is it acceptable for a company make an accrual in their accounts for a donation to local causes? Does the donation have to be paid within a certain period after year end? The reason for this question is that until we prepare our accounts we do not know what our profit will be. The business is a community shop run by volunteers for the purpose of giving profits to the community and local area. Thanks
The company does not need to make an accrual for distributing the profit it has make.
At the end of the year, the charity will show a surplus for the year which it will add to its reserves. The charity will then show as a distribution of its reserves payments it makes to the local community.
Therefore there is no need to make a accrual, the payment to the local community will be recorded in the accounts as and when the payment is made.
I hope this helps and if happy, please click accept.
the company is not a registered charity, therefore corporation tax is payable on any surplus?? The accrual will be necessary to reduce the surplus and avoid a tax liability. Is it acceptable to make an accrual on this basis? Many thanks
I didn't realise the entity was not a registered chartity and Corporation Tax would be paid on the surplus.
In essence, the accrual would be like a bonus / dividend which also distributes the profits for the year.
As long as at the balance sheet date there is a valid obligation to pay the surpluses to the local community, an accrual is justified.
The obligation has to exist at the balance sheet date so there should be minutes of meetings which authorise the payment of the surpluses. It is acceptable to have an obligation that doesn't specify an amount, but the key part is this obligation must be in place by the year end. You can't agree now to distribute the surplus as there would not have been an obligation in place at the balance sheet date.
In summary, providing there is something in writing in place as at the year end, it is okay to include an accrual. Obviously I can not advise to back-date minutes, but I have heard of firms doing this to put through bonuses / dividends.
Certified Chartered Accountant