Charities have an important role in the modern world and their work is valuable across the different parts of society. To ensure the work is actually for the benefit of society, it’s important to have guidelines governing how charities operate. That’s why financial reporting for charities is a mandatory thing. But what do charities have to report and to whom?
What are the documents charities need to prepare?
Financial reporting for charities is mandatory for all charities. The reporting aims to provide the relevant authorities with a clear picture of the financial position of the charity. It helps the authorities know the charity is performing its duties according to law. However, the kind of reporting a charity has to do can depend on the legal structure, income and the value of its assets.
In general, all charities have to prepare two reports:
- Annual accounts and accounting records, which include cashbooks, receipts, records of grants and so on.
- A trustees’ annual report that describes the work the charity is doing.
In addition to this, registered charities with an income over £10,000 and all Charitable Incorporated Organisations (CIOs) must also file an annual return. In terms of registration, charities making over £5,000 are required by law to register with the Charity Commission. Take a look at our previous blog post on how to register as a charity to find out more.
What forms of accounting should charities use?
Financial reporting for charities can be done in two different ways: accrual accounting or receipts and payments. The type of accounts charities should use depends on the form of the charity and its income.
Receipts and payments accounts
The basic form of accounting is the receipt and payments method. It summarises the money the charity received and what it paid out during the financial year. It’s considered an easier way of reporting, which is why many smaller charities prefer to use it. The law doesn’t require any specific format of accounting to be used – however, it’s a good idea to stick to similar record-keeping and reporting each year. Receipts and payments style of accounting can be used by unincorporated charities and CIOs with a gross annual income under £250,000.
Financial reporting for charities gets a bit more complex as the charity grows in size. All charitable companies and unincorporated charities and CIOs with annual income over £250,000 must use accrual accounting. It provides a more comprehensive picture of the charity’s finances, showing income and expenditure as they relate to the year in question. Accrual accounting also looks at the value of the assets closely. Charities can find lots of information on accruals reporting on the Charity SORP website.
Who needs to see the accounts?
In terms of the external scrutiny of financial reporting for charities, a lot depends on the income and legal structure of the charity.
Charities with an annual income above £25,000 can have either an independent examination of accounts or an audit. Charities with annual income above £1 million or those with income over £250,000 and assets above £3.26 million need to have an audit. It’s also worth noting that charities might also require an audit if their governing document specifically mentions it.
For smaller charities, the independent examiner can be chosen independently. The only obligation for the charity is to ensure the person if fully independent of the charity and able to carry out a proper independent examination. Charities with an income above £250,000 must use an examiner with professional qualifications or an examiner who’s a member of a body specified in the Charities Act 2006. The audit process is more defined and it must be carried out by a registered auditor.
How and when to report annual returns?
In addition to the annual accounts, registered charities with income over £10,000 and all CIOs have to fill an annual return. The report can be filed online and the deadline is given in the return form. It’s usually 10 months after the end of the charity’s financial year. The form is available on the Charity Commission’s website.
Please note that charities making less than £10,000 still have to provide an annual update to the Charity Commission. This is a limited report with the financial information related to the charity’s income and expenditure.
What about the annual trustees’ report?
Another financial reporting tool for charities is the Annual Trustees’ report. This is a document showcasing:
- What are the aims of the charity
- How it’s achieving them
In terms of financial information, the report shows how money is being used. Charities with gross income above £25,000 must submit it to the Charity Commission. The styling of the document and the information required changes depending on the charity income and its type.
How to find help with financial reporting for charities?
In order to maintain public trust in the charity, proper care should be taken to ensure transparency and legality of operations. By staying on top of your legal obligations and preparing the right financial documents for relevant authorities to see, a charity can do its work efficiently.
But financial reporting for charities isn’t always straightforward and it’s important to seek help to ensure everything is conducted properly. Your charity should find an accountant with experience in the charity sector to ensure your reporting is done correctly.
We here at Devonshire Green are ready to help. With years of experience in the field, we know just what it takes to keep your records pristine. Contact us today to find out more!