West Yorkshire Community Accounting Service

Voluntary Sector Accounting Information

Any questions on the accounts……? A guide to understanding your annual accounts

Very often the approving of the annual accounts at the management committee is one of the main items on the agenda -however it is also often the shortest! How often have you attended a meeting -the treasurer says 'Any questions on the accounts' -everyone looks away, shuffles their papers and looks embarrassed; once again the accounts are approved without any questions. A funder said recently 'how can funders be sure you can manage their grant if the committee does not understand what the figures mean?' Hopefully this article will give you some pointers as to the sorts of questions that could be asked, and how to interpret the figures.

Accounts tell stories

There are usually 3 parts to a set of accounts, each of which can give you particular information about what is going on in that organisation. The first part (known as the receipts and payments account, the statement of financial activities, or income and expenditure account according to the legal status and size of your organisation )tells the story of what has gone on over the last year. Just as you can read down someone's checkout receipt from the supermarket and have a fair guess about their lifestyle; so you can read down the list of payments/expenditure categories and the amounts spent and get a fair idea of what an organisation has been doing over that year.

Income

At the top of this account will be the money coming into the organisation which should show where the organisations funds have come from over the year; some questions to ask are as follows-are grants and donations received for a specific purpose shown separately from income available for general use; is there a large sum in 'miscellaneous' in which case what is included. Are there any amounts which seem disproportionately large or small. Is the organisation heavily dependent on one source of income. How does each category of income compare with last year's figures (these should be in a column on the far right). How does the total income (otherwise known as total receipts or total incoming resources) compare with last year's total. If there are any significant differences you do not understand -ask why.

Payments

The payments figures come next (known as expenditure, payments or outgoing resources); what is the largest payment category - does this agree with what you thought was happening; are there any amounts which seem disproportionately large or small. How do the payment figures compare with the previous year. (eg if salaries have doubled since last year, were you aware that the organisation had doubled it's staff team…..?). How do fundraising costs compare with fundraising income shown in the section above. What proportion of all expenditure is spent on staff. How does the total expenditure (otherwise known as total payments or outgoing resources) compare with last year.

Surplus or Deficit

Underneath the money in and money out categories you should have a line called 'surplus/deficit' or 'net incoming resources' for the period. This is a particularly important line and tells you if there has been an excess of income over expenditure over the year or vice versa (in which case the figure will have brackets or a minus sign on it). If there is a large deficit you should find out why and if it was not intended what measures are being put in place to prevent a deficit in the current year. If there is a big surplus particularly on the restricted funds, again it is useful to find out why.
Below this line you should find a line called funds brought forward; this is the surplus /deficit brought forward at the beginning of the year, which are added to the surplus/deficit for the year in question to give you a figure for total funds carried forward at the end of the year. It is well worth comparing this figure with that for the previous year and if significantly different check out why; is that balance of funds in the unrestricted funds sufficient to carry you through a cash crisis for example if a funder pays you late.

Balance Sheet

On the next page comes the balance sheet or statement of assets and liabilities. This gives a snapshot of the organisation's worth crystallised at a specific moment in time (ie the last day of your financial year). It tells you what funds your organisation held at the end of the year and in what form they were held eg in the bank or as investments. Here are some of the headings you may see:
  • Fixed assets: Property, equipment or other major items owned by the organisation eg a mini bus or computer
  • Current Assets: This includes cash held in the bank or the petty cash tin, amounts of money owed to you (known as debtors) and prepayments, which are amounts paid out for goods or services which you will receive /use in a later accounting period (eg insurance)
  • Current liabilities: This includes creditors who are the people waiting to receive the balance of money you owe to them at the end of the year. (eg a stationery bill). It also includes accruals which are estimated amounts for services that you have used but had not been billed for at the end of the year, eg gas. They are liabilities because you hadn't paid them but will have to pay up eventually.

A key point to check is does the organisation have more current assets than current liabilities; if it does not it is going to have difficulty meeting its debts as they become due; another key question is what is the balance between unrestricted (ie general funds available for the general purposes of the group) and restricted (ie given for a specific purpose by the funder) fund balances. If most of the resources are tied up in restricted funds it means the organisation has very low resources to call on if there is a sudden crisis like the roof falling in or a funder paying late. Finally if there are a lot of debtors (ie people who owe the organisation money) what is being done to chase them up. Better to have the cash in your bank than their's!

Notes to the Accounts

The third part of a set of accounts is the Notes and although they look boring they are well worth burrowing into to get the breakdown of figures on the other two pages; for example they may tell you where the grants have come from, and what balance remains on each one. They should also tell you if depreciation is being charged and at what rate. The notes should also tell you what each restricted fund is for, and what balance remains on each one.

Want to understand your organisation's accounts better?

Talk to your accountant about anything you don't understand; they are usually delighted that someone is taking an interest! And if you don't understand what they are talking about, say so! Understanding your organisation's annual accounts is crucial to making sound decisions about your organisation's future.

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