Accrual or Income & Expenditure Accounts

This is where accounts are prepared in a way which shows not only what
happened in a period, but what should have happened in the period, e.g. If
you got a gas bill after year-end, it would be included in the accounts since the
gas was actually used before the year-end. If you issued an invoice for work
done before year-end and it had not been paid, you would include it in the
accounts as if it had been paid. This approach enables you to measure the
trading surplus/(deficit), rather than the flow of cash in/out of the organisation
over the accounting period.

Accruals (another meaning)

These are estimates of specific expenses that have been incurred by the
company, but have not been billed or paid for during the accounting period.

Assets
These can be:
Fixed – valuable items that last more than one year, eg. vehicle, furniture,
equipment, IT, investments.
Current – cash or things that can be turned into cash within a short period,
eg. stock, money in the bank, petty cash, prepayments and debtors.

Audit
Any Registered Auditor must follow a set of guidelines issues by the Audit
Practice Board. The Auditor does not say that the accounts are correct, but
simply expresses an opinion on the accounts. Auditors must be registered in
accordance with the 1989 Companies Act.

Average Costs
Average cost is the cost of doing each thing, e.g. if it costs £200 to produce
100 widgets, including all the initial set up costs, the average cost of those
100 widgets is 200/100 = £2 per widget. If you then produce another widget,
making a total of 101 widgets with a total cost of £200.50 the average cost per
widget will be 200.50/101 = £1.985 per widget. On this basis the cost of the
101st widget is £1.985 – compare this to the Marginal Cost example later in
the Glossary.

Balance Sheet
This is a statement within the accounts that explains what the group has and
where it came from. The first part adds up the good things (like money in the
bank), and subtracts the bad things (like bills you haven't paid yet). The
second half usually shows which project or fund it all belongs to. Only larger
charities and companies need to do this.

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Capital
Capital has many meanings in accounting, the most common use for charities
is to mean monies granted or raised to purchase or convert buildings, vehicles
or equipment, as opposed to revenue funds that are usually granted for
delivery of services.

Cost Driver
This is the factors that drives the cost of an activity up or down, e.g. the more
people that come to the lunch club, the more the catering will cost. In this
example the cost-driver is people attending.

Creditors
These are people you owe money to at any particular time - usually listed at
the year end in the accounts.

Debtors
Money owed to the organisation. Although debtors are considered an asset, if
you are owed a vast amount, this might indicate problems collecting monies
owed and possible cash flow difficulties.

Deferred grants
These will be grants received in one period but actually intended for spending
in a future period. Sometimes this may be called Grants in Advance or
Advance Receipts.

Depreciation
Depreciation is a way of spreading the cost of an asset over the expected
useful economic life of that asset.

Designated (Unrestricted) Reserves

Trustees may decide to set aside some of a charity’s own reserves for a
specific purpose, e.g. a redundancy fund. Some charities designate their
tangible fixed assets too.

Direct costs
Costs that can be attributed clearly to the activity you are considering, e.g. the
salary of the youth project worker.

Fixed Costs
Costs that remain the same however much activity you do, e.g. the line rental
charge in a phone bill.

Funds
See General (Unrestricted) Funds, Restricted Funds and Designated
(Unrestricted) Reserves. See also Reserves.

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General (Unrestricted) Funds
Funds held that are not already committed to a specific purpose or tied up in
the form of tangible fixed assets necessary for the operation of the charity.

Independent Examination
This is a service, similar to an audit, where a group’s accounts are checked by
an independent person. There are rules for who can do this, and guidelines on
how it should be done. It is of particular relevance to charities.

Indirect or Shared costs

These are costs that also relate to a particular activity, but less clearly. They
are often costs shared by a number of projects or activities.

Liabilities
Money you owe to others. These can be current (payable within one year) or
long-term.

Liquidity
This is the measure of how much cash you have and is it enough for your
needs. It can include things that can be turned into cash quite quickly like
debtors and other current assets. A ‘liquidity problem’ is where you don’t have
enough cash to pay your immediate bills.

Marginal Costs
Marginal cost is the cost of doing one more thing, e.g. making the 101st
widget, when all the set up costs have already been included in the costs of
producing the 1st 100 widgets. Producing 100 widgets costs £200, including
all the set up costs of £150 (i.e. £2 per widget) and producing the 101st widget
will cost £200.50 in total – the same as in the Average Costs example. As the
first 100 widgets are already produced and the set up costs have already
been covered, the marginal cost of producing the 101st widget will be £200.50
- £200 = £0.50 – different from the Average Costs example earlier in the
Glossary.

Materiality
This is a concept often used into accounts. It basically means 'big enough to
bother about'. For example a £100 error in the petty cash may be very
'material' to a small group but 'immaterial' for a big national group. The basic
test of materiality is - if the reader of the accounts would form a different
opinion if they knew about it, then it is material.

Net Current Assets

This is a figure that appears in the Balance Sheet. It comprises the current
assets less the current liabilities. It can be a very important figure. For
example, you may have total assets of £1,000,001, but if a million of this is an
old building and only £1 is in the bank then it’s not so good.

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Opportunity Costs
These are costs associated with losing the opportunity to do something else
with your time, e.g. instead of coming to this training course, you could have
delivered a course of your own and earned £500 for your organisation. This
type of cost is rarely recognised in the voluntary sector.

Overheads
Sometimes called core costs, these are the costs usually incurred at the
office, which must be paid for by all the projects and activities of the
organization, e.g. audit fees, some salaries, office rent, etc.

Prepayments
These are services that the company has paid for in advance, but not used
during the accounting period.

Profit / (Loss)
Profit is when surpluses derived from trading or financial activities are kept by
or distributed to owners of an organisation. Loss is when trading or financial
activities produce a negative result, meaning that no profits can be shared by
the owners of the organisation.

Receipts & Payments or Cash Accounts

These are accounts prepared to show simply what money has been received
& paid out through the bank and petty cash during the accounting period. This
approach does not measure the trading surplus/(deficit) during the period.

Reserves
Each year income is received and expenditure incurred resulting in surplus or
deficit funds. Year-on-year this builds up as a Reserve Funds or Reserves,
which can be:
Restricted – money where the donor has specified what it must be spent on;
General – uncommitted unrestricted reserves;
Designated – unrestricted money set aside by the Trustees for a particular
purpose.

Restricted Funds
Monies given by funders “…for specific purposes narrower than the broad
charitable objectives of the organisation.” They may be capital or revenue
funds. Endowment funds may be a form of restricted fund.

Revenue
This has various meanings in accounting, for charities revenue usually relates
to funds granted to support spending on services, rather than purchase of
capital items, such as equipment or buildings.

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SOFA
Statement Of Financial Activities. Not to be confused with a comfy piece of
furniture! This is the new name for the Income and Expenditure Account for
Charities with an income over £100,000.

SORP
This is the Statement Of Recommended Practice for Charities and it sets out
the regulations for accounting by charities. Larger charities must follow the
SORP. Smaller charities have different (easier) regulations to follow.

Statement of Assets and Liabilities

This is an accounting statement common in the accounts of smaller charities.
It’s basically a list of what you own (fixed assets, etc) and owe (creditors, etc).

Surplus / (Deficit)
Surplus is the positive amount derived from trading or financial activities. It is
reinvested in the organisation and its aims and objectives. It may also be used
to build up reserves to appropriate levels to ensure sustainability. Deficit is
when trading or financial activities produce a negative result.

Turnover
Turnover is the volume of business over a period of time; in charity terms this
usually means total income.

Variable Costs
Costs that vary as you do more activity, e.g. the call charges detailed in a
phone bill.

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