Oldham Community Accountancy
Service
A to Z of Accounting Terms
Accrual Accounts
This is when accounts are prepared to show everything that the
organisation has done in the year and not just when the organisation has
paid or received money. For example you will generally pay gas and
electricity in arrears therefore it is highly likely to get an invoice after the
year end which relates to part of the prior year and therefore the expense
will be included in the accounts before the year end. Also if you issue and
invoice before the year end but it is not paid before the year end it should
also be shown in income in the financial year when the invoice has been
issued as it reflects work done in that year.
Accrual accounts have to be prepared by Charities with an income which is
greater than £250,000, but a company, whatever the size, must produce
accounts under these rules
Accruals
These are estimates of expenses which have been incurred by the
company for which no invoice has been received or paid before the end of
the accounting period.
Assets
Assets are resources owned by an organisation which will give benefit to
the organisation in the future (generally cash). Assets are spilt into two
categories: fixed and current.
Audit
An audit is an examination of an organisations financial statements and
accounting records and will express an opinion on the accounts in line with
the Charities Act 1993 and the Companies Act 2006. All organisations
registered under the Charities Act 1993 and have an income exceeding
£500,000 are required to have an audit each year.
Balance Sheet
This forms part of the financial statements, the balance sheet shows the
financial position of an organisation at a given date. The Balance Sheet
adds up all the organisations assets and subtracts all its liabilities to give a
value of the organisation. The Balance Sheet also shows the funds of the
organisation split between its different funds. The Balance Sheet is only
required to be produced by organisations producing accrual accounts.
Creditors
These are suppliers of goods and services which the organisation owes
money to at the balance sheet date
Current Assets
These are items which are to be converted to cash in the short term.
Examples of current assets include stock, debtors, prepayments and cash.
Current Liabilities
This is a short term liability, which is expected to be paid within one year.
Examples of current liabilities include creditors, accruals and overdrafts.
Debtors
These are the people who owe the organisation money. Even though this
is an asset some people will be slow to pay, and if they owe a lot of
money there could be problems when trying to collect the money and
therefore cause cash flow issues.
Deferred Grants
These are grants received by the organisation in a financial period but
they are not intended to be used until the next financial period. These are
also known as Grants Received in Advance or Advance Receipts.
Depreciation
This is a method of spreading the cost of a fixed asset over its useful
economic life.
Direct Costs
These are costs which are directly attributable to an activity, for example
the salary of the activity co-ordinator. The level of these costs will
increase in line with any increase in the use of the activity.
Endowment Funds
This is a fund from which an organisation receives income. It is generally
not allowed to spend the capital but is allowed to use the income
generated from the endowment.
Financial Period
This represents the period of time over which you keep you accounting
records. This will generally cover 12 months, at the end of the 12 months
you will produce you accounts which summarise all the activities over the
12 month period.
Fixed Costs
These are costs which remain at the same level no matter how much the
activity there is, e.g. rent.
Income
This is the money that the organisation has received to carry out its
charitable objectives. Income can come from a number of different
sources such as grants, donations, fees, investments, bank interest, etc.
Independent Examination
This is similar to an audit however the level of examination is not as
detailed. Any organisation registered under the Charities Act 1993 with
income between £25,000 and £500,000 is now only required to have an
Independent Examination. This includes charitable companies.
Indirect Costs
These are costs incurred to perform an activity but cannot be directly
attributable for example utility bills. These sorts of costs will be spread
across a number of different activities.
Liabilities
Liabilities are debts and obligations that an organisation has to a third
party. They can be split between current and long term.
Long Term Liabilities
These are amounts owed by the organisation which are payable after
more than one year. An example of a long term liability is a bank loan.
Liquidity
This is a measure of how much cash you have and is it enough to meet
your short term needs. If you don’t have enough cash to pay your
immediate obligations then you will have a ‘liquidity problem’.
Materiality
This is a concept used to determine whether something is big enough to
be a concern to an organisation. Materiality will be different for all groups
and will depend on the size of the organisation. For example a £100 error
will be material for a small organisation but not for a large one.
Net Current Assets
This is a figure which is shown on the balance sheet and is calculated by
subtracting current liabilities from current assets. This is also referred to
as working capital as it represents the funds of the business available for
day to day running.
Overheads
These are the costs which are incurred by the organisation as a whole
regardless or the number of activities or projects the organisation is
running. Examples of overheads include, rent, rates, heating and lighting,
accountancy fees, etc.
Prepayments
These are services which an organisation has paid for in advance which
have not been used in the current financial period. For example you are
likely to pay rent in advance.
Receipts & Payments Accounts
These are accounts which are prepared based simply on the cash which
has come in and out of an organisation of the course of a financial period.
Reserves
Each year an organisation receives income and incurs expenditure, which
result in a surplus or deficit. Year on year the surplus/deficit’s accumulate
and forms a reserve. There are three types of reserve an organisation can
have:
Restricted:
funds which have been specified as to how they can be
spent by the donor
Unrestricted: funds which can be used for any general purpose
Designated:
funds which have been set aside for a specific use by the
Trustees
Statement Of Financial Activities (SOFA)
The SOFA is produced for organisations who prepare accrual accounts, i.e.
where income is greater than £250,000. The SOFA shows all incoming
resources and resources expended by activity and by fund.
Statement of Recommended Practice for charities (SORP)
The SORP sets out the basic principles of charity accounting, prescribes
formats and content of charity accounts, and provides guidance for the
preparation of charity accounts.
There are simplified rules for smaller charities that fall under the audit
threshold.
Statement of Assets and Liabilities
This is a statement produced by organisations who produce receipt and
payments accounts. It is basically a list of all items that the organisation
owns (fixed assets, debtors, cash, etc) and the items that it owes
(creditors, etc)
Variable Costs
These are costs which will increase in line with the more of an activity you
do. For example any resources you give out such as guides and
templates, the more of these you give out the more it will cost.
For more help and information
Please contact Oldham Community Accountancy Service
Tel: 0161 652 2344; E-mail enquries@ocas.org.uk
Website: www.ocas.org.uk