Charities contribute to several issues in society, including humanitarian, social, and environmental causes. Charities must be run effectively, especially regarding their financial accounts. Accountability is of the utmost focus in this context. Follow this guide, as it contains every minute detail related to preparing charity annual accounts.
Charities must prepare annual charity accounts and maintain them mandatorily, including grants, receipts, and cash books. They must also prepare and maintain trustee reports.
Key Components of Charity Accounts
Depending on the structure and size of the organization, charity accounting will differ. Some basic standards will, however, apply in all cases. Charity annual accounts are characterized by –
- A balance sheet with a list of liabilities, assets, and net assets must be prepared when the reporting period closes.
- A statement of Financial Activities (SoFA) summarizes the charity’s income and expenditures within the given financial year. Income categories could include donations, fundraising, grants, etc.
- Notes to the Accounts offer additional information and explanations related to various policies, events, and transactions.
Accounting Requirements for Charities
Accountability and good governance are two main reasons for maintaining charitable accounts. To maintain trust and confidence in the entities, they need to ensure that the organization is run within the regulatory framework and that all transactions are transparent.
In the United Kingdom, the Charity Commission for England and Wales sets charities’ accounting and reporting standards. The Charity Commission for Northern Ireland defines the rules for Northern Ireland, and the Office of the Scottish Charity Regulator governs the rules for Scotland.
Preparing Charity AccountsÂ
- Annual Earnings Between £5,000 – £25,000
Accounting for charities earning between £5,000 – £25,000 need them to register with the Charity Commission and should be able to produce the trustees’ annual report on request. For earnings between £5,000 – £10,000, an Annual Update is a must containing details of income and expenditure with trustee information to the Commission. For earnings between £10,000 – £25,000, the annual return must be filed with the Commission—the allowed duration to file the return – within 10 months from the financial year’s last date.
- Annual Earnings Between £25,000 – £250,000
In this case, an independent examination of charity accounts is a must. The charity records in the form of an annual return must be submitted within 10 months from the closing of the financial year to the Charity Commission.
- Annual Earnings Between £250,000 – £1000,000
In this case, charitable accounts need to be in the form of accrual accounts and need to be audited by an independent examiner who is approved by the Commission.
- Annual Earnings Above £1000,000
If the annual income is more than 1 million pounds, charities need to maintain accruals accounts, which must be audited every year.
Understanding More About Accounting for Charities
Types of Accounts for Charities
- Receipts & Payments
These accounts show payments received and paid in the financial year. It is the most simple form of accounting charity. Smaller Charities that earn less than £250,000 yearly follow this accounting system. However, since receipts and payment accounts are pretty basic, it is difficult to get a clear picture of the organization’s financial health by looking at them. These small charities must also prepare a statement with assets and liabilities alongside these accounts.
- Accruals Accounts
Bigger charitable organizations follow this method of charity accounting. Creating accrual accounts is not a simple job, and most charities need the help of professional accountants to prepare charity records in this form of accounting.
These types of accounts provide detailed and clear information about the charity’s financial health and can be adjusted audience-wise. In these accounts, assets are clearly demarcated from expenses.
In the UK, the accrual accounts must be prepared within the SORP. The explanatory notes need to include a balance sheet and a statement showcasing financial activities, different sources of income, and how money is spent.
Scrutinizing Accounts for Charities
- Independent examination of charity accounts
Any charity that is earning more than £25,000 needs to get its accounts checked by an independent and approved party. The independent examiner of charity accounts scrutinizes the charity records to ensure that these have been prepared and maintained correctly, as per the Charities Act. Compared to an audit, it is less intrusive.
As per the Charities Act 2011, trustees are legally responsible for appointing an independent examiner of charity accounts. The examiner must be capable, skilled, and competent to examine all records.
- Regular Audits
All charities earning £ 1 million or more must have their accounts audited regularly. A registered auditor must conduct the audit as it requires a highly skilled person to scrutinize every aspect of the charity’s accounts for accuracy and fairness.
Trustees’ Annual Report
When a charity earns above £25,000, it needs to prepare a trustees’ annual report clearly mentioning the charity’s objectives and achievements and submit the same to the Charity Commission. The purpose of the Annual Report is to show funders and the public the quality of work being done by the charity.
Annual Returns
This needs to be filled by all charities earning over £10,000 annually. It is an online form that has to be correctly filled out and submitted to the Charity Commission within ten months from the date of the close of the financial year. Charities earning more than £25,000 annually need to be pointed out in case any major incident occurs during the financial year related to fraud or other financial risks. Charities also need to update all relevant details on the Charity Commission website.
To conclude, accounting for charities entails maintaining accurate charity records, allocating costs appropriately and transparently, and seeking professional advice, as it can all get pretty complex. Bigger charities may find it much more difficult to navigate the challenges of accounting and should certainly hire the services of leading accountants specialized in charity accounting.
If you are seeking expert guidance and support in accounting for your charitable organization, you can speak with Taxcan Accountants today and streamline your accounting processes to build a financially healthy ecosystem for your work.
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Additional Links
You can find detailed information here​ (GOV.UK)​​ (GOV.UK)​.
This document is essential for understanding the nuances of charity accounting and can be accessed here​ (GOV.UK)​.
Using these templates can streamline the process and ensure compliance. These templates are available here​ (GOV.UK)​.
More information can be found here​ (Price Bailey Chartered Accountants)​.
