A restricted fund is money a charity holds for a specific purpose set by the donor or funder: a named project, an appeal, a grant with conditions. An unrestricted fund is money the trustees may spend on any of the charity’s charitable aims. The difference is legal, not administrative. Spending restricted money on something else, however worthy, is a breach of trust, and trustees are personally responsible for making sure it does not happen.

This guide covers charities registered in England and Wales. Charities in Scotland and Northern Ireland follow different rules set by their own regulators. What follows defines the fund types, explains why the separation exists and walks through the mistakes that cause the most trouble.

What are restricted, unrestricted and designated funds?

Unrestricted funds are the charity’s general money: unconditional donations, fundraising with no stated purpose, trading income. Trustees decide how to apply it within the charity’s objects.

Restricted funds arise when the terms of the gift restrict its use. An appeal for a new roof, a grant for a youth worker’s salary, a legacy left for a named activity. The restriction comes from the donor’s terms, and only the donor’s terms.

Designated funds are unrestricted money the trustees have chosen to earmark for a purpose. Because the trustees created the designation, they can undo it. A designation is a plan; a restriction is a binding obligation. Confusing the two overstates how tied up the charity’s money really is, or understates it.

Why the law insists on separation

Donors give on terms, and charity law holds trustees to those terms. A charity that spends roof appeal money on running costs has, in law, misapplied trust money, even if it intended to top the fund back up. The accounts must therefore show each restricted fund’s income, spending and balance separately, a requirement the Charities SORP builds into accruals accounts, which is why fund analysis sits at the centre of what charity accounts should include. Fund treatment can also interact with the charity’s tax position, on which the GOV.UK guidance on charities and tax is the reference point.

How the restriction is created, and how it ends

A restriction is created by the terms under which money is given: the wording of an appeal, a grant agreement, a letter accompanying a legacy. It ends when the purpose is fulfilled, when the funder formally releases the condition, or through the legal routes available for genuinely unusable funds. Trustees cannot simply vote a restriction away. Keeping the originating paperwork is therefore essential, and it belongs in the file described in our charity bookkeeping records checklist.

Fund mistakes that cause real trouble

  • Treating a restricted grant as general income because it arrived in the main bank account
  • Borrowing from restricted balances to cover cash-flow gaps, with repayment left informal
  • Recording an appeal’s proceeds without keeping the appeal wording that created the restriction
  • Labelling trustee designations as restricted funds, or the reverse
  • Carrying a restricted fund deficit, which means restricted money was overspent from general funds without anyone deciding to subsidise it

Several of these surface only when an external reviewer looks at the accounts, which is one reason the scrutiny regime exists at all. We compare the two forms of review in independent examination versus audit.

Records that keep funds defensible

For each restricted fund, keep the document creating the restriction, a running record of income and spending against the fund, and the closing balance reconciled at least annually. One bank account is fine; separate accounting is what matters. Note that a fund’s balance is a bookkeeping figure, and the cash to honour it must actually exist across the charity’s accounts.

The point at which advice pays for itself

Ambiguous gift wording, a funder condition the charity can no longer meet, a restricted deficit already on the books, or a proposed merger of funds are all situations where trustees should take advice before acting, because the wrong move is hard to reverse. Our bookkeeping service sets up fund-tagged records so the routine cases never become ambiguous in the first place.

Frequently asked questions

Does money from a sponsored event count as restricted?

It depends on what participants and donors were told. If the event was promoted as raising money for a specific project, the proceeds are restricted to that project. If it was general fundraising, they are unrestricted. The publicity wording decides.

Can trustees move a surplus left over in a restricted fund?

Not on their own authority. If the purpose is complete and money remains, the terms of the gift, the funder’s agreement or the legal rules for surplus funds determine what happens next. Small balances have simpler routes, but the starting point is always the original terms.

Do restricted funds need their own bank account?

No. The requirement is separate accounting, not separate banking. Some funders do ask for a dedicated account as a grant condition, in which case the funder’s terms govern.

What does it mean if a charity’s unrestricted funds are negative?

It suggests the charity has been living off restricted money, which is a solvency and trust concern rolled into one. Trustees should establish the true position quickly and take advice, because continuing to trade on restricted balances compounds the problem.

How we can help

Our charity accounting support includes untangling fund positions and setting up accounting that keeps restrictions visible all year. Request a quote and we will start with a clear picture of what is restricted and what is not.