Fund accounting

For the purposes of accounting, charity funding is divided into three main groups:

Restricted funds

Restricted funds are subject to specific trusts declared by the donor(s), or with their authority (for instance, through a public appeal). They can only be used for the purposes for which they are given. Restricted funds can be of two types: restricted income funds which must be spent to further some particular object of the charity; or restricted capital funds, where the assets must be invested or retained for actual use.

Unrestricted funds

These are also sometimes known as general funds. They may be spent at the discretion of the trustees in furtherance of the objects of the charity.

Designated funds

Where part of an unrestricted fund is earmarked for a particular project it may be described as designated as a separate fund. However that designation has an administrative purpose only and does not legally restrict the trustees' discretion to apply the fund. In other words, trustees will still have the right to use those funds in any way that furthers the objects of the charity.

Examples are funds allocated for a new building, a staff redundancy contingency fund, or a programme guarantee fund established by a grant-making charity to ensure it can honour commitments it has made for future years.

The distinction between restricted and unrestricted funds is crucial. Misapplying restricted funds amounts to a breach of trust and could result in the trustees having personally to make good the misspent funds. Because of this, assets and liabilities should be analysed separately for restricted and general funds to make sure each fund has adequate and appropriate assets. This would normally be part of the notes to the accounts. Fund accounting appears in the SOFA with a separate column for each type of fund - see SOFA format.

Find out more about other accounting issues and examples in the In more depth section.