Dictionary
Debitoor's accounting dictionary
Charity

Charity – what is a charity?

A charity is an organisation that is set up to help people in need and is for a specific cause.

Organising your accounts and maintaining an overview of expenditure is essential when running a charity. Make sure your accounts are in order and try Debitoor for free today.

Charities belong to the third sector, which is not about making profit but rather about making a difference to society. Charities receive grants from many fundraising organisations, for example, the National Lottery. They can also raise money through sales of goods in charity shops and through public donations.

All money raised goes towards furthering the charity’s specific cause or is used to pay for the operation and running of the charity.

The rules that all charities must follow

There are a number of rules that all charities must follow to maintain their charitable status:

1. Charitable categories

The aims of charity have to fit within the categories that the Charities Act has deemed ‘charitable’. Included within these categories are things like the prevention and relief of poverty, the advancement of education, health, environmental protection, and improvement and relief of those in need owing to youth, old age, disability, financial hardship, or other disadvantage.

2. Public benefit

The charity must be beneficial to the public. This means that it has to do positive things and any negative side effects must be outweighed by its positive work. Benefiting the public does not mean every individual must benefit; rather it may be everyone within a specific community or everyone who has a specific characteristic (e.g. a specific disease, illness, occupation, educational background) benefits from the charity’s work.

The Charity Commission must decide whether an organisation passes the public benefit test. Decisions are made on the basis of its guidance and case law.

3. Profit

A charity is not allowed to make a profit. All of the money it raises has to go towards achieving their social aims. Charity owners and shareholders cannot benefit financially from the charity.

Bookkeeping and charities

Bookkeeping for charities is the same as for any other organisation. However, there is a slightly different emphasis on what should be accounted for and there is an additional need to keep restricted funds separate.

The charity trustees must ensure that the charity’s accounting records are sufficiently ordered so as to meet the requirements of the Charities Act. It must be possible for trustees to:

  • Disclose the financial position of the charity at any time with reasonable accuracy
  • Explain all of the charity’s transactions.

Moreover, the accounts must be organised so as to comply with accounting regulations.

The charity’s accounting records must contain:

  • Records of the charity’s liabilities and assets.
  • Entries that document and date all of the sums of money that the charity has spent and received. The nature of the expenditure must be included.

It's therefore important to keep documentation to support all of the transactions in the account. This may include receipts for expenses such as room hires, documentation of income from grants in the form of confirmation letters that state the terms and conditions, donations with accompanying letters or emails, or cash from events and fundraisers with completed cash sheets.

Travel and volunteer expenses should also be completed with an accurate claim form, explaining the purpose of the expenditure. Other invoices and smaller payments need to be properly authorised with an explanation of the goods or services purchased.

If trustees maintain the charity’s accounts in a detailed manner, it's far easier to demonstrate that the charity is meeting the standards the Charity Commission demands. HMRC provides more information on how to manage a charity’s money, taxation and accounts.

How does a charity make money?

The majority of a charity’s income comes from donations and grants. A donation is a gift made by an individual or organisation, most commonly in the form of cash. Donations can take other forms too, for example, real estate, vehicles, clothing and other assets or services.

Grants are non-repayable awards, given by one party (usually a corporation, governmental department, foundation or trust) to a recipient (most commonly a nonprofit entity, educational institution, business or individual). Grants are given with the aim of facilitating a goal or incentivising performance.

However, to stretch money further, many charities rely on volunteerism. There are many different ways charities can utilise volunteers to further their business. Examples may include employing volunteers to work in shops, sell tickets or answer the phone.

How to set up a charity

Setting up a charity takes multiple steps. You must choose your charity's name, structure, and trustees, and develop a governing document that outlines the charitable purposes you wish to pursue. You can apply to register as a charity online.

Naming your charity

The name of your charity must be carefully considered. It cannot be similar to the name of another charity or use words that you do not have permission to use. It cannot use offensive words or acronyms and must not mislead the public by suggesting the charity does something it does not.

Choosing your charity's structure

Charities are commonly structured in four different ways. It can be organised as either a 'charitable company', a 'charitable incorporated organisation', a 'charitable trust', or an 'unincorporated charitable association' Choosing the structure will determine who owns it, how it's run, and how flexible it is in what it can do. More information regarding the different structures can be found at www.gov.uk.

Choosing your trustees

You must find trustees for your charity. A trustee is an individual who is given administrative power within the charity. They are in a position of trust and administer property or assets for the benefit of a third party, in this case, the charity.

Clarifying your charitable purposes

It's essential that the charity has ‘charitable purposes for the public benefit’. The charity’s purposes should clearly explain the goals of the charity, its plan for achieving these goals, who will benefit from these outcomes, and how far the benefits extend.

In doing so a ‘governing document’ must be created. This is a kind of rule book that explains how the charity is run. Included in this document is a summary of the charity’s purpose, the names of those who run it, and how, an explanation of how trustees will be appointed, rules about their expenses, how the charity will pay them, and finally how the charity can be closed in the future.