Understanding the Balance Sheet - what it means for charities

The Balance Sheet is one of the key financial statements in a Charity set of accounts, and one that Trustees should have a good understanding of. Also known as the statement of financial position, it provides a snapshot of the charity's finances at a specific point in time on one particular date in the calendar - the Year End. It is different the day before, and different the day after.

What is a Balance Sheet?

The Balance Sheet essentially answers 3 core questions:

1. What does the charity own? (Assets)
2. What does the charity owe? (Liabilities)
3. What are the charity’s net funds? (Reserves)

The Balance Sheet is structured around the formula:

Assets - Liabilities = Reserves

Key Components of a Balance Sheet

1. Assets: These are resources owned by the charity that have some economic value. They include:

a) Fixed Assets & Investments: Long-term assets such as property, equipment, and other tangible items, as well as investments that are not immediately accessible.

b) Current Assets:

• Cash in the bank or in hand;
• Money that is owed to the charity - e.g. gift aid due not yet received, invoices not yet paid;
• Prepayments - where you have paid for something that hasn’t all been ‘used’ by the year end – a very common example is insurance paid for a full year and that period is different to the financial year;
• Any other money due to the charity that will be converted into cash within the next 12 months.

2. Liabilities: This is how much the charity owes to other people. They include:

a) Current Liabilities: due within 1 year

• Money owed to suppliers;
• Money owed to HMRC and pension providers;
• Contract income received in advance (this is often referred to as deferred income), where the performance of the contract goes into the following financial year (note: this does not normally apply to grants which are carried forward in restricted funds);
• Money owed for goods and services related to the past financial year but you have not yet received the invoice. These are Accruals. A typical example is the invoice for the Audit/Independent Examination which happens after the year end, but relates to that year;
• Loans due for repayment within 1 year;
• Bank overdrafts repayable on demand;
• Any other money that the charity owes that needs to be paid within the next 12 months from the year end date.

b) Long-term Liabilities: more than 1 year. Money the charity owes that is not due in the next 12 months such as mortgages or long-term loans. These items will normally have the next 12 months payments included in Current Liabilities, and the remainder showing in long-term liabilities.

3. Reserves: Also known as funds, show the difference between the charity's assets and liabilities. They are usually classified as:

a) Restricted Funds: Funds given for a specific purpose and must be spent in accordance with the donors' agreed activities. They cannot be spent on general activities.

b) Designated Funds: Funds received as unrestricted but have been designated by the Trustees for a specific purpose. These can be varied and are often for the purchase of property or for the expansion of new projects/services. These funds can be re-designated by the Trustees to unrestricted if required, or if the proposed designation is no longer relevant. The designated funds should also be explained in the Trustees Annual Report (Financial Review section) as to why they have been designated, and when they are expected to be spent.

c) Unrestricted Funds: Funds that can be used flexibly for any of the charity’s operations or projects.

Note: Free reserves are often not noted on the Balance Sheet but included in the Financial Review section of the Trustees Annual Report.

Free reserves are the part of unrestricted reserves that are available to spend on any of the charity’s operations or projects. In reality, this is calculated as Unrestricted Reserves minus Fixed Assets (as cash from these is not readily available), minus any other investments that cannot be reasonably quickly converted back into cash.

Why the Balance Sheet Matters for Charities

A Balance Sheet is important because it reveals the charity's financial strength, liquidity, and long-term sustainability. The Balance Sheet helps with informed decision making for both the Charity and for funders, donors and other stakeholders as well as giving stakeholder confidence with a robust balance sheet showing that the charity is financially healthy (or not).

For more detailed guidance on general charity accounting and reporting, refer to the Charity Commission's publication: Charity reporting and accounting: the essentials

IMPORTANT: Future developments on the Balance Sheet that Trustees need to be aware of.

For accounting periods starting on or after 1 January 2026 there will be a significant change on the Balance Sheet for many charities. A new Charity Statement of Recommended Practice (SORP FRS102) will be issued during 2025 that includes the provisions of the already issued updated Financial Reporting Standard FRS102. In this there are a number of changes that will affect charities in general, and you should speak to your accountant about these.

However, there is a change to how Leases will be accounted for that will affect the Balance Sheet of a very significant number of charities. There are all different types of leases that your charity may hold, that give you a ‘Right to Use’ the asset. This is most often for property i.e. rent of a building but could also be for other assets you ‘rent’ to run your charity (photocopier, motor vehicles, franking machine, IT equipment, etc). The new rules apply to any non-cancellable element of the lease, and these are currently only disclosed in a note to the accounts.

In short, under the current rules these leases are accounted for as an expenditure amount through the Statement of Financial Activities (SoFA) and form part of the net movement in funds for the year. These have in the past been called operating leases. For accounting periods starting on or after 1 January 2026 (new rules), these leases will need to be classified on the Balance Sheet as part of Fixed Assets and the treatment of the payments will be different, and the assets will require depreciation.

There is an exemption for low value/short-term leases, but this is not the value of the payments but the underlying asset itself. Any short-term lease of less than 12 months the new rules do not apply to, and they will continue to be treated in the same way. Any lease over 12 months must be looked at carefully.

It is important to be aware that some income contracts/Service Level Agreements for charities can also contain leases, and so these will need to be carefully reviewed to ensure that any lease element included is correctly accounted for in the future.

The overall effect of this will be to increase the Assets and Liabilities amounts on the Balance Sheet, but not by the same figures (talking technically, the lease has to be calculated to its future Net Present Value using a discount rate and released to the SoFA over the period of the lease), and the ‘interest plus depreciation’ element will replace the current simple posting of rent paid to the SoFA.

This is complicated!

As an attempt at a simple example, if you have a 10-year lease on a property and currently pay £700 per month in rent, £700 x 12 months (£8,400) is shown as expenditure in the SoFA and nothing is shown on the Balance Sheet.

Under the new rules you will have a Right of Use Asset on the Balance Sheet that starts at £84,000 and is depreciated over the useful economic life (10 years), but you will also have a Liability on the Balance Sheet of the future Net Present Value of that asset – i.e. in today’s money terms, what is that asset worth over the whole term of the lease. Bear in mind that the value of money changes over time, so £8,400 in todays money may only be worth £6,000 in 10 years time, so the Balance Sheet Liability will be less than the £84,000 increase in the asset value at the start, and in year 1 of the lease there may be a significant increase in reserves due to the accounting change.

As I said, it’s complicated!

Your accountant will most likely be doing these calculations for you, but the Trustees need to be aware of the impact this will have on both the Balance Sheet and the SoFA in the near future, and be able to explain the impact to funders, donors, and other stakeholders and so should begin to familiarise themselves with these changes now, and the impact it will have on their Balance Sheets. Funders may not be fully up to speed on these changes immediately and your charity needs to be able to explain any significant increase in reserves due to the accounting treatment only changes.

Trustees will also need to include explanations in the Trustees Annual Report, as well as a change in accounting policies in the notes to the accounts.

When the new Charity SORP FRS102 is released, we will do a further blog on these changes in an attempt to make it as simple as we can for you 😊.

If you wish to read more on the FRS102 technical information relating to leases, please refer to Section 20 of the new FRS102.