Fund Accounting

Charities, churches and not-for-profit entities are subject to the Charities SORP 'Statement of Recommended Practice 2019'. This includes Funds handling and compliant Statement of Financial Activities SOFA 2019, FRS102 version reports.

FRS102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland.

About Fund Accounting

Fund Accounting is an essential and required feature of charity accounting. Fund accounting distinguishes between two primary classes of fund:

• those that are unrestricted in their use and can be spent on any charitable purposes of the charity,
• and those that are restricted in use and can only be used for a specific charitable purpose.

Proper accounting for funds is therefore essential to ensure that the Trustees do not act in breach of trust.

A fund represents financial resources held and maintained separately from other financial resources because of the circumstances in which those resources were received or the restrictions imposed on them when received.

In more detail, any Fund is classified as either:

• Unrestricted General
• Unrestricted Designated
• Restricted
• Endowment Capital
• Endowment Expendable

Unrestricted Funds

Unrestricted funds are spent or applied at the discretion of the trustees to further any of the charity's purposes. Unrestricted funds may be used to supplement expenditure made from restricted funds.

Trustees may choose to designate or set aside a part of the unrestricted funds to be used for a particular future project or commitment.

Restricted Funds

Funds held on specific trusts under charity law are Restricted funds. The specific trusts may be declared by the donor when making the gift or may result from the terms of an appeal for funds. The specific trusts establish the purpose for which a charity can lawfully use the restricted funds. A charity may have several individual restricted funds, each for a particular purpose of the charity.

Trustees must be very careful to abide by the terms of any restricted trust and fund accounting is designed to demonstrate that stewardship and diligence.

Endowment Capital Funds

Permanent endowment funds exist where there is a capital fund with no power to convert the capital into income. These funds must generally be held indefinitely.

Endowment Expendable Funds

Expendable endowments are those funds which may be applied as income although there is no requirement to do so. It can be done at the discretion of the trustees. This makes the important difference between other types of funds.

The law around endowments is complicated and users are advised to take appropriate professional advice.

About Statement of Financial Activity (SOFA)

The accounting for funds is reported on a Statement of Financial Activity (SOFA) either on a Receipts and Payments basis for smaller charities or on an Income and Expenses basis for larger charities or those that use accrual accounting.

A SOFA must be presented analysed between Unrestricted, Restricted and Endowment Funds so a suitable accounting and bookkeeping software that easily allows for this analysis is essential.