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

England and Wales: This page sets out the position in full. Scotland: the same position — fund accounting is a SORP requirement, and the SORP applies UK-wide. Northern Ireland: the same position, for the same reason.

What does a charity chart of accounts need to keep apart?

A charity chart of accounts needs to keep restricted money apart from unrestricted money. It also needs to keep a donor’s restriction apart from the trustees’ own designations. A chart of accounts is the coding structure behind a charity’s books. Every transaction in it carries a nominal code and a fund code. Building it is usually the treasurer’s job.

This page assumes the books are already open; if not, first open your books and choose your accounting basis.

The rule is the same in England and Wales, Scotland and Northern Ireland. Only the regulator differs: the Charity Commission, OSCR or the Charity Commission for Northern Ireland. If you are already approaching funders — see find funders that genuinely fit — expect each restricted grant to need its own fund code.

A trustee designation and a donor restriction show up as two separate lines on the same balance sheet. That makes them look the same. They are not. A restriction is imposed from outside, and the trustees cannot lift it. A designation is their own decision, and they can reverse it.

The difference between restricted and unrestricted funds has its own explainer.

Reporting designated money as restricted overstates the charity’s obligations and understates its free reserves. Reporting restricted money as unrestricted does the opposite. It can amount to a breach of trust if the money is then spent as if it were free.

Why build the fund dimension in from the start?

The Charities SORP requires fund accounting in accruals accounts. It requires a charity to identify each restricted fund separately and keep accounting records showing that fund’s income, expenses, assets and liabilities. Each class of fund has its own character in trust law. The SORP also warns that mismanaging restricted funds can put trustees in breach of trust.

A charity works out its SORP tier afresh every year, on that year’s gross income alone, with no smoothing across years.

The Tier 1 ceiling is £500,000. Code restricted and unrestricted money correctly in the chart of accounts from the start. Then you can produce every later report from the ledger, not rebuild each one by hand at year end. That means the fund analysis in the accounts, the trustees’ annual report, and the tier check itself.

Can restricted funds be tracked on a spreadsheet instead?

A spreadsheet note beside the main ledger works only while there are one or two restricted funds. It stops working as soon as the fund analysis in the accounts has to reconcile back to the ledger. That is one of the things a scrutineer or examiner tests.

Tracking a grant or two this way is quicker than building fund codes into the chart of accounts properly. That is why charities do it.

Reporting spend to each funder is covered in set up restricted fund tracking for the award. It works from these fund codes, not instead of them. The Charity Commission has found before that a meaningful share of the smallest charities fail to account for charitable funds properly.

No fact record in this project pins down the exact figure from that review, so it is not given here as a number. But take the finding seriously from the start. Keeping funds only in a side note is a real weak point the regulator has seen, not a theory.

What does the fund dimension need to do in the ledger?

Every nominal code in the chart of accounts should be able to carry any fund code, not only the ones you have today.

Take a charity with core donations, a grant restricted to a named post, and a building appeal. It needs at least three fund codes: unrestricted, and one restricted code for each distinct restriction. Every nominal code must be able to carry any of them. Built this way, the trial balance can be split by fund without a manual analysis each time a report is needed.

Next, set your financial year end. When the first restricted grant arrives, record it against its own code.

Common mistake: treating a trustee designation as a restriction

Both appear as separate funds on the balance sheet, so they look the same. They are not. A restriction is imposed from outside by the donor’s terms or the terms of an appeal. 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. It can amount to a breach of trust if the money is then spent.

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

It is quicker, and it works while there are only one or two grants. But the fund analysis in the accounts cannot then be reconciled to the ledger. That is one of the tests the regulator applies. It is a real weak point the regulator has seen among the smallest charities, not a theory.

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. Every nominal code can carry any of the three. The result is a trial balance that can be split by fund without a manual analysis each time a report is needed.