How do I set up my charity's chart of accounts?

England and Wales: researched. Scotland: researched — no difference in principle; fund accounting is a SORP requirement, and the SORP is UK-wide. Northern Ireland: researched — no difference in principle, for the same reason.

Two fund types that look identical on the balance sheet and are legally nothing alike

★ A trustee designation and a donor restriction show up as two separate lines on the same balance sheet, which makes them look equivalent. They are not. A restriction is imposed from outside, by the donor’s own terms or by the terms of an appeal, and the trustees cannot lift it themselves. A designation is the trustees’ own decision, and they can reverse it at any time. Reporting designated money as restricted overstates the charity’s obligations and understates its free reserves; reporting restricted money as unrestricted does the opposite, and can amount to a breach of trust if the money is then spent as if it were free.

Why the fund dimension has to be built in from the start, not bolted on later

The SORP requires fund accounting because a charity’s own tier and reporting obligations turn on figures that a fund-blind ledger cannot reliably produce. A charity assesses its SORP tier fresh every single year, on that year’s gross income alone, with no smoothing across years — against a ceiling of £500,000 for Tier 1. Getting restricted and unrestricted money right in the coding structure is what makes every later report — the fund analysis in the accounts, the trustees’ annual report, the tier determination itself — something you can actually produce from the ledger, rather than reconstruct by hand at year end.

Running restricted funds as a memorandum note doesn’t survive scrutiny

It is quicker to track a grant or two on a spreadsheet alongside the main ledger than to build fund codes into the chart of accounts properly, and it works while there are only one or two restricted funds. It stops working as soon as the fund analysis in the accounts has to reconcile back to the ledger — which is one of the things a scrutineer or examiner actually tests. The Charity Commission has previously found that a meaningful proportion of the smallest charities fail to account for charitable funds properly; no fact record in this project currently pins down the exact figure from that review, so it is not repeated here as a number, but the underlying finding — that memorandum-only fund tracking is a real and regulator-observed weak point, not a hypothetical one — is worth taking seriously from the start.

What the fund dimension actually needs to do in the ledger

The practical requirement is simple even where the accounting judgement above is not: every nominal code in the chart of accounts should be able to carry any fund code, not just the ones you happen to have today. A charity with core donations, a grant restricted to a named post, and a building appeal needs at minimum three fund codes — unrestricted, and one restricted code per distinct restriction — with every nominal code able to carry any of them. Built this way, the trial balance can be pivoted by fund without a manual analysis exercise each time a report is needed.

Common mistake: treating a trustee designation as a restriction

Both appear as separate funds on the balance sheet, so they look equivalent. They are not: a restriction is imposed from outside by the donor’s terms or the terms of an appeal, and the trustees cannot lift it. A designation is the trustees’ own decision, and they can reverse it at any time. Reporting designated money as restricted overstates the charity’s obligations and understates its free reserves; reporting restricted money as unrestricted does the opposite, and can amount to a breach of trust if it is then spent.

Common mistake: running restricted funds as a memorandum note rather than in the ledger

It is quicker, and works while there are only one or two grants. The fund analysis in the accounts cannot then be reconciled to the ledger, which is one of the criteria the regulator tests — a real and regulator-observed weak point among the smallest charities, not a hypothetical one.

Worked example

A charity has core donations, a lottery grant restricted to funding a youth worker’s post, and a building appeal. It sets up three fund codes: unrestricted, restricted-youth-worker, and restricted-building — with every nominal code able to carry any of the three. The outcome: a trial balance that can be pivoted by fund without a manual analysis exercise each time a report is needed.