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Accounting Glossary

Published: 18/04/2019
Updated: 18/04/2019


Accounting and Reporting by Charities: Statement of Recommended Practice (SORP)

The SORP sets the framework for charity financial reporting in the UK for charitable companies, charities with income of £250,000 and more and all other charities preparing accruals accounts.

Accounting and Reporting by Charities: Statement of Recommended Practice 2015.  Copies can be downloaded at: www.charitiessorp.org. 

This means everything a charity owns; property, money, equipment, including heritable property (such as land and buildings and rights attached to it).

An audit is an examination of an organisation’s accounts carried out by someone eligible to act as an auditor in terms of section 1212 of the Companies Act 2006. Where the audit is being carried out on accrued accounts it will be carried out following the International Standards on Auditing. The opinion on fully accrued accounts will state whether the accounts give a true and fair view of the financial affairs of the organisation. A true and fair view cannot be given on receipts and payments accounts and the auditors’ opinion will state whether the statement of accounts properly presents the receipts and payments and its statement of balances.

Close relative
Close relatives are children, parents, grandchildren, grandparents, brothers or sisters, and any spouse of these.

Consolidation adjustments
Consolidation adjustments are adjustments to remove inter-group transactions and balances between the parent charity and its subsidiaries so that the consolidated accounts accurately reflect the results and financial position of the whole group.

Connected organisation
An organisation is connected to a charity if it is controlled by the charity (either directly or through nominees) or it is a corporate body in which the charity has a substantial interest.

Connected person
The term connected person includes:

  • spouses, civil partners and cohabitees of a charity trustee
  • child, stepchild, parent, grandchild, grandparent, brother or sister of a charity trustee (and a spouse of any such person)
  • an institution controlled by a charity trustee or a person connected with them or two or more trustees/connected persons when taken together
  • a body corporate or company in which the charity trustee or a person connected with them has a substantial interest, or
  • a Scottish partnership (business) in which the charity trustee or, a person connected with them is a partner.

Constitutional requirement
A provision within the governing document of the charity that, for example, requires an audit to be carried out in relation to the annual accounts or makes a reference to the appointment of an ‘auditor’.

Contingent liabilities
Contingent liabilities are liabilities that may arise from past events but whether they will, or how much they may be, cannot be established until a future event occurs.

Designated fund
A designated fund is that part of the charity’s unrestricted funds that the charity trustees have decided to earmark, or designate, for a particular purpose.

Donated facilities and services
Donated facilities and services are gifts to the charity of facilities, services of volunteers or beneficial loan arrangements.

An enactment includes Acts of both the Scottish and Westminster Parliaments and any subordinate legislation. Examples would be the Companies Act 2006, or the Charities and Trustee Investment (Scotland) Act 2005.

Endowment funds
An endowment is a fund consisting of property, including cash which is held for the benefit of the charity. The objective is to provide the charity with an income from the fund.

There are two forms of endowment fund:

  • a permanent endowment fund is one that consists of property (which may be heritable or moveable) that has been gifted to the charity with specific conditions attached and where the capital cannot be spent in any circumstances.
  • an expendable endowment fund is one that consists of property (which may be heritable or moveable) that has been gifted to the charity with specific conditions attached and which cannot be spent except in those circumstances specified in the terms of the endowment document.

Normally, the governing document of the charity or the directions of the donor of the endowment will specify how the income from the endowment can be used and therefore whether the income should be included in the accounts as restricted or unrestricted.

External scrutiny report

Your charity's accounts must be externally scrutinised. That is, someone who is independent of your charity must review the accounts and produce a report, attached to the accounts, that highlights any issues to the reader.

Financial year
An accounting period of a charity that can be no more than 18 months. The first financial year of a charity cannot be less than six months.

Financial year end date

The financial year end date is the date that your charity’s financial year ends and to which accounts are prepared.

Fully accrued accounts
Fully accrued accounts allocate the costs or income of a particular activity according to when the liability is incurred or when there is entitlement or certainty about income. This is not necessarily the date on which money is received or paid out.

Governing document
A governing document (or constitution) is the document (or set of documents) that sets up an organisation and says what its purposes are. It will usually deal with other matters, including who will manage and control the organisation, what its powers are, what it can do with the organisation's money and other assets, and membership of the organisation. For more information, see our FAQs.

This is defined in section 106 of the 2005 Act.

Gross income
A charity’s gross income is the total incoming resources of the charity in all restricted and unrestricted funds but excluding the receipt of any donated asset in a permanent or expendable endowment fund.

Any income that has been collected specifically for, and passed onto, a third party (e.g. that part of a membership fee that is passed onto a parent body, or a collection held for another charity) should be excluded. However, the transferred amount should be recorded by way of a note to the accounts.

Where a person is not involved in, and has no control over, the management and administration of a charity. Any ‘connected person’ cannot be independent.

Independent examination
Independent examination is a less onerous form of external scrutiny than an audit and is available, under the Regulations, for charities with a gross income under £500,000, where the gross assets are less than £3,260,000. It is not available where the constitution of the charity or another enactment requires the accounts to be audited. An independent examiner reviews the accounting records kept by the charity and compares them with the accounts prepared from those records. The examiner then writes a report which provides the information required by the Regulations and provides an assurance of whether or not anything has been found that needs to be brought to the attention of readers of the accounts.

Independent examiner
An independent person whom the charity trustees reasonably believe to have the requisite ability and practical experience to carry out a competent examination of the accounts or, where accruals accounts are prepared, a professionally qualified person recognised by charity law.

Legal Form

Charities can take a number of legal forms. The legal form is the structure or entity, which then becomes a charity. For example:

  • Unincorporated associations
  • Companies
  • Scottish Charitable Incorporated Organisations (SCIO)
  • Trusts
  • Community Benefit Society
  • Statutory corporation established by an Act of Parliament or Royal Charter
  • Educational endowment

Our Legal Forms Factsheet has more information on the most common legal forms for Scottish charities.

A liability is an obligation to transfer to another body at some future time, some economic benefit, which is usually but not always, a sum of money.

There is no formal definition of what is ‘material’ but the concept may be more meaningfully explained by way of an example.

Consider the sum of £100.

  • If the total income of the charity is £500, then £100 is material. However, if total income is £100,000 then £100 is probably not material.
  • If the £100 in question indicates criminal activity, then it is probably always material. If it is included or omitted from the accounts due to a genuine mistake, it is not so likely to be material.
  • Where it is more difficult to assess materiality from income, say £2,000 income where the £100 represents 5% of the income, the examiner should consider the nature of the mistake and the nature and context of the charity itself. For example, a loss of £100 in a charity working with young people on low incomes which offers advice on personal budgeting would probably be material. This is because the reputation of the charity could be damaged if the loss were made public. However, if the charity was a small arts charity putting on a couple of performances or exhibitions a year, the potential damage to its reputation may make the £100 error not material.
  • Examiners need to be mindful of the cumulative impact of errors. One error of £100 may not be material, but three or four similar errors may indicate issues that require to be resolved.


Material investments

When we talk about a charity having material investments this means that the value of these investments is so significant that the overall picture of the charity’s finances or activities would be distorted if they were not taken into account. It is the responsibility of the person preparing the charity’s accounts to decide whether an item is material or not.

Receipts and payments accounts
Receipts and payments accounts are a simple form of accounting that consist of a summary of all monies received and paid via the bank and in cash by the charity during its financial year, along with a statement of balances.

Registered auditor
A registered auditor is someone eligible to act as an auditor in terms of section 1212 of the Companies Act 2006.

General reserves are funds held by a charity that are freely available to spend on any of the charity’s purposes. This would exclude endowment and restricted funds and tangible fixed assets.

Restricted funds
Restricted funds are funds that can only be used for the particular purposes specified by the donor. For example, if a local authority provides a grant to a local charity to refurbish the community hall, the grant is a restricted fund that can only be used for the purpose for which it was given, in this case refurbishing the hall. Another example would be if a charity carries out an appeal for a particular purpose (for example to purchase a minibus). The money raised by the appeal would be a restricted fund and should only be used for the purpose of the appeal. Income from assets held in a restricted fund (for example interest) will be subject to the same restriction as the original fund unless the terms of the original restriction say otherwise.

See ‘Accounting and Reporting by Charities’

True and fair
Accounts that are prepared on a fully accrued basis in accordance with UK Generally Accepted Accounting Practice are considered to provide a ‘true and fair’ view as they include all assets and liabilities of the organisation at the period end date.

Unrestricted funds
Unrestricted funds are funds that the charity trustees are able to use for any of the charity’s purposes. Donations that are not given for a specific purpose would be an unrestricted fund (for example membership fees). Income from these funds is also unrestricted and can be used for any of the charity’s purposes at the discretion of the charity trustees. Charity trustees may decide to earmark part of a charity’s unrestricted funds for a particular purpose, for example major repair works. These sums are designated for that purpose and should be accounted for as part of the charity’s unrestricted funds.