Restricted vs Unrestricted Funds: Why Clear Bookkeeping is Crucial for Charities

By Carol Stevenson, Senior Charity Bookkeeper at Beeston-Clarke Accountants

Charities often manage multiple streams of income, each with its own purpose and limitations. Understanding and accurately recording these funds is essential to ensure compliance, transparency, easier reporting and financial stability. In this blog post, we'll break down the differences between restricted, unrestricted, endowment and designated funds, and explain why meticulous bookkeeping is vital for charity finance.

Understanding Restricted and Unrestricted Funds

Charitable funds generally fall into two main categories: restricted and unrestricted.

Restricted Funds:

These are funds given to a charity with specific conditions attached that are decided upon by the donor. The money must be used for a particular project, purpose, or activity as specified in the grant or donation agreement. For example, a donation received to build a new community centre cannot be used for general running costs. Restricted funds are typically monitored closely to ensure compliance with the donor’s wishes.

Unrestricted Funds:

Unrestricted funds, on the other hand, can be used at the charity’s discretion to support its general operations or any purpose that aligns with the charity’s objectives. These funds offer more flexibility and are vital for covering core expenses, such as staff salaries or administrative costs.

What About Endowment Funds?

Endowment funds are a specific type of restricted fund where the capital is invested, and only the generated income can be spent. Some endowments are permanent, meaning the capital itself must remain intact, while others may allow some or all of the capital to be spent under certain conditions. These funds are often established to support the long-term financial sustainability of a charity.

And Designated Funds?

Designated funds are a subset of unrestricted funds that the trustees have earmarked for a specific purpose. While they are not legally restricted, the charity’s trustees have made an internal decision to set them aside for a particular project or future need. This makes it easier to plan for long-term projects while still maintaining flexibility in financial planning.

Why Clear Bookkeeping Matters

Maintaining clear and accurate bookkeeping is crucial for several reasons:

1. Financial Transparency: Donors, funders, and regulators expect charities to demonstrate how funds are managed. Clear records ensure that restricted funds are used appropriately and can be reported accurately, not just at the year end, but at any point.
2. Compliance and Accountability: Mismanagement of restricted funds can lead to regulatory scrutiny, reputational damage, or even financial penalties. Proper bookkeeping ensures you are always audit/examination-ready!
3. Better Financial Planning: Clear separation of funds allows for more strategic decision-making. Understanding which funds are available for core activities and which are tied to specific projects helps with budgeting and long-term planning.
4. Trust and Donor Confidence: Demonstrating responsible fund management helps build trust with donors and stakeholders. They are more likely to continue supporting a charity that respects their intentions and can provide reliable information quickly.

Need Help Managing Your Charity Finances?

Managing different types of funds can be challenging, especially when dealing with complex projects or multiple grants. If you need support with your charity’s bookkeeping and reporting, our expert team can help. We specialise in charity finance and ensure your funds are accurately recorded and reported.

By keeping your bookkeeping organised and transparent, you can focus on what really matters – making a difference through your charity’s work. Let us look after the numbers so you can look after what is important to you.