle and approve any write-offs. You should also put in place security policies such as cybersecurity that will look after any sensitive transactional information. Always take inventory of your fixed assets too, so nothing is ever forgotten about. 

Utilising accounting software

There’s a wide range of accounting software products out there that can help with non-profit accounting. It can help you handle your finances in a more safe and efficient way. If this is the route you want to go, then you should find a solution that has the best features that work with non-profits and their needs. 

You may also choose to outsource your accounting needs to experts like Braant. You can often ask them to handle all your processes, or you can use their services alongside your accounting software based on your individual needs and current budget. Simply talk to one of the experts at Braant to see what they can help you with. 

Regular financial reviews and audits

As we mentioned before, you only really need an audit for your non-profit organisation if you have an annual income of over £1 million. However, that doesn’t mean that you should avoid them if you earn under this threshold. Audits can be a very good thing and help identify any errors in your financials, as well as find ways you can improve the financial health of your organisation. 

When you conduct an audit, the results are also open to be published publicly. If it shows that everything in your finances is above board and running smoothly, the transparency can actually help you gain more donations and grants for your charity. 

Frequently reference your budget

Non-profits have board members who are independent of the organisation and are not employed by it. They are the people who are involved in the annual budget approval process, but this shouldn’t be the only time you take a look and evaluate your budget. It is actually recommended that you look at it on a monthly basis, comparing and evaluating your budgeted revenue and expenses against your actual revenue and expenses. 

By always referencing your budget, you will also be prepared when there are changes within the organisation. For example, if a program or project is discontinued, or your funding falls through, or you even get more funding, you can address these and then adapt your strategy. 

What is the difference between non-profit and for-profit accounting?

Accounting tends to be quite similar across many organisations, but there are also a few main differences between non-profit and for-profit accounting.

For-profit organisations must have a balance sheet which offers information on the net equity for owners and shareholders, but non-profits don’t need this as they don’t have shareholders. Instead, they’ll just need to produce a financial statement. 

Unlike companies that aim to generate profits, they’ll produce income statements that display revenue, expenses, gains, and losses. A non-profit doesn’t have a bottom line and, therefore, simply needs to produce a detailed statement of activities that outlines the revenue and expenses of each of its initiatives. 

A similarity between these two is that they both need to create cash flow statements. It helps ensure their expenditure doesn’t exceed their income on a regular basis. 

Conclusion 

Just like any other organisation, non-profits need to stay on top of their finances. However, this can be hard when you don’t have the expert knowledge to do so. That’s where Braant comes in to help. We have specialised accountants who understand the needs of non-profits and can ensure everything stays afloat for each financial year. Contact us today to find out more.