GLOSSARY OF TERMS
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Accruals accounting
Under Charity Commission rules, churches having a gross income in excess of £250,000 in the financial year ending on or after 1st April 2009 must prepare their accounts on an accruals basis. Previously the threshold was £100,000. Accruals accounting provides an accurate view of the financial status of the church. Revenues and costs are accounted for when they occur. The principal status reports associated with accruals accounting are the Income and Expenditure Report, the Balance Sheet and the Statement of Financial Activities (SOFA).
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Assets
Assets are the money, goods and property owned by the church including any legal rights it may have to receive goods, services, money or property from others. Assets are generally split into two categories, ‘Fixed assets’ and ‘Current assets’.
Fixed assets are longer term assets that continue to be held by the church year after year and are liable to depreciate as time moves on. Current assets are assets that are subject to variation or disposal in the short term. Examples of current assets are money accounts including bank accounts, prepayments, goods for resale, etc.
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Audit thresholds
All churches must prepare accounts for public scrutiny. Under the Charity Commission rules, churches having a gross income or total expenditure in excess of £500,000 must have their annual accounts audited by a professional auditor. Below this threshold, churches must have an independent examination of their annual accounts. If the gross income is between £250,000 and £500,000 then a qualified accountant must perform the independent examination.
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Balance sheet
Accounts generated on an accruals accounting basis would prepare a statement of assets and liabilities in the form of a balance sheet which shows net worth.
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Designated fund
Used to account for unrestricted funds that are allocated for a particular purpose by the church. Such funds can be re-designated and spent for some other purpose.
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Endowment fund
An endowment fund (or capital) is a class of restricted fund that must be retained for the benefit of the church. There are two types of endowment fund; a permanent endowment and an expendable endowment and both are classes of restricted funds. A permanent endowment must be retained ad infinitum and the capital cannot be converted into an income although income generated can be expended in accordance with the directions of the donor. An expendable endowment can be converted into income at the discretion of the trustees.
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General fund
An unrestricted fund that can be used for the general administration and any other purposes of the church.
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Gross income
The total income of the church for all unrestricted and restricted funds but excluding amounts received as capital (endowment funds). The gross income must not include any cost deductions.
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Income and expenditure accounts
When accounting on an accruals basis, the annual analysis of revenues and costs are held in income and expenditure accounts.
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Independent examination
Churches below the £250,000 threshold can have an independent examination rather than a full audit of their annual accounts. This is a less onerous form of scrutiny than a full audit. Between £250,000 and £500,000 an independent examination is still permitted but a qualified accountant must carry it out.
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Liabilities
The amounts owed by the church as shown on the Balance Sheet (accruals accounting) or the Assets & Liabilities report (receipts and payments).
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Receipts & payments
Under Charity Commission rules, churches having a gross income of less than £250,000 may prepare their accounts on a receipts and payments basis. This provides a ‘cash book’ record keeping system where only money received or paid is entered to the accounts and is generally regarded as a simpler method of preparation. The principal reports are the Receipts & Payments Report and the Assets & Liabilities reports.
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Reserves
Generally construed as the amount freely available for the church to spend. Hence, reserves do not include any amounts from endowment or restricted funds or any amount from unrestricted funds that could only be realised by the disposal of an asset.
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Restricted fund
Restricted funds can only be used for a specific purpose. This is usually defined through a written instruction by the donor in the form of a trust or set out through the terms of an appeal. They cannot generally be used for other purposes without permission from the Charity Commission.
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SOFA
The Statement of Financial Activities required to be submitted annually to the Charity Commission in their defined format. Applies to churches preparing accounts on an accruals basis.
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SORP
The ‘Statement of Recommended Practice – Accounting and Reporting by Charities’, issued by the Charity Commission. It provides guidance for preparing the Trustees’ Annual Report and for preparing accounts on the accruals basis.
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Total expenditure
TThe gross expenditure of the church from all funds but excluding the granting or repayment of loans and the purchase of investments to be held for the furtherance of the mission of the church.
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Unrestricted fund
Funds held for the general purposes of the church. The church can allocate unrestricted funds for a particular purpose in which case they are referred to as designated funds and can subsequently be re-designated.
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There is much information and guidance on the Charity Commission website www.charitycommission.gov.uk. This is also where the Commission makes charity accounts and reports available for the public to view.
For the Church of England, there are two guides for accounts preparation; one for receipts and payments and one for accruals accounts. See www.cofe.anglican.org/info/finance.
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