Glossary of accounting terms

Jargon made easy

Introduction

This resource is designed to help trustees, staff, and volunteers at small to medium-sized charities understand the financial terminology you'll encounter when managing your organisation's finances.

Financial management is a crucial part of running an effective charity, but the language of accounting can sometimes feel like a barrier. This glossary breaks down important terms into plain English, with practical examples relevant to the charity sector.

Accrual

An adjustment made at the end of an accounting period to record expenses that have been incurred but not yet paid for or invoiced. For example, if your charity used electricity in March but won't receive the bill until April, you would create an accrual for the March accounts.

More broadly, "accrual accounting" refers to recording income and expenses when they occur (rather than when money changes hands), giving a more accurate picture of your financial activity during a specific period.

Assets

Possessions or claims that have value to your organisation. These are divided into two categories:

• Fixed assets: Valuable items that last more than one year, such as vehicles, furniture, equipment, computers, and investments.

• Current assets: Cash or items that can be converted to cash relatively quickly, including:

  • Money in bank accounts

  • Petty cash

  • Stock/inventory

  • Debtors (money owed to you)

  • Prepayments (services paid for in advance)

Audit

A formal examination of your accounts by an independent qualified professional (a Registered Auditor). The auditor follows guidelines issued by the Audit Practice Board and expresses an opinion on whether the accounts present a "true and fair view" of your financial position. Not all charities require an audit - it depends on your income level and governing documents.

Balance sheet

A snapshot of your organisation's financial position on a specific date. It shows:

• What you own (assets)

• What you owe (liabilities)

• The resulting net worth (funds/reserves)

Think of it as a financial photograph showing your charity's position at a point in time.

Creditors

Amounts your charity owes to others at a particular time. These appear under liabilities in your year-end accounts and may include:

• Suppliers you haven't paid yet

• Tax and National Insurance due

• Loans

Debtors

Money owed to your organisation that hasn't been received yet. While debtors are considered an asset, a large amount might indicate difficulties collecting money owed, which could lead to cash flow problems.

Deferred grants

Grants received in your current accounting period but intended for spending in a future period. These may also be called "Grants in Advance" or "Advance Receipts." They should not be counted as income until the period they relate to.

Depreciation

A method of spreading the cost of a fixed asset over its expected useful life. For example, if you buy a £5,000 computer system expected to last five years, you might record £1,000 of depreciation expense each year rather than showing the full £5,000 as an expense in the year of purchase.

Independent examination

A review of a charity's accounts that is less rigorous (and less expensive) than a full audit. There are specific rules about which charities can use an Independent Examination instead of an audit, and about who can serve as an examiner.

Liabilities

Amounts your charity owes to others. These can be:

• Current liabilities: Due within one year (e.g., unpaid bills, short-term loans)

• Long-term liabilities: Due after more than one year (e.g., mortgages, long-term loans)

Net current assets

The value of your current assets minus your current liabilities. This important figure shows your short-term financial health - whether you have enough readily available resources to meet your upcoming obligations.

Prepayments

Services your charity has paid for in advance but not yet used during the current accounting period. For example, if you pay a year's insurance premium in January but your accounting year ends in March, 9 months' worth would be recorded as a prepayment.

Receipts & payments (cash-based) accounts

A simple form of accounting that records only money actually received and paid out through your bank and petty cash during the period. This method shows opening and closing balances and is often used by smaller charities.

Reserves

The accumulated surpluses or deficits from each year's activities. Reserves can be:

• Restricted: Funds that must be used for specific purposes as directed by donors

• Unrestricted: Funds that can be used for any charitable purpose, which may be further divided into:

  • General reserves: Funds available for any purpose

  • Designated reserves: Unrestricted funds the trustees have set aside for a particular future purpose

SOFA (Statement of financial activities)

The primary financial statement required for larger charities. Unlike a simple income and expenditure account, the SOFA shows all incoming and outgoing resources during the period, categorized by the type of fund (restricted or unrestricted).

SORP (Statement of recommended practice)

The set of regulations that govern charity accounting in the UK. Larger charities must follow the full Charity SORP, while smaller charities have simpler requirements to meet.

Statement of assets and liabilities

A simplified financial statement commonly used by smaller charities that don't need to produce a full Balance Sheet. It lists what the charity owns (assets) and what it owes (liabilities) at a specific date.