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Hi, my name is Moragh and I run North West Numbers CIC which provides bookkeeping and accountancy services for small charities, not-for-profits, and Social Enterprises

Today I want to Simplify and demystify accounting terms and processes and talk about Restricted & Unrestricted funds.

Restricted Funds relate to any funding that you get for specific purposes.
What you will have received, from your funder, is some kind of letter or contract where they say that this amount of money is possibly for a set amount of time. But the main point is, that it needs to be spent on a specific purpose. Now, that would make it restricted.

However, there is actually no end date and it's in perpetuity, you know, keeps going, that's actually called an endowment fund. You can sometimes find that in funding types such as legacies, etcetera. The endowment funds that I have mentioned are usually more for something like a building or larger long-term assets, and they're usually quite big types of funding/expenditure.

For both types of funding what you would do in my accounts is, set up a specific funder category, as though they were a department or cost centre, This depends on which software you are using and how your accounts are set up or within the project.

Not only the money that comes in but also the specific expenditure that you're putting against it is then categorised against this department/cost centre as most of the requirements laid down by the funders would mean you have to monitor this and report back on it on a regular basis, possibly quarterly, yearly, potentially just at the end of the project.

It's up to them to specify the reporting regularity.

What you can then do is basically print off reports for that specific funder to be able to send to them on whatever regular basis they want. And it should then show them exactly, what money you have received and how it has been spent.

Now quite often, and I have spoken about this before. Quite often because the money is over an extended period of time. You would probably need to defer some of it so that you can release it against different periods as the funds are expended. The amount of income left allocated to the current financial period along with the related expenditure is then shown as restricted on your Profit and loss account. Any unspent balance would then also be shown as part of the closing reserves of your balance sheet.

So restricted funds are basically where the funder is dictating to you what it has to be spent on. Anything that's not got any kind of restriction is called unrestricted money which means that the trustees have full power to spend it in whichever way benefits the Charity. This is normally your donations, and any money you have raised yourself, etc., that's all unrestricted.

A further type of fund which is at the board's discretion is called a designated fund. This is made up of monies that would have originally been raised in a way that would have made it unrestricted money. But what the board can do is state that they want to set aside some of the reserves for a specific purpose. For example, they want to set aside for buying a building in the future or set it aside for some large piece of equipment. Basically, they are deciding themselves that they are going to use unrestricted money for a specific function. However, it has not been specified by the funder. The difference with Designated Funds is that it is not legally stuck there, so at any point in the future if they decide, they don't want to do that function, and want to bring it back into the pot, it is perfectly legal to do because they made the decision in the first place. There has been no third parties giving restrictions on the type of spend.

Basically, the Charities Commission legislates quite strongly on this and will come down on Organisations that use restricted funds for something else. This is one reason why there is a different accounting format for Charities and potentially if you also don't use the funds in the period that is specified, the actual funder can claim it back, which is why we show it separately in your balance sheet. It may be possible for you to contact the funder and negotiate different terms if the monies cannot be spent as dictated but remember that it is possible they can actually claim it back.

It is also possible to have more than one funder for the same project when matched funding has been requested by the funder. In this case, you have to be careful about how you are going to split the costs. So when you put in a type of expenditure, if it is funded by more than one funder, at some point in time, you would have to split between them and categorise them separately.

The easiest way to record this would be to allocate different invoices to each funder up to the relevant value of funding based on the types of expenditure they wish to fund. Other times, although it may be the same activity, the funders are giving money for different elements. For example, both funders are giving for daycare but one is paying for the meals and the other pays for travel.

My main hope is that this has been explained in a jargon-free way and that you understand a bit more about what you can do to help monitor and keep a track of these particular kinds of funding.

If you are interested in discussing your organisation with me and would like to get in contact with me, by email, please do on [email protected].

You can also book a 30-minute free, no hard sell chat with me either by email or through my Facebook, Twitter, Linkedin, or Instagram pages.