In 2022, more than 615,000 associations were registered in Germany, and this number continues to grow. Associations are popular because they unite people with shared interests. Additionally, they benefit from various advantages such as tax reductions and government funding. However, it’s important to note that associations must comply with several legal requirements in their accounting practices.

In this article, we’ll look at the accounting requirements for associations and outline the principles of proper accounting. We’ll also cover who handles accounting in an association, whether associations can manage their own books, and the potential repercussions of incorrect accounting. We’ll also provide tips to help you simplify your association’s accounting processes.

What’s in this article?

• What are the basic accounting requirements for associations?
  
• What are the principles of proper accounting?
  
• Who is responsible for an association’s accounts?
  
• Can associations manage their own books?
  
• What are the consequences of errors in associations’ accounts?
  
• How can associations’ accounting be made easier?
  

What are the basic accounting requirements for associations?

Legally, a registered association is defined as “any association, regardless of its legal structure, where the majority of members, whether individuals or entities, have voluntarily come together for a common goal over an extended period and follow an organized decision-making process” (see Section 2 paragraph 1 of the Association Law).

Whether it’s a sports club, shooting club, or nonprofit organization, associations are recognized as legal entities and must adhere to association accounting requirements. These are based on the tax requirements of the law and the association’s bylaws. This is because the general meeting can request an audit of the association’s finances, and the tax office can audit income and expenses. Income and expenses are divided into the following four categories:

• Noncommercial activities: This category covers noncommercial activities that are directly connected to the association’s mission. This includes membership dues, along with income from donations, gifts, and inheritances. Expenses in this category can include administrative costs, rent for club facilities, or allowances for trainers.
  
• Commercial activities: This includes any revenue-generating activities that are outside the stated purpose of the association. For example, revenue in this category may come from selling food and beverages at events.
  
• Special activities: A special activity is an operation within the association that supports its legal purpose and is key to its fulfillment. The articles of association distinguish it from commercial activities. For example, income may be generated by selling tickets to association events. Expenses include costs such as renting equipment or hiring specialized staff for the event.
  
• Asset management: Asset management involves income from activities such as renting or leasing property owned by the association. Renting advertising space, such as on association-owned vehicles, may also generate income. Expenses may include building maintenance or insurance, and bank account fees.
  

Areas of activity in an association

Associations must begin bookkeeping as soon as they are registered and engage in commercial activities, whether or not they seek to make a profit. All business transactions must be thoroughly documented. This includes all income and expenses, as well as cash and account balances. Accounts must also include a list of the association’s assets, such as real estate, vehicles, equipment, machinery, or laboratory facilities that the association owns.

The association’s tax returns must be prepared and filed by the deadline. For smaller associations with manageable turnover and profits, cash-basis accounting (called “Einnahmenüberschussrechnung” or “EÜR”) is sufficient (see Section 4, paragraph 3 of the Income Tax Act). If an association’s annual turnover exceeds €600,000 or its annual profit is over €60,000, it must use double-entry bookkeeping for accounting.

It is key to keep receipts or documents for all transactions to verify income and expenses. This is because associations must follow the same proper accounting principles as companies.

What are the principles of proper accounting?

The latest version of the principles of proper accounting has been effective since 2020. It is referred to as GoBD, which in German stands for “Grundsätze zur ordnungsmäßigen Führung und Aufbewahrung von Büchern, Aufzeichnungen und Unterlagen in elektronischer Form sowie zum Datenzugriff.” This regulation from the German Federal Ministry of Finance outlines the fundamental principles for digital accounting of tax-related documents, applicable to both companies and associations.

The GoBD’s key principles are:

• Traceability and verifiability: The association’s accounting must be complete, clear, and concise.
  
• Completeness: Every business transaction must be documented in accordance with the retention periods. Receipts for income and spending must include the date, amount, quantity, receipt number, and issuer and recipient.
  
• Accuracy: All business transactions must be documented truthfully and reflect the actual transactions. The corresponding receipts are archived for this purpose.
  
• Timely entries and records: Timely recording is also key to proper accounting. All business transactions should be recorded promptly after they occur. The law requires that noncash transactions be recorded within 10 days, while cash receipts and disbursements must be recorded daily.
  
• Orderliness: Records should be maintained so that third parties can easily understand the association’s accounting. This could include an auditor or tax consultant. Systematic accounting distinguishes between cash and noncash transactions, and it also classifies sales as taxable, tax-free, or nontaxable. All receipts must be machine-readable.
  
• Unalterability: Accounting documents must be stored in a way that ensures they cannot be altered or tampered with. If any changes are made afterward, they must be documented transparently. Any amended documents must be resaved. A version history is also required by law.
  

Association accounting complies with GoBD only if these principles are followed. You can find more information in our article on GoBD.

Who is responsible for an association’s accounts?

The board is responsible for maintaining the association’s accounting and ensuring that proper accounting principles are followed. Because the board manages the association’s property and business, it has a duty of care and accountability. This includes responsibilities such as providing information to the general meeting. Typically, the board fulfills this obligation annually by presenting the association’s financial statements for the previous year. This requirement is detailed in the association’s bylaws.

The board often appoints a treasurer to oversee the finances. An auditor may also be appointed. However, even in these situations, the board remains solely responsible for accurate accounting.

Can associations manage their own books?

Associations can handle their own bookkeeping. This approach is especially suitable for smaller associations with few members and manageable turnover. No expert knowledge is required in these situations. However, those in charge should have a basic understanding of bookkeeping, similar to what’s needed for preparing an income tax return.

In this situation, it’s a good idea to use specialized association accounting software that can simplify the process. It’s important that it adheres to proper accounting principles. The main advantage of using software is that it can automate many routine tasks.

These tasks include creating a profit and loss statement; managing income and expenses; recording transactions in specific categories and assigning them to different accounts; generating invoices, donation receipts, or reminders; and planning the association’s budget. Additionally, the software automatically updates to meet new regulatory requirements. Costs typically range from tens to hundreds of dollars per year, depending on the number of members managed or who have access to the program.

However, for associations with high revenues, a large number of members, employees, or real estate holdings, managing accounting independently can quickly become a significant challenge. In such cases, it makes sense to seek help from a third party and outsource accounting. A specialized service provider or accountant may be considered for this task.

Stripe Billing can help you with recurring invoicing for your members, and it also automates workflows and reduces manual tasks. Additionally, you can manage your accounts and access detailed financial and revenue reports directly from the Dashboard, making your accounting much easier. You can also allow your customers to manage their subscriptions independently through the customer portal.

It is important to evaluate the accounting costs and budget on a case-by-case basis. A hybrid solution could also be used, where only specific transactions are outsourced instead of the entire accounting process. Aside from accepting membership fees, associations can also use Stripe to handle the sale of goods and services to nonmembers, or to collect donations.

What are the consequences of errors in associations’ accounts?

Associations must comply with GoBD and meet deadlines—otherwise, things can get expensive.

Missing deadlines can result in late fees and interest charges on overdue amounts. Associations should gather comprehensive information to ensure that all documents are submitted completely and on time. If a deadline cannot be met, it is advised to contact the tax office to discuss the situation. The tax office is usually cooperative when notified in a timely manner.

If the tax office finds gaps in the accounting during an audit, it may issue additional assessments. In order to establish an appropriate basis for taxation, missing income or expenses are estimated on the basis of the highest probability. It becomes even more problematic if the association is suspected of tax evasion. In this situation, there is a risk of substantial fines, and board members may be held personally liable with their own assets. There is also the possibility of imprisonment for up to 10 years.

How can associations’ accounting be made easier?

Obtaining nonprofit status can simplify accounting for associations. This is because nonprofit associations are exempt from trade tax, corporate income tax, and value-added tax (VAT). However, this only applies if the associations meet the same criteria as for the small-scale entrepreneur rule: the annual turnover in the previous year must not exceed €22,000, and it must be less than €50,000 in the current financial year.

Additionally, nonprofit associations can deduct donations for tax purposes because they are entitled to issue donation receipts. Another benefit for nonprofit associations is that they can apply for government funding. However, the funding must be used for a specific purpose and this must be fully proven. Nonprofit status offers several advantages and simplifications, but it also requires more detailed recordkeeping.

In recent years, digitization has simplified accounting for all associations. Specialized solutions such as Stripe Billing simplify accounting processes, enhancing efficiency and transparency. Manual tasks such as account assignment and data entry are minimized and automated. Outgoing invoices can be generated automatically, and incoming invoices can be processed and archived more swiftly. Payment flows can also be tracked in real time. For associations, as well as for companies, it’s worth using technical tools or third-party providers. This helps to avoid errors, and therefore reduces costs and additional work.