A charity can have money in the bank and still be unable to pay its rent — legally. Understanding why is understanding fund accounting, the concept that trips up more new charities than any other.

The two (and a half) kinds of money

  • Restricted funds — given for a specific purpose. A £20,000 grant "for the after-school club" is restricted: it can only be spent on the after-school club. Not on rent, not on salaries elsewhere, not on keeping the lights on — even if the lights are about to go off.
  • Unrestricted funds — general money you can spend on any charitable purpose, including core costs. This is the money that actually keeps you solvent.
  • Designated funds — unrestricted money the trustees have earmarked for a plan (a "building fund"). Legally still unrestricted — trustees can un-earmark it — but flagged for intent.

Why mixing them up is serious

Spending restricted money on the wrong thing is a breach of trust. It's not a technicality — trustees can be held personally responsible for making good the misused funds, and it's exactly the kind of thing that surfaces in an independent examination or audit and lands in a regulator's inbox. "We were desperate" is not a defence; the donor's or funder's restriction stands.

The trap in plain terms

New charities often win a big restricted grant, see a healthy bank balance, and relax — then discover they can't pay core costs because almost all the money is spoken for. A £50,000 balance that's £45,000 restricted is really £5,000 of usable money. The bank balance lies; the fund breakdown tells the truth.

How to stay clean

  • Track funds separately from day one. Every incoming grant or donation gets tagged restricted or unrestricted at the moment it arrives. General small-business software like FreeAgent isn't built for this, so we set charities up with fund-coded records the right way, so your true usable balance is always visible.
  • Recover core costs in grant budgets. Every restricted application should include a fair share of overheads (full cost recovery) — that's how core costs legitimately get funded rather than quietly eating your unrestricted reserves.
  • Build unrestricted reserves. Unrestricted income (trading, unrestricted donations, Gift Aid) is the money that gives you resilience. Protect and grow it.
  • Report by fund. Your accounts must show movements on each fund. Do it monthly, not at year-end, and funder reports write themselves.

Fund accounting sounds abstract until it's the reason you can or can't pay your team this month. Getting it right is core to what our charity packages do — and it's the discipline that keeps trustees safe and funders confident.