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How to Prepare a Charity’s Annual Accounts

Charities may not pay taxes the same way corporations do, but they are still required to manage annual accounts and reporting. Beyond the legal obligation to report to the Charity Commission, this process plays a crucial role in fostering trust with donors and stakeholders.

Preparing a charity’s annual accounts can become a complex task without proper organisation or a clear understanding of charity-specific reporting standards. However, with the right knowledge of reporting requirements and professional advice when needed, the process can be straightforward and efficient.

With that in mind, let’s dive into how annual accounts work for UK charities and what your organisation needs to prepare.

Charity Reporting Requirements in the UK

Depending on their size, charities have different reporting requirements, which means you must first determine where your organisation falls within the Charity Commission’s income categories. Only then can you start preparing your accounts, knowing precisely what is required of your organisation.

All UK Charities

No matter if they are registered with the Charity Commission or not, all charities in the UK must keep accounting records, which may include records of grants, receipts, cash records, and other financial documents that reflect their transactions. Moreover, all charities must prepare a trustees’ annual report that accounts for the work done and decisions taken throughout the year.

In some cases, the governing document requires trustees to send the trustees’ annual report along with the annual accounts to members or have them approved at the Annual General Meeting.

Tip: Even if this is not stipulated in your governing document, it’s good practice to make these documents accessible to the members of your organisation to foster trust and show that you are transparent about how the funds have been spent.

Charities with an Annual Income of £5,000 to £25,000

Once your charity has reached an annual income of £5,000, you are required to register with the Charity Commission and submit an annual trustees’ report. If your income stays below £10,000, the Commission also asks for you to submit an Annual Update, including your income and expenditure for the year as well as changes in charity’s details or trustees if occurred.

Does your organisation have an annual income above £10,000 but under £25,000 (or are you a Charitable Incorporated Organisation)? Within 10 months from the end of your financial year, you need to submit an annual return to the Commission, including your trustees’ report and your annual accounts.

Charities with an Annual Income of £25,000 to £250,000

The next income threshold for charities is £25,000, at which point your organisation needs to arrange external scrutiny. You can choose either an independent examination or an audit of your annual accounts. The key difference is that an independent examination is a less rigorous form of scrutiny that ensures your records align with reality, whilst an auditor takes a closer look at your accounts to identify any financial risks that could be mitigated if addressed in time.

You can learn more about the differences between an independent examination and an audit in our complete guide here.

Once you’ve had your accounts examined or audited, you need to include them in your annual return and submit them within 10 months from the end of your financial year, along with a simplified trustees’ report.

Charities with an Annual Income of £250,000 to £1 million

For charities with a net income between £250,000 and £1 million but with assets worth less than £3.26m, accruals accounts are required. Just as important, these accounts must be independently examined or audited by a member of a body approved by the Charity Commission. Make sure to check the list of approved bodies before you appoint your auditor.

You must also submit a trustees’ report, which can be simplified. This goes along with your accruals accounts in your annual return you can file online no later than 10 months after your financial year has ended.

Charities with an Annual Income of above £1 million

If your organisation has an annual income higher than £1 million (or an annual income over £250,000, with gross assets worth more than £3.26m), you are required to prepare accruals accounts and fill in an annual return that includes a full trustees’ report. Moreover, you no longer can opt for an independent examination; instead, you must appoint a registered auditor to evaluate your accounts.

Charitable Companies

As trustees of a charitable company, you must prepare accounts under company law and follow the recommendations of the applicable Statement of Recommended Practice (SORP). This includes producing a directors’ report and accruals-based accounts, which you must file with Companies House. For the annual report, you must meet the same requirements as other charities, often by expanding the directors’ report to include all necessary details.

Types of Accounts and Reports Charities Need to Prepare

Now that we’ve established what annual accounts you must prepare depending on your organisation’s annual income, it’s time to take a closer look at them.

Receipts and Payments Accounts

Receipts and payments accounting is a straightforward method that summarizes all money received and paid out during the financial year. The final balance reveals how much money your charity has at the year’s end. This simplicity makes it an attractive option for small charities with straightforward financial activities.

Who Can Use This Method?

Unincorporated charities and Charitable Incorporated Organisations (CIOs) with a gross annual income under £250,000 may choose this accounting method. Its ease of use and minimal complexity often suit smaller organisations.

Considerations for Trustees

While this method simplifies record-keeping, it has limitations. It doesn’t always provide a clear financial picture or allow for easy year-to-year comparisons. For example, paying an annual insurance premium at the start and end of consecutive financial years could distort your accounts, showing an inflated expense in one year and none in the next.

Legal and Practical Requirements

Charity law does not prescribe a specific format for receipts and payments accounts, but consistency is essential. Trustees must also include a statement of assets and liabilities at the year’s end to give a fuller financial overview.

Accruals Accounts

As your charity’s financial structure grows more complex, transitioning to accruals accounting may be necessary to provide a clearer and more accurate financial picture. Unlike receipts and payments accounting, accruals accounting records income and expenditure as they relate to the financial year, not just when cash changes hands.

Who Must Use Accruals Accounting?

• Charitable Companies: All are required to prepare accruals accounts.
• Unincorporated Charities and CIOs: If your annual income exceeds £250,000, accruals accounting is mandatory.

Why Choose Accruals Accounting?

This method offers a comprehensive view of your charity’s finances:

• Debt and Credit Transparency: Accounts adjust for debtors (money owed to the charity), creditors (money the charity owes), and accruals (unbilled expenses like utilities).
• Asset Valuation: Capital equipment, land, and buildings are treated as assets. Instead of showing the full purchase cost as an expense, depreciation is applied over time, reflecting the asset’s declining value while maintaining its current worth on the balance sheet.
• Financial Snapshot: The balance sheet provides a clear end-of-year view of the charity’s financial health, supported by a statement of financial activities detailing resource use.

Legal and Practical Considerations

Charities preparing accruals accounts must follow the Statement of Recommended Practice (SORP). Your accounts must include:

1. A balance sheet.
2. A statement of financial activities.
3. Explanatory notes.

If you’re moving to accruals accounting for the first time, consider seeking professional advice to ensure a smooth transition and proper record-keeping throughout the year.

Trustees’ Annual Report

A trustees’ report for small charities can be straightforward but must include key information:

• The charity’s name, registration number, address, and trustee names.
• Its structure and management, including trustee recruitment processes.
• Objectives, activities, and achievements during the year, with a clear focus on public benefit.
• A financial review, including reserves policies and any debts.
• Details of any funds held as a custodian trustee (if applicable).

For larger charities, or those requiring statutory audits, additional disclosures are necessary, such as fundraising standards and expanded financial reviews.

What Makes a Great Trustees’ Report?

Beyond the essentials, an exceptional report conveys the charity’s vision and impact. For larger charities, a chairman’s statement can set the tone, sharing the charity’s mission in a personal, compelling way.

Incorporating visuals, such as photos, charts, and graphs, can enhance engagement, especially as many users view reports digitally.