Charities must follow fund accounting principles and these principles apply to restricted funding. One fundamental principle is that when you receive income, you must allocate it to a fund based on the purpose for which it was given. So when restricted income is given, it must be allocated to a corresponding restricted fund.
Often, charities wrongly believe that restricted money needs to be physically held within a different bank account as well. Furthermore, they then spend time transferring money between bank accounts each month. This is done to try and align bank account balances with fund balances. But it is not needed!
In the video below, Tim Wyatt, an independent examiner at Wyatt & Co Chartered Accountants explains more.
If I don’t have a separate bank account, how do I keep track of restricted funds?
Restricted funding is one of the most common reasons churches and charities open multiple bank accounts. The typical causes for opening separate bank accounts are:
- The church or charity isn’t using a proper fund accounting package and instead is trying to use a spreadsheet. Alternatively, they may be using a business accounting package which doesn’t have the functionality needed to track funds.
- The church or charity is using a fund accounting package but isn’t using the inbuilt functionality to track funds.
For the vast majority of Churches and Charities, there is no need for additional bank accounts to track fund balances – your fund accounting software does this for you. When money is received into any bank or petty cash account, it should be recorded to the fund it relates to. Likewise when money is paid out. Thus, the reports within the fund accounting software will show you the correct income, expenditure and balances for each fund, regardless of which bank account money physically arrived into or was paid out of.
This means your church or charity can have just one bank account even if you have multiple funds. Even restricted funds.
Furthermore, if you do have multiple bank accounts, you do not need to move money between bank accounts to keep track of your fund balances. Your fund accounting software will keep track of what money belongs to which fund.
Are there any good reasons for having multiple bank accounts?
Yes, but these reasons are not to do with restricted funds! Good reasons for having separate bank accounts include:
- To keep within the FSCS cover limit per provider. For example, if your charity has £100,000 then you might wish to move £15,000 into a different bank account with a different bank to mitigate risk.
- To help distinguish unknown income. For example, where multiple churches are part of the same charity, having a different bank account for each may help you to know which church to record income to.
- Where you are required to do so. For example, if it is a condition of a grant that has been received (which is rarely the case).
ExpensePlus is a fund accounting package that is designed for churches and charities. ExpensePlus enables you to track and account for different funds with ease. To find out more, click here.
