How to prepare charity accounts

What accounts and reports does your charity need to prepare?

The type of accounts and reports your charity needs to prepare depends on the legal structure, income and overall value of assets.

All charities are required to keep accounting records such as receipts, grants, cash books etc. Annual accounts and trustee reports must also be prepared by all charities. 

Charities with an annual income of £5,000 - £25,000

• Charities with an annual income above £5,000 are legally required to register with the Charity Commission. 
• Every registered charity is then required to produce a trustees’ annual report that is available upon request. 
• If a charity’s income is below £10,000, it's required to submit an Annual Update to the Charity Commission.
• The Annual Update contains information such as income and expenditure for the year and trustee details.
• If a charity’s income is above £10,000, it must submit an annual return to the Charity Commission within 10 months of the end of its financial year. This will also include information on accounts and trustees.

Charities with an annual income of £25,000 - £250,000

• If a charity’s income is between £25,000 and £250,000 then it must have its annual accounts independently examined or audited.
• The annual return must then be submitted to the Charity Commission within 10 months of the end of its financial year.

Charities with an annual income of £250,000 - £1,000,000

• If a charity’s income is between £250,000 and £1 million then it keeps accruals accounts which are required to be audited or independently examined by an individual who is a member of a body approved by the Charity Commission.

Charities with an annual income of £1,000,000

• Charities with an annual income of over £1 million must keep accruals accounts which then must be audited, not independently examined. 

Receipts & Payments Accounts

Receipts and payments accounts are a simplified form of accounting that summarises the money received and paid out during the financial year. Charities with an annual income under £250,000 often choose to prepare their accounts in this simplified way.

This form of accounting works for small charities with straightforward financial dealings. Due to the simplified nature of these accounts, it can be difficult to determine a clear picture of finances and compare different years. 

Receipts and payment accounts should be prepared in the same way from one year to the next. Alongside these accounts, you should also provide a statement that lists assets and liabilities.

Accruals Accounts

As charities grow and the financial structure becomes more complicated, accruals accounting may be a better option. We advise you to seek professional advice when moving over to a different form of accounting to ensure the transition is smooth and the right information is recorded. Accruals accounts work well for larger charities due to the following:

• Clearer picture of the charity’s finances - income and expenses are shown relating to the year in question rather than recording money in and money out. 
• Adjust for different audiences - accruals accounts adjust depending on the audience such as debtors, creditors and accruals.
• Value of assets - assets are clearly separated from expenses on accruals accounts. The value of assets automatically reduces with time, reflecting a more accurate picture of a charity’s assets.

A charity’s accruals accounts must follow the Statement of Recommended Practice (SORP) which requires a balance sheet, a statement of financial activities showing incoming resources and how they were used and explanatory notes.

Scrutiny of Accounts

There are two types of scrutiny of accounts:

• Independent examination - a requirement for all charities with an income of above £25,000.
• Audit - a requirement for all charities with an income of above £1 million.

Independent Examination

The purpose of an independent examination of charity accounts is to ensure that all money is accounted for and records have been kept correctly. This examination is a less intrusive version of a full audit with less scrutiny involved.

An independent examiner must scrutinise accounts to ensure all money is accounted for and they aren’t failing to comply with the Charities Act.

Under the Charities Act 2011, trustees have a legal duty to appoint ‘an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts’. No specific qualifications are required of the independent examiner but they must have a strong understanding of charity accounts.

Audit

The audit of a charity’s accounts must be carried out by a registered auditor. An audit is the highest level of scrutiny and aims to find evidence to describe a charity’s accounts as ‘true and fair’.

Every charity with an annual income of over £1 million is required to have an audit carried out by law. 

Trustees’ Annual Report

Every charity with an income above £25,000 must produce a trustee’s annual report and submit it to the Charity Commission. This report explains the charity's aims and how it is achieving them. It’s a good way to show the public the great work of a charity and show funders what their money has achieved.

Annual Return

An annual return is an online form that must be completed each year by registered charities with an annual income of over £10,000. The completed annual return must be returned to the Charity Commission by the stated deadline (10 months after the end of the financial year).

Charities that must complete an annual return will receive a helpful email reminder. The information required for an annual return will be found in your accounts or trustee’s annual report. Charities with an income of over £25,000 must state any serious incidents that took place in the last year. This could include incidents such as fraud or other risks to beneficiaries.

By law, before completing an annual return, charities are required to update their details on the Charity Commission website.

Understanding how to prepare charity accounts is so important to ensure accurate reporting. Charity accounting software can make keeping track of finances much simpler with all of the information in one place. At AccountsIQ, we provide software that makes accounting easier for charities.