Charities have to prepare their accounts in accordance with a guide called the Statement of Recommended Practice (SORP), which in turn is based on the Financial Reporting Standard 102. These guidance principles were updated in 2015 and must be adopted in order to fulfil the trustees’ responsibilities to prepare accounts that show a true and fair view. Most of the basic accounting principles apply, but they have to be adapted to fit the non-commercial nature of some charity transactions.
The profit concept is not appropriate to charities, as charity law requires them to use all funds to further the charitable objects. The profit and loss account (income and expenditure account) is therefore replaced by a statement of financial activities (SoFA). The SoFA brings together all the resources available to the charity and shows how these have been used to fulfil the charity’s objectives. Incoming resources include new endowments received by the charity, donated assets and donated services.