Accounting and Book Keeping for Trust

Trusts play a vital role in India’s social and economic fabric, often established to serve philanthropic, educational, religious, and other public welfare objectives. Trusts must follow a structured accounting and bookkeeping approach to ensure transparency, accountability, and compliance with various legal regulations. This blog explores the key aspects of accounting and bookkeeping for trusts, along with the relevant acts, laws, and compliance obligations.

Introduction to Trust Accounting and Bookkeeping

In India, trusts are usually classified as public or private. Public trusts are typically set up for charitable or religious purposes and enjoy certain tax exemptions, while private trusts may be established for the benefit of specific individuals or families. Regardless of their type, all trusts must maintain accurate financial records and adhere to legal requirements to ensure that they operate transparently and serve their intended purpose effectively.

Key Aspects of Accounting for Trusts

1. Fund Accounting: Trusts generally use fund accounting to keep track of funds designated for specific purposes. Each fund represents a unique source of revenue or purpose, helping trustees ensure that the funds are used as intended.
2. Income and Expense Tracking: Trusts must record all income sources, such as donations, grants, or investments, and track expenses related to the trust’s objectives, administration, and maintenance.
3. Asset and Liability Management: Trusts often hold assets, such as property, investments, or equipment. It is essential to track these assets accurately, along with any liabilities like loans or payables.
4. Beneficiary Records: Trusts established for the benefit of specific individuals must maintain records showing how funds are distributed to beneficiaries.
5. Financial Reporting: Trusts need to prepare financial statements, such as the balance sheet, income and expenditure statement, and receipt and payment account, which offer a transparent view of the trust’s financial activities.

Importance of Bookkeeping for Trusts

Proper bookkeeping practices help trusts:

• Ensure compliance with applicable laws and regulations.
• Maintain transparency in financial operations.
• Efficiently allocate resources toward the trust’s objectives.
• Facilitate audits and inspections required by regulatory bodies.
• Protect the trust’s reputation and build donor confidence.

Governing Acts and Laws for Trusts in India

Trusts in India are governed by various laws depending on their type, objective, and jurisdiction. Below are the main acts and laws that affect trust accounting and compliance requirements.

1. The Indian Trusts Act, 1882

• Applicability: This act primarily governs private trusts. It outlines the duties, responsibilities, and liabilities of trustees and the rights of beneficiaries.
• Accounting Requirements: While the act does not specify strict accounting guidelines, trustees are expected to manage accounts prudently, avoid self-dealing, and maintain transparency in fund management.
• Fund Management: Trustees must handle funds in accordance with the trust deed and are liable to beneficiaries for mismanagement or breach of trust.

2. The Charitable and Religious Trusts Act, 1920

• Applicability: This act governs charitable and religious trusts, particularly regarding transparency and accountability.
• Accounting Requirements: Charitable and religious trusts must maintain proper accounts and are expected to file financial reports, depending on the state’s requirements.
• Trustee Obligations: Trustees must ensure that donations and funds are used exclusively for the trust’s objectives, as outlined in the trust deed.

3. Income Tax Act, 1961

• Tax Exemptions: Trusts established for charitable or religious purposes may qualify for tax exemptions under sections 11, 12, and 13 of the Income Tax Act. To avail of these exemptions, trusts must be registered under Section 12AB and spend at least 85% of their income for charitable purposes.
• Filing Requirements:
  • Trusts must file Form ITR-7 annually with the Income Tax Department.
  • Compliance with Section 80G, if applicable, allows trusts to issue tax-deductible receipts to donors.
• Audit Requirement: Trusts with total income exceeding ₹2.5 lakh (without claiming exemptions) must have their accounts audited by a Chartered Accountant under Section 12A(b).

4. The Societies Registration Act, 1860 (Applicable to Registered Societies)

• Applicability: Some charitable trusts are registered as societies under this act to achieve legal recognition.
• Compliance Requirements: Societies must maintain proper books of accounts and prepare financial statements annually. Additionally, societies are required to file annual returns with the Registrar of Societies.
• Audit: Societies are subject to an annual audit, and their financial records must be available for inspection by members or regulatory bodies.

5. Foreign Contribution (Regulation) Act, 2010 (FCRA)

• Applicability: Trusts receiving foreign contributions must register under the FCRA.
• Compliance Requirements: FCRA-registered trusts must maintain separate books of accounts for foreign funds and file annual returns (Form FC-4) with the Ministry of Home Affairs.
• Audit Requirement: FCRA trusts must have their accounts audited annually by a Chartered Accountant, detailing foreign contributions received and their utilization.

6. Goods and Services Tax (GST) Act, 2017

• Registration Requirement: Trusts engaged in taxable supplies of goods or services (e.g., renting property, consultancy) with turnover above ₹20 lakh are required to register for GST.
• GST Returns Filing: GST-registered trusts must file regular returns (such as GSTR-1 and GSTR-3B) as applicable, ensuring proper records of GST invoices and payments.
• Compliance: Trusts must maintain records of GST collected and paid to avoid penalties.

Essential Bookkeeping Practices for Trusts

1. Segregated Fund Management
   • Trusts should maintain separate accounts for general and specific funds, such as donations designated for particular projects. This ensures compliance with donor restrictions and proper resource allocation.
2. Donation Records
   • Maintain a record of all donations, including donor details, amounts, and any restrictions imposed by donors. For trusts under Section 80G, it is essential to issue receipts for donations to allow donors to claim tax benefits.
3. Asset Tracking
   • If the trust holds assets like land, buildings, or investments, it is essential to record the value, depreciation, and any revenue generated (e.g., rent). This helps in effective management and financial reporting.
4. Regular Audits and Reconciliations
   • Periodic audits and reconciliations of accounts help maintain transparency, detect errors, and ensure that funds are used for their intended purposes.
5. Expense Allocation
   • Record expenses related to administrative costs separately from those used directly for charitable or religious activities. Proper expense categorization helps the trust in compliance and effective fund utilization.
6. Use of Accounting Software
   • Accounting software, such as Tally, Zoho Books, or QuickBooks, can help streamline the trust’s bookkeeping and ensure accurate records. These tools allow trusts to automate report generation, manage donations, and prepare financial statements.

Compliance Checklist for Trusts

1. Registration and Filings:
   • Ensure the trust is registered with the relevant authorities (Registrar of Trusts, Societies, or Income Tax Department).
   • File annual income tax returns (Form ITR-7) and obtain Section 12AB registration for income tax exemptions.
2. Statutory Audit:
   • If required under the Income Tax Act or FCRA, conduct an annual audit of the trust’s financial statements by a Chartered Accountant.
3. 80G Compliance (if applicable):
   • If the trust is registered under Section 80G, issue receipts to donors for tax deduction eligibility.
4. Annual Reports and Filings:
   • Submit annual reports and financial statements to the Registrar of Societies (if registered as a society) and file with relevant authorities under FCRA if foreign funds are involved.
5. GST Compliance:
   • Register for GST if the trust’s turnover exceeds ₹20 lakh in taxable services and ensure accurate filing of GST returns.
6. Foreign Contribution Compliance:
   • For trusts receiving foreign funds, maintain separate books for foreign contributions and file annual returns in Form FC-4 under FCRA.

Conclusion

Accounting and bookkeeping for trusts in India require careful adherence to multiple laws and regulations. Trusts must maintain clear records of donations, expenses, assets, and liabilities to ensure transparency and accountability. By following proper bookkeeping practices and meeting compliance requirements, trusts can focus on their mission while building donor confidence and safeguarding their tax-exempt status.