Charity accounting refers to the specialised financial reporting and management practices that ensure charities operate transparently, accountably, and comply with legal and regulatory requirements. Unlike commercial accounting, charity accounting must reflect how funds are raised, restricted, and spent in line with a charity’s objectives.

In the United Kingdom, charities must follow specific accounting standards, including the Charities Statement of Recommended Practice (SORP), which ensures consistency and accountability. On top of that, the Charity Commission oversees compliance with reporting requirements, while HMRC regulates tax matters, including Gift Aid and VAT relief for charities. Proper accounting is not just a legal necessity but also crucial for maintaining public trust, securing funding and demonstrating impact.

As of 2025, the charity sector faces a rapidly evolving environment. Regulatory updates, digital transformation, and economic challenges continue to shape financial management for charitable organisations. With increasing oversight from regulators and donors, charities must adopt robust accounting practices to ensure compliance, efficiency, and sustainability.

UK Charity Law and Compliance

Charities in the United Kingdom must operate within a strict legal and regulatory framework to ensure transparency, accountability and compliance. The Charity Commission primarily governs this framework, the Charities Act 2011, and the Statement of Recommended Practice (SORP), which sets charitable organisations’ accounting and reporting standards.

1. Charity Commission Requirements

The Charity Commission for England and Wales is the regulator responsible for ensuring charities comply with legal obligations, including financial reporting. Registered charities must:

Prepare and submit annual accounts per the applicable SORP.
File an Annual Return or Annual Update, depending on income level.
Submit a Trustees’ Annual Report, outlining financial activities and public benefit.
Maintain accurate financial records and meet governance standards.

Failure to comply can result in regulatory action, including investigations and potential removal from the charity register.

2. Charities Act 2011 Overview

The Charities Act 2011 consolidates previous charity laws and defines the legal framework under which charities operate. Key provisions include:

Definition of charitable purposes and public benefit.
Trustee responsibilities and governance requirements.
Financial reporting and fundraising regulations.
The Charity Commission’s powers to investigate and intervene in mismanagement cases.

This Act remains the foundation of charity law, though amendments continue to reflect sector changes.

3. Charities Act 2022

The Charities Act 2022 introduced key amendments to the Charities Act 2011, affecting trustee powers, asset management, and governance. Changes include:

Trustee Powers: Greater flexibility in amending governing documents and using permanent endowments.
Disposal of Charity Land: Simplified rules for selling, leasing, or transferring charity property.
Fundraising and Ex-Gratia Payments: Easier processes for small ex-gratia payments without Charity Commission approval.
Appointment of Trustees: Streamlined procedures for appointing and removing trustees.

UK charities must align with these changes to ensure compliance and efficient operations.

3. Statement of Recommended Practice Guidelines

The Charities SORP (Statement of Recommended Practice) provides the financial reporting framework for charities, ensuring consistency and transparency. It sets out:

How charities should present financial statements.
The treatment of restricted and unrestricted funds.
Requirements for recognising income (e.g., donations, grants, and legacies).
Disclosure requirements to provide a clear picture of financial health.

Following SORP is crucial for demonstrating good governance and maintaining donor confidence.

4. Recent Updates and Changes for 2025

In 2025, the regulatory aspect will continue to evolve. Recent updates include:

New SORP changes: Alterations to financial disclosures and governance reporting to improve clarity.
Increased digital reporting requirements: Greater emphasis on online submissions and real-time financial transparency.
Fundraising regulations: Stricter oversight on public donations and donor protection.
Charity tax updates: Gift Aid and VAT relief changes that impact financial planning.

Keeping up with these changes is essential for charities to remain compliant and operate efficiently.

Understanding Different Charity Accounting Types

Charities in the UK must prepare accounts based on their income level and structure. The two main types of charity accounts are:

1. Receipts and Payments Accounts

This is a simpler form of accounting available to charities with an annual income of £250,000 or less, provided they are not required to use accrual accounting (e.g., charitable companies). It records only cash movements, money received and money spent without reflecting outstanding payments or accrued income.

Key Requirements:

Must include a statement of receipts and payments and a statement of assets and liabilities.
Suitable for smaller charities that do not need full accrual-based accounts.
No requirement to follow SORP (Statement of Recommended Practice), but transparency is expected.

2. Accrual Accounts

Charities with an income above £250,000, as well as all charitable incorporated organisations (CIOs), must prepare accrual-based accounts under the Charities SORP (FRS 102) framework. This method provides a fuller picture of financial activity by recording income and expenses when they are incurred, not just when cash is received or spent.

Key Requirements:

Must include a statement of financial activities (SoFA), a balance sheet, and descriptive notes.
Requires compliance with SORP guidelines and must be prepared on a true and fair basis.
Subject to independent examination or audit, depending on income and asset thresholds.

Understanding which type of accounting applies is crucial for compliance with Charity Commission and HMRC regulations.

Core Elements of Charity Financial Statements

Charity financial statements provide a structured overview of an organisation’s financial position, performance, and cash flow. They must be prepared to follow UK accounting regulations, ensuring transparency and accountability. Below are the key components:

1. Statement of Financial Activities (SOFA)

The SOFA is a core financial statement for charities using accrual accounting. It summarises all incoming resources (income) and outgoing resources (expenditure), categorised by unrestricted, restricted, and endowment funds. The SOFA also includes gains or losses on investments and other financial activities, giving a clear picture of a charity’s financial health over the reporting period.

2. Balance Sheet

Also known as the statement of financial position, the balance sheet presents a snapshot of a charity’s assets, liabilities, and funds at the end of the financial year. It distinguishes between fixed and current assets, liabilities, and reserves, ensuring compliance with charity accounting principles.

3. Cash Flow Statement

The cash flow statement outlines the movement of cash within the charity, categorising inflows and outflows from operating, investing, and financing activities. It helps trustees and stakeholders understand the organisation’s liquidity position and financial sustainability.

4. Notes to the Accounts

These provide essential additional information to support the financial statements. Notes may include accounting policies, explanations of significant transactions, fund movements, and disclosures required by the Charities SORP and regulatory bodies such as the Charity Commission and HMRC. They increase transparency and help users interpret the financial data effectively.

How to Prepare Charity Annual Reports and Accounts

Charities in the UK must prepare annual reports and accounts to provide transparency and accountability to regulators, donors and stakeholders. The format and reporting requirements depend on the charity’s size and legal structure. Below are the key components:

1. Trustees’ Annual Report

The Trustees’ Annual Report summarises the charity’s activities, achievements and governance over the financial year. It should explain how the charity has advanced its charitable objectives and used its resources effectively. The report must also cover governance arrangements, risk management and future plans for larger charities.

2. Financial Review Section

This section outlines the charity’s financial position, highlighting key figures from the accounts. It should cover:

Income sources and major funding streams
Expenditure breakdown and reserves policy
Investment performance and any financial risks

3. Impact Reporting

Charities are encouraged to go beyond financial data and demonstrate their social impact by creating charity impact reports. This can include:

Outcomes achieved related to the charity’s objectives
Case studies or success stories
Performance against key performance indicators (KPIs)

4. Deadline and Submission Process

The deadline for submitting annual reports and accounts depends on the charity’s legal status and income level:

Registered charities in England and Wales: Must submit their report to the Charity Commission within 10 months of the financial year-end if their income exceeds £25,000.
Charitable companies: Must file accounts with the Charity Commission and Companies House, following company law deadlines.
HMRC requirements: Charities claiming Gift Aid or other tax exemptions must ensure their financial records comply with HMRC regulations.

Failure to meet reporting deadlines can result in regulatory inquiry and reputational risks for the charity.

Managing Charity Funds for Transparency and Compliance

UK charities must follow fund accounting principles to ensure transparency in how different sources of income are managed and spent. Unlike businesses, which report a single financial position, charities must distinguish between various types of funds based on donor restrictions and decision-making.

1. Restricted Funds

Restricted funds are donations or grants given for a specific purpose, as determined by the donor or funder. These funds cannot be used for general expenses and must be accounted for separately. Examples include:

A grant for a specific project or service
Donations for a building refurbishment
Funds designated for a specific beneficiary group

2. Unrestricted Funds

Unrestricted funds are general-purpose funds that the charity can use at its discretion to support its objectives. These include:

General donations without restrictions
Income from trading activities
Membership fees

3. Designated Funds

Designated funds are a subset of unrestricted funds that the charity’s trustees have allocated for a special purpose. Unlike restricted funds, these are not legally bound and can be reallocated if necessary. Examples include:

A reserve set aside for future expansion
Funds allocated for a new programme launch

4. Endowment Funds

Endowment funds are assets held by the charity where only the income generated (e.g., gain, dividends) can be spent, while the principal remains intact. They can be:

Permanent Endowments – The capital must be retained indefinitely.
Expendable Endowments – The trustees may have the power to spend the capital if needed.

Proper fund accounting ensures that charities remain compliant with regulations and maintain donor trust by using funds as intended.

Accurate Income Recognition and Reporting for UK Charities

Recognising and reporting income accurately is essential for UK charities to comply with SORP and relevant accounting standards. Proper income recognition ensures financial transparency, regulatory compliance, and accurate reporting of a charity’s financial position.

1. Donations and Legacies

Donations and legacies are voluntary income sources, including:

Cash donations – Recognised when received unless there is an enforceable legal commitment from the donor.
Gift Aid – Recognised as income when the associated donation is received, with the tax reclaim recorded separately.
Legacies – Recognised when probate has been granted, the charity is notified, and the amount can be estimated with reasonable certainty.

2. Charitable Activities Income

Income from charitable activities arises from providing services directly related to a charity’s mission. Examples include:

Grants and service contracts – Recognised when entitlement is established, receipt is reasonably certain, and the amount can be reliably measured.
Membership fees – Recognised as income when the charity provides services or benefits in return.

3. Trading Income

Charities may engage in trading activities to generate funds, categorised as:

Primary purpose trading – Directly related to the charity’s objectives, such as selling educational materials by a charity promoting literacy.
Non-primary purpose trading – Activities not directly related to the charity’s mission, such as running a charity shop. Larger-scale non-charitable trading is often conducted through a trading subsidiary.

4. Investment Income

Investment income includes returns from financial assets, such as:

Dividends from shares – Recognised when declared.
Rental income from property – Recognised on an accrual basis.

Charities must ensure income is correctly classified, reported transparently, and aligned with fund restrictions.

Expenditure Recognition and Allocation in Charitable Finances

Proper recognition and allocation of expenditures are essential for transparent financial reporting and regulatory compliance. Understanding how costs are categorised helps in accurate financial reporting and decision-making.

1. Charitable Activities Expenditure

This includes costs directly linked to delivering a charity’s objectives, such as programme expenses, grants, and service delivery costs. These should be allocated to the relevant charitable activities.

2. Fundraising Costs

Fundraising expenditure covers the costs incurred to generate voluntary income, including event expenses, marketing and donor engagement activities. Charities must disclose these separately in their financial statements.

3. Support Costs

These are overheads necessary for running the charity, such as administrative expenses, IT, HR and finance. Support costs should be allocated across charitable activities and fundraising based on a reasonable and consistent method.

4. Governance Costs

Governance costs relate to the management and regulation of the charity, including trustee meetings, audit fees, and legal compliance. These costs ensure accountability and compliance with regulatory requirements.

Managing and Reporting Charity Assets

Effective asset management ensures charities maintain financial stability and comply with reporting requirements. Charities must accurately record and disclose various assets in their financial statements.

Tangible Fixed Assets – Includes property, equipment, and other physical assets used for charitable activities. These must be recorded at cost or valuation and depreciated appropriately.
Investments – Covers financial assets such as stocks, bonds or investment properties. Charities must report investment gains or losses and follow ethical investment policies.
Heritage Assets – Assets of historical, artistic or cultural importance held for public benefit. Charities must disclose policies on acquisition, preservation and valuation.
Depreciation and Impairment – Depreciation policies should reflect the useful life of assets, while impairment reviews ensure that assets are not overvalued in financial statements.

Implementing Strong Financial Controls and Risk Management

Strong financial controls and risk management are essential for maintaining transparency, preventing fraud, and ensuring long-term sustainability. Implementing robust systems is a must for charities to safeguard assets and comply with regulatory requirements.

1. Internal Control Systems

Effective financial controls, such as segregation of duties, approval processes, and financial oversight, help prevent errors and fraud.

2. Risk Assessment and Mitigation

Regular risk assessments identify financial, operational, and compliance risks. Mitigation strategies may include insurance, contingency planning and improved governance.

3. Reserves Policy

A well-defined reserves policy ensures that charities maintain adequate funds for future obligations while justifying the level of reserves held.

4. Going Concern Aspects

Trustees must assess whether the charity can continue operating for the foreseeable future, considering financial health, funding stability and external economic factors.

Ensuring Rigorous External Scrutiny in Charity Accounts

External scrutiny ensures accountability and compliance with charity regulations. The level of scrutiny required depends on the charity’s income and legal structure.

1. Independent Examination

Charities with an income between £25,000 and £1 million (if assets are below £3.26 million) may choose an independent examination instead of a full audit. The examiner reviews financial statements for consistency and compliance but does not provide an audit-level opinion.

2. Audit Requirements

Charities must undergo a statutory audit if their income exceeds £1 million or if their income is over £250,000 and assets exceed £3.26 million. Some funders or regulators may also require an audit regardless of size.

3. Choosing an Examiner or Auditor

The examiner or auditor should be suitably qualified and independent. Charitable companies and larger charities must use a registered auditor, while smaller charities may appoint an experienced independent person, such as an accountant.

Leveraging Technology to Improve Charity Accounting Efficiency

The role of technology in charity accounting has grown significantly, helping organisations improve efficiency, accuracy and compliance.

1. Accounting Software for Charities

Specialist accounting software targeted towards charities simplifies financial management by automating bookkeeping, fund tracking, and report generation. Many solutions integrate with banking systems and donor management platforms to streamline financial processes. Popular options include Xero, QuickBooks, and Sage, with charity-specific features.

2. Digital Reporting and Filing

With regulatory bodies such as the Charity Commission and HMRC encouraging digital submissions, charities must comply with online filing requirements. Platforms like the Charity Commission’s online portal and HMRC’s Making Tax Digital (MTD) initiative facilitate electronic submissions, reducing paperwork and errors.

3. Data Security and GDPR Compliance

Charities handle sensitive financial and donor information, making data protection a priority. Compliance with GDPR requires robust security measures, including secure data storage, access controls, and policies for handling personal information. Encryption, two-factor authentication, and regular audits help safeguard financial records against cyber threats.

Effective Approaches for Charity Accounting Success

Charities must adopt best practices that align with the evolving financial and regulatory ecosystem by maintaining compliance, efficiency and trust.

1. Embracing AI and Automation

Artificial intelligence (AI) and automation streamline financial processes by reducing manual data entry, detecting anomalies, and improving accuracy in reporting. Automated systems can also boost donor management and grant tracking, ensuring better financial oversight.

2. Focus on Impact Measurement

Funders and regulators expect charities to demonstrate the success of their work. Integrating financial reporting with impact measurement and linking expenditure to tangible outcomes help build credibility and attract ongoing support.

3. Transparency and Stakeholder Communication

Clear, accessible financial reporting strengthens trust with donors, beneficiaries and regulators. Charities should prioritise open communication through detailed annual reports, real-time financial updates and digital engagement strategies.

4. Adapting to Changing Regulatory Framework

With ongoing regulatory changes, charities must stay informed about updates to SORP, tax requirements and reporting obligations. Regular training, professional advice, and proactive compliance reviews help mitigate risks and follow the latest standards.

Tackling Charity Financial Challenges for Better Sustainability

Charities face various financial challenges that can impact sustainability and compliance. Addressing these issues proactively ensures better financial health and operational efficiency.

1. Managing Multiple Funding Streams

Charities often receive income from diverse sources, including grants, donations, trading and investments. Proper fund accounting is essential to ensure that restricted funds are used appropriately. Implementing clear financial tracking systems and using accounting software developed for charities can help manage and report funds accurately.

2. Volunteer-Led Financial Management

Many small charities rely on volunteers for financial administration, which can lead to inconsistencies or gaps in knowledge. Providing training, establishing well-defined financial policies, and looking for professional support such as independent examinations or advisory services can help maintain financial oversight.

3. Compliance with Complex Regulations

Navigating regulatory requirements from the Charity Commission, HMRC, and SORP can be challenging. Regular policy reviews, ongoing trustee training and working with experienced accountants or auditors help ensure compliance and reduce the risk of financial mismanagement.

4. Demonstrating Financial Sustainability

Funders and stakeholders require evidence of long-term financial sustainability. Charities should develop a reserves policy, diversify income streams, and regularly review financial projections to ensure stability. Transparent reporting on how funds are managed and invested also strengthens donor confidence.

The Future of Charity Accounting

Charity accounting is evolving with tech innovations and increasing stakeholder expectations. Charities that adapt to emerging trends will increase transparency, efficiency and financial sustainability.

1. Integrated Reporting

Charities are moving towards integrated reporting, which combines financial and non-financial data to provide a holistic view of an organisation’s performance. This approach helps stakeholders understand how resources are used to achieve charitable objectives.

2. Sustainability Accounting

With a growing emphasis on environmental and social responsibility, charities are beginning to adopt sustainability accounting. This involves tracking and reporting on carbon footprints, ethical investments, and social impact, aligning financial practices with broader sustainability goals.

3. Blockchain for Transparency

Blockchain technology has the potential to improve financial accountability in the charity sector by providing a secure, tamper-proof ledger for transactions. This can improve donor confidence by ensuring funds are used as intended and reducing the risk of fraud.

4. Real-Time Financial Reporting

Innovations in cloud-based accounting software enable real-time financial reporting, allowing charities to track income, expenditure, and financial performance more accurately. This facilitates better decision-making, improves cash flow management, and ensures compliance with regulatory requirements.

My Final Thoughts

Charity accounting is crucial for financial transparency, regulatory compliance, and effective resource management. Throughout this guide, I have explored key aspects, including fund accounting, income and expenditure recognition, financial controls, and emerging trends shaping the sector in 2025 and beyond.

As the regulatory framework and tech innovations continue to evolve, charities need to stay informed and adapt to best practices. Leveraging automation, improving financial reporting, and maintaining strong governance will help charities build trust with donors and stakeholders.

To keep your charity financially sound and compliant, regularly review your accounting processes, look for expert guidance, and adopt innovative solutions that increase efficiency. Book a free consultation today to ensure your organisation stays on the right track.