GLOSSARY OF TERMS
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Accruals accounting
Under Charity Commission rules, churches having a gross income and/or total expenditure in excess of £100K must prepare their accounts on an accruals basis. Accruals accounting provides an accurate view of the financial status of the church. Revenues are accounted for when they occur with matched costs also included. 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. Examples of fixed assets are land, buildings, furnishings, fixtures and fittings, etc.
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 £500K 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 £250K and £500K then the independent examination must be performed by a qualified accountant.
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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 which 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 not converted into an income. An expendable endowment can be converted into income at the discretion of the trustees.
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General fund
An unrestricted fund used for the general administration of the church.
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Gross income
The total income of the church for all unrestricted an 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 £250K threshold can have an independent examination rather than a full audit at year end. Between £250K and £500K an independent examination is still permitted but it must be carried out by a qualified accountant.
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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 and/or total expenditure of less than £100K 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. 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
Income that must be spent 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.
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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 defined by the Charity Commission. Provides guidance for churches on the treatment of items within their accounts.
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Total expenditure
The 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 which can subsequently be re-designated.
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