Even without formal financial training, as a trustee, you’re responsible for your charity’s money. That means understanding the annual accounts well enough to make informed decisions and spot risks. Reading the accounts helps you safeguard assets and act in the charity’s best interests.

The Charity Commission and NCVO both emphasise that trustees should not leave financial oversight solely to accountants or treasurers. You need enough financial awareness to ask questions and judge your charity’s position.

In short, going through the accounts is a legal duty of prudence and care. Accounts can look daunting, but they follow a standard format that becomes clearer with practice.

The Key Documents You’ll See

Charity accounts typically include several components, each offering a different perspective on financial health. You’ll usually receive these as part of the annual report:

• The Statement of Financial Activities (SoFA) brings together all income and expenditure for the year. Think of it as the charity equivalent of a profit and loss statement, though charities don’t make a profit. They generate surpluses or deficits.
• The Balance Sheet (or Statement of Financial Position) provides a snapshot of what the charity owns and owes at the year-end. It shows assets, liabilities and the resulting net worth.
• Larger charities with income exceeding £500,000 must also include a Cash Flow Statement, detailing how money moved in and out during the year.
• The Notes to the Accounts explain how figures were calculated, break down major items and disclose important details like related party transactions or accounting policies.
• Finally, the Trustees’ Annual Report provides narrative context, the story behind the numbers. Reading this first often makes the financial statements easier to interpret.

Smaller organisations may use receipts and payments accounting, which is simpler. Those above £250,000 income typically prepare accrual accounts following the Charities SORP. Once you understand the basic framework though, you can read accounts from any UK charity.

Start With the Trustees’ Annual Report

Before you look at any numbers, read the narrative report. This explains what the charity was trying to achieve during the year, what worked, what didn’t and what challenges emerged. It should also set out your reserves policy, explain major financial movements and discuss principal risks.

Watch for vague language about financial position, missing reserves policies, or no discussion of risks. These gaps suggest weak governance. A good Trustees’ Report makes the financial statements easier to interpret because it tells you what story the numbers should be telling.

Understanding the Statement of Financial Activities, (SoFA)

The SoFA lists all resources coming into the charity and all spending going out, with the difference shown as net movement in funds. Unlike commercial accounts, the SoFA separates figures by fund type – a crucial distinction we’ll explore shortly.

Start with the income section at the top. You’ll see categories such as donations, grants, fundraising events, trading income and investment returns. Look at each line and ask: Does this match our expectations? If grant income dropped significantly from last year, do we know why? Did a major donor stop giving or was last year’s figure inflated by a one-off legacy?

The expenditure section breaks down spending. Charities must show charitable activities separately from support costs like fundraising and governance. Check these proportions make sense. If fundraising costs suddenly doubled, that warrants investigation. If charitable programme costs seem low relative to income, perhaps the charity is building reserves rather than spending on mission.

Pay close attention to the fund columns. Most SoFAs show restricted funds, unrestricted funds, and a total. This separation matters enormously. If your charity received a £20,000 grant for a specific project, (restricted) you should see roughly £20,000 of expenditure against that project or a carried-forward balance if the work continues next year.

At the bottom, you’ll find net movement in funds: the surplus or deficit. A small surplus suggests prudent management. A large deficit might indicate the charity is drawing down reserves to fund activities, which could be planned or could signal problems. Conversely, large surpluses year after year might suggest the charity is being overcautious and not maximising impact.

Reading the Balance Sheet, (Statement of Financial Position)

While the SoFA shows the year’s activity, the balance sheet reveals the charity’s financial position at a single point in time, usually the last day of your financial year. This document tells you whether the charity is solvent and has resources to continue operating.

The balance sheet has three main sections. Assets include everything the charity owns: cash in the bank, investments, equipment, property and amounts owed to the charity, (debtors). Note the split between fixed assets, (long-term items like buildings) and current assets, (cash and things that will become cash soon).

Liabilities are what the charity owes: bank loans, unpaid supplier invoices and accrued expenses. Some short-term liabilities are perfectly normal – you might owe rent at month-end or have unpaid utility bills. However, high debts or persistent overdrafts are warning signs.

The difference between assets and liabilities gives you net assets, which equals the charity’s reserves or fund balances. If this figure is negative, the charity is technically insolvent, a critical red flag requiring immediate trustee attention.

Look closely at liquidity. A charity might show substantial net assets but have most value tied up in a building. If cash balances are low, how will you pay staff and suppliers next month? Compare this year’s cash position with last year’s. Has it improved or deteriorated?

The balance sheet should also prompt you to check the going concern status. If auditors or independent examiners raised doubts about whether the charity can continue for the next twelve months, that’s serious and must be addressed by the board.

Quick check: Assets, (cash plus investments plus fixed assets) minus liabilities, (debts plus amounts owed) should equal net assets shown at the bottom. If reserves have fallen sharply since last year, understand why before approving the accounts.

Cash Flow Statement, (for Larger Charities)

Charities with gross income over £500,000 must include a Statement of Cash Flows. Even if your charity doesn’t require one, understanding cash flow is valuable.

This statement shows how cash moved during the year, divided into three categories. Operating activities reflect core charity work: cash from donations and grants coming in, payments to staff and suppliers going out. Investing activities cover buying or selling assets like property or investments. Financing activities show loans taken or repaid.

The insight here is crucial: you can have a surplus on the SoFA yet struggle with cash. Perhaps you’ve recognised grant income that hasn’t been paid yet or you’ve bought equipment that’s shown as an asset rather than immediate expenditure.

Look for patterns. Consistently negative cash from operations means you’re spending more cash than you’re receiving from donors and activities, unsustainable unless you have other income sources. Large investment outflows might indicate capital projects. Financing activities involving new loans suggest the charity needed to borrow.

Even smaller charities benefit from tracking cash flow informally. Compare the opening cash on last year’s balance sheet with the closing cash on this year’s. The cash flow statement explains how you got from one figure to the other.

What the Notes Tell You

The notes explain how figures were calculated and often contain more revealing detail than the main statements. Start with accounting policies. These tell you whether the charity uses accrual or receipts and payments accounting, how it values assets, and when it recognises income.

Check for related party transactions. Payments to trustees or connected organisations must be disclosed here, with the authorisation that permitted them. Large grants often get their own note explaining the conditions attached.

Fund movement schedules show how each restricted fund changed during the year. If restricted funds are piling up unspent, this is where you’ll see it.

Pension obligations, significant commitments, and contingent liabilities also appear in the notes rather than the main statements.

Understanding Funds and Reserves

Here’s where charity accounting differs most from commercial finance: fund accounting. Rather than focusing on profit, charities must track how money is restricted by donor intent and ensure spending aligns with charitable purposes.

Restricted funds can only be used for specific purposes set by the donor. If someone gives £10,000 “for youth work”, that’s restricted. You must spend it on youth work or return it. The Charity Commission expects you to track restricted funds separately and report on them clearly.

Unrestricted funds are at the trustees’ discretion. General donations, membership fees, and unrestricted grants fall here. You can use these for any of the charity’s purposes. Within unrestricted funds, trustees sometimes create designated funds, money earmarked for a specific future need, like replacing a vehicle. These remain legally unrestricted, so you can change your mind but designation shows donors you’re planning ahead.

Reserves typically mean the freely available unrestricted funds, excluding fixed assets and designated amounts. If your balance sheet shows £30,000 general unrestricted funds, £5,000 designated for equipment, £20,000 restricted for an education project and £50,000 in fixed assets, your free reserves are roughly the £30,000 general fund.

Why does this matter? Trustees must ensure restricted funds are spent correctly. Mixing restricted and unrestricted money or using restricted funds for the wrong purpose, breaches trust law. Meanwhile, reserves provide your safety net. Too little, and you’re vulnerable to unexpected costs or income drops. Too much, and donors may question why you’re hoarding rather than delivering impact.

The Charity Commission expects every charity to have a reserves policy explaining how much it aims to hold and why. Your accounts should show whether you’re meeting that policy.

Common Red Flags to Watch For

As you review the accounts, certain warning signs should prompt immediate discussion:

• Persistent deficits – spending more than income year after year erodes reserves and threatens sustainability.
• Declining cash or reserves – a shrinking safety net leaves no room for unexpected challenges.
• Unexplained swings – sudden, large changes in income or spending without a clear explanation in the Trustees’ Report or notes.
• Over-reliance on one funder – if a single source provides 50% or more of income, losing them could be catastrophic.
• High debts or overdrafts – persistent borrowing suggests cash flow problems.
• Related party transactions – payments to trustees or connected entities must be disclosed and properly authorised.
• Inactive restricted funds – large balances sitting unused might indicate stalled projects or forgotten commitments.
• Late accounts or audit qualifications – consistently late filing or concerns raised by auditors suggest weak governance.

One red flag doesn’t necessarily mean disaster but multiple issues or persistent problems demand urgent trustee attention and often external advice. Strong boards use accounts as an early warning system, addressing risks before they become crises.

What Good Boards Do

You don’t need to become an accountant. But you do need to know whether your charity can afford what it’s planning, whether funds are being spent properly, and when something’s going wrong.

Most trustees find that once they’ve worked through a couple of years of accounts with someone who can explain them, the format starts making sense. The fear goes away.

If your board’s struggling with the numbers, that’s worth fixing. We work with trustees who need clearer reporting and practical guidance on what they’re actually looking at. Book a free call, and we’ll talk through what would help.