Restricted and unrestricted funds, explained for treasurers

The one question that decides it: who set the purpose?

If a donor, a funder or the wording of an appeal set the purpose, the money is restricted. The Charity Commission describes restricted funds as funds subject to specific trusts, declared by the donor or with their authority — a grant letter that says “for pitch drainage”, or a leaflet that asks for help “to buy a minibus”, does exactly that.

If the trustees or the committee set the purpose themselves, the money is designated. It is still unrestricted: designation is an administrative earmark, not a legal restriction, so the people who made it can undo it.

If nobody set a purpose — subs, bar takings, a general donation, the summer fair raising money for “the club” — the money is unrestricted, and can be spent on anything within the organisation’s purposes.

Three worked examples

A football club. The county gives £4,000 towards pitch drainage: restricted to drainage. The committee sets £1,500 aside towards a minibus: designated, and still the committee’s to release. Subs, match fees and bar takings: unrestricted.

A PTA. A parent gives £200 “for the library”: restricted to library books. The summer fair raises £2,300 with no stated purpose: unrestricted, even if the committee already has plans for it. A raffle advertised as “for new playground markings” raises restricted money, because the poster set the purpose.

A small charity. A trust grants £12,000 for a youth project’s sessions and its share of the hall: restricted to that project, and every cost charged to it has to be one of the project’s. A legacy with no conditions: unrestricted. The trustees set £5,000 of it aside for a new boiler: designated.

Why one bank balance is not enough

Take the football club at the year end. The bank shows £5,460. Of that, £1,350 is what is left of the drainage grant and can be spent only on drainage; £1,500 is the minibus money; £2,610 is the general fund. The money the committee can genuinely spend on anything is £4,110, and £2,610 of it is not already earmarked.

Reserves follow the same logic. The Charity Commission’s guidance on reserves leaves restricted funds out of a charity’s reserves altogether, and money properly designated for essential future spending can be left out too. A balance that looks healthy can be mostly someone else’s promise.

Keeping funds apart through the year

Many small organisations keep every fund in one bank account; what keeps the funds apart is the record. Give each restricted grant and each designated pot its own heading, tag every receipt and payment to its fund as it happens, and check each fund’s balance whenever you reconcile the bank.

Charge a cost to a restricted fund only when it is one the purpose covers, and keep what shows it — the invoice, the grant letter, the minutes where the committee agreed it. When a fund is spent, it closes at nil; when it is not, its balance carries into next year.

At the year end

A charity’s accounts show restricted and unrestricted money separately, so the examiner, the trustees and anyone reading the accounts can see what was given for what. A designated fund is reported as part of the unrestricted funds, usually with a note of what it is for.

Each fund’s story is the same four numbers: what it started the year with, what came in, what went out and what is left. If those add up for every fund and the funds add up to the bank, most of an examiner’s first questions are already answered. For the format itself, the receipts and payments year-end walks through it.

When a restricted purpose can no longer be met

Projects get cancelled and grants come in under budget. What happens to the money left over is decided by the terms it was given on: some funders ask for it back, some agree a new use, some allow it to be kept. Ask the funder in writing before moving anything, and for a charity take advice first — spending restricted money on something else is treated seriously by the regulator.