CHARITY ACCOUNTS:
ACCOUNTING FOR DIFFERENT FUNDS

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The new accounting regime for charities requires the identification of different types of funds. Funds can basically be classified as restricted and as unrestricted, and they can be capital or income funds.

• Types of Funds

• Effect of different funds on your accounts.

TYPES OF FUNDS

Capital Funds                            Income Funds
           I                                                 I
Endowments - Permanent             Restricted Funds
                     - Expendable           Unrestricted Funds- Designated Funds
                                                                                 - Other Charitable Funds
                                                                                 - Non-charitable 
                                                                                       Trading Funds

These are monies and assets which the donor has restricted the use of, i.e. the person giving the asset or money has specified that it is to be used for a particular project or purpose.
The donor can be an individual, a company, the public etc.

Example:
You are a community centre. The local authority give you a grant to run a playscheme.
This money is restricted as it cannot be used for the general operations and maintenance of the centre. It must be used solely for playscheme activities.

Example:
You fundraise from the public for famine relief in Africa.
This money is restricted. It cannot be used for famine relief elsewhere or for other disaster relief.

Unrestricted Funds

These are monies and assets which can be used for the general operations of the charity. The money is unrestricted as the donors have not responded to a particular appeal and have not specified exactly how it is to be used. The money, of course, must be used within the objects of the charity e.g. it cannot be used to buy a racehorse or lent to a trustee to fund a luxury cruise.

These are sums from within unrestricted funds that the trustees can earmark for a particular use. The designated amount, because it is from within unrestricted funds, can be reallocated and earmarked for other uses in future if required.

These are funds given to be held as capital, generally without the right to convert into income.
A permanent endowment cannot be spent. For example, if a portfolio of shares is given under a permanent endowment, then the proceeds of any shares traded must be reinvested. Endowments can decrease in value for example, to reflect the depreciation of an asset or to charge fund managers fees against it.

An expendable endowment can be applied as income at the discretion of the trustees.

Any income from assets held in an endowment fund is generally treated as unrestricted income unless the donor has directed otherwise.

Non- charitable trading funds

These are funds retained by a trading subsidiary. This can happen where not all of the profits are covenanted to the main charity. An example of the type of activity that can form a trading subsidiary is a charity shop.

As your accounts are required to show details of what is included in the various funds, you must make sure that adequate records are kept. You may already be accounting for different projects individually.

1. List your main sources of income.
2. Establish if the person giving the money/ asset imposed any restrictions on its use, i.e. it is not just for the general running and operations of the charity.
3. Identify any monies you have fundraised for a particular purpose or project.
4. Do you have any assets or investments which you are not allowed to sell ?
5. Are there any amounts you want to earmark for particular projects ?
6. If you have a trading subsidiary, were all the profits covenanted to the main charity by the year end ?
7. Are the individual funds represented by particular assets and liabilities, 
   e.g. a bank account or a PAYE bill due to the Inland Revenue ?
8. Track the expenditure that relates to individual funds/projects. You may find that a manual cash book is not big enough if you have a lot of different funds. You may wish to use a spreadsheet or a computer programme such as Quickbooks.