Fund accounting: when the money is not all yours to spend

Fund accounting keeps money in separate pots according to the conditions attached to it, rather than pooling everything into one balance. A charity that receives a grant for a specific project, a school with a capital appeal, a local authority with statutory reserves — all of them have money that is legally theirs and not legally theirs to spend on anything they like. Ordinary commercial accounting has no concept for that, which is why fund accounting exists and why a bank balance means much less in these organisations than in a business.

The fund types

• Unrestricted: available for any purpose within the objects of the organisation. This is the only money that can cover a shortfall elsewhere.
• Designated: unrestricted money the board has earmarked for something. The restriction is internal, and the board can undesignate it — which is worth remembering when reserves look tight.
• Restricted income: given for a stated purpose by the donor or funder. Spending it otherwise is a breach, not a judgement call.
• Endowment: capital that must be retained, where sometimes only the income can be spent. Permanent and expendable endowments behave differently.
• Where a fund is overspent, the deficit is normally borne by unrestricted funds, which is how a well-funded organisation ends up with no usable money.

What it changes day to day

1. Every transaction carries a fund as well as a nominal code — this is the single structural change, and it has to be in the chart of accounts from the start rather than retrofitted.
2. Income is recognised against the fund with the restriction the funder actually imposed, which means reading the grant agreement rather than the covering email.
3. Shared costs are apportioned across funds on a stated, consistent basis; inventing the basis each year is a standard audit finding.
4. Fund balances are reported individually, not netted, so a restricted surplus cannot hide an unrestricted deficit.
5. Transfers between funds are made deliberately and minuted, because moving money out of a restricted fund needs authority most organisations do not have.

The number that matters is free reserves — unrestricted funds not already committed or tied up in fixed assets. Organisations get into difficulty holding healthy total funds and almost no free reserves, and the total is the figure that appears in the bank and in casual conversation. A reserves policy stating the target range, reviewed annually, is what turns that number into a decision rather than a discovery.

Where it goes wrong

• Restrictions recorded from memory rather than from the agreement, so a fund is treated as restricted for years after the condition lapsed — or worse, the reverse.
• Grant conditions with reporting deadlines nobody diarised, which is how a compliant spend still produces a clawback.
• Support costs left entirely in unrestricted funds because apportioning them is awkward, which quietly reports the core as more expensive than it is.
• Fund balances reconciled once a year at audit rather than monthly, so an overspent restricted fund is discovered when it is too late to fix.
• A chart of accounts designed for commercial reporting, where the fund dimension is bolted on as a text field nobody can report from.

Groups face an extra step at year end. Consolidated accounts combine parent and subsidiaries into a single set of figures, with intra-group balances eliminated so the result presents the group as one economic entity.

Restricted funds are one kind of reporting obligation; indirect tax is another. A vat return reconciles what was charged against what was reclaimed for the period, and the filing deadline rarely moves for anybody.

Where the funds live

Ettex Books can carry a fund dimension alongside the nominal codes, which is what makes fund-level reporting a filter rather than a manual exercise at year end. Keep the grant agreements and their conditions as records linked to the fund, since the question "what were we allowed to spend this on" is answered by the agreement and not by the ledger. Ettex is not specialist charity software and does not produce statutory charity accounts in the format a regulator expects; for anything beyond straightforward, your accountant and a dedicated package will do this better. What it can do is stop the fund from being a note in someone’s head.