Restricted funds, without the headache

Restricted funds cause more anxiety in small charities than anything else in the accounts, and usually for the wrong reason. Treasurers imagine the difficulty is technical. It is not — it is a record-keeping discipline that takes ten minutes a month once set up, and about two days to reconstruct if it was never done.

What makes money restricted

A fund is restricted when the person giving it specified what it is for, and the charity accepted it on that basis. The restriction comes from the donor, not from the trustees.

So a grant awarded for a specific project is restricted. A donation given in response to an appeal for a named purpose is restricted, because the appeal itself set the terms. A legacy with conditions attached in the will is restricted. And crucially, so is money raised by a fundraising event advertised as being for something particular — a collection tin labelled "for the minibus" creates a restriction just as surely as a grant agreement does.

What is not restricted: a general donation, membership subscriptions, trading income, and anything the trustees have themselves decided to set aside. That last one is a designated fund — unrestricted money earmarked by the trustees, which they can un-earmark whenever they choose. Keeping designated and restricted apart is the single most common error in small charity accounts.

What the charity must actually do

Three obligations, and they are less onerous than they sound.

Spend it on the stated purpose. Spending restricted money on something else is a breach of trust, even where the alternative use is unquestionably good and within the charity's objects.

Account for it separately. The charity must be able to show, for each restricted fund, what came in, what went out and what remains.

Report it separately. Restricted and unrestricted funds are shown separately in the accounts, and the reserves position is calculated on the unrestricted side only — a point covered in more detail in our guide to setting a reserves policy.

Note what is not required: separate bank accounts. Many small charities open one per grant, believing they have to. It is perfectly acceptable to hold everything in one account provided the records show the split clearly, and one account is usually easier to reconcile.

Doing it in a spreadsheet

Small charities do not need fund accounting software. They need one extra column.

Add a fund column to the cashbook and code every single transaction to a fund — "Unrestricted", "Minibus appeal", "Lottery grant 2026", and so on. Every receipt and every payment, without exception.

Then, at the year end, a summary per fund: opening balance, income, expenditure, closing balance. The closing balances must add up to the total funds in the accounts, and the total of all fund bank movements must reconcile to the bank. If they do, the fund accounting is done.

Overheads and shared costs

This is where treasurers get stuck. If a grant funds a project and the project uses some of the charity's insurance, phone and premises, can those be charged to the restricted fund?

Generally yes, where the funder allows it and the basis of apportionment is reasonable and consistently applied. Check the grant terms first, because some funders exclude overheads entirely and others cap them at a stated percentage. Then pick a defensible basis — staff time on the project, floor area, headcount — write it down, and apply the same basis every year. What fails scrutiny is not the apportionment; it is an apportionment nobody can explain.

When a restricted fund overspends

A restricted fund cannot go into deficit. If the project cost more than the funding, the excess is met from unrestricted funds — which means the general reserve absorbs the difference. Show it that way in the accounts rather than leaving the fund negative.

Worth flagging in advance: this is exactly how charities get into difficulty. A project part-funded by a grant, delivered at a loss, quietly consumes unrestricted reserves. Trustees should know the likely shortfall before accepting the grant, not after delivering the project.

When a restricted fund is left over

Money remaining after the purpose is fulfilled — or where the purpose becomes impossible — does not simply become general funds.

The starting point is the grant agreement or the terms of the appeal, which often say what happens: repay the funder, or seek written agreement to redirect it. Ask the funder; most are pragmatic about small residual sums and many will agree in writing to a related use.

Where the money came from public donations for a purpose that can no longer be carried out, and the amounts are significant, releasing the restriction may require a formal process and, in some cases, the Charity Commission's involvement. Do not simply absorb it — an unexplained transfer from restricted to unrestricted funds is one of the first things an independent examiner looks at.

What examiners actually find

Four things recur: designated funds presented as restricted, which overstates how tied up the charity's money is; restricted balances that do not carry forward correctly from one year to the next; expenditure coded to the wrong fund, usually because coding was done at the year end from memory; and restricted funds shown in the accounts with no explanation anywhere of what each one is for.

All four are prevented by the same habit — code as you go, and keep a short note of each fund's purpose and origin alongside the accounts.

Reporting requirements depend on the charity's size and accounting basis; the Charities SORP applies to accruals accounts. Check the current Charity Commission guidance for the requirements applying to your charity and year.