The basic principles of Charity Accounting are the same as other businesses. The main difference is the emphasis on restricted and unrestricted funds and the expenditure that goes along with it.
The point about the record-keeping is that you need to keep records that enable the trustees to follow the requirements of the Charities Act, so those requirements are:-
To provide basic information so that you're able to show and explain all of the charity's transactions.
You must be able to disclose, at any point in time, with reasonable accuracy, what it says, the financial position of the charity and,
Basically, the ultimate is for the trustees to be able to prepare a set of accounts.
Deferred income is used often in Charity Accounting in order to ensure that only the element of the income received that relates to the actual months within the Financial year are accounted for in the Financial Statements.
The money is deferred (removed from the profit & loss) and put into the balance sheet as a current liability (debt) which will be released back into the profit & loss within the next 12 months.
The video explains the situations when this happens.
In Charity Accounts there are 4 types of fund that can appear on a set of Financial Statements:
Restricted, where the funder has specified the money be spent on specific expenses or activity;
Endowment, where the money is to be spent on a long term asset such as a building, and the Endowment is released into the P&L account at the same rate as the depreciation on the asset;
Designated, Funds that were originally unrestricted but the Board have voted for it to be shown on the Financial Statements as designated, put aside, for a project they wish to fund in the future. This can be undone by the Board at any time and the money fall back into the Unrestricted pot.
Unrestricted, anything that can be used against any type of the businesses expenditure.
Cost recovery comes into play in Charity Accounting when money has been received from a funder who has restricted the type of expense the money can be spent on. It can also be used in Job Cost Processing but that is another topic entirely.
Full Cost Recovery = the total cost of expenditure can be included;
Absorption Costing = only a portion of the cost can be allocated.