This article explains what bank accounts and funds are in fund accounting for UK charities, how they differ, and how to avoid the common mistakes that arise from confusing the two.

If you work in charity finance – or are a volunteer treasurer or trustee of a church or charity – there is a good chance you have not had any formal training in fund accounting.

You may have picked up many day-to-day essentials along the way – processing payments, raising invoices, claiming Gift Aid – but it is really important to develop a solid understanding of key fund accounting concepts.

One of the most persistent misconceptions in charity accounting is that funds and bank accounts are the same thing – or that you need a bank account for each fund.

This confusion can lead to real problems with reporting, compliance, and day-to-day bookkeeping. This matters because charity trustees have a legal responsibility to ensure they manage and report charity finances correctly.

Estimated reading time: 13 minutes

Funds vs bank accounts at a glance

The table below describes the key differences between funds and bank accounts in fund accounting for UK charities.

Fund	Bank Account
Tracks what money is for	Tracks where money is held
Set up within fund accounting software	Opened with a bank or building society
Balances reflect purpose of funds	Balance reflects where the cash is held
Required by the Charities SORP (FRS 102)	Opened based on operational need
Moving money between funds requires a journal entry in your accounting software	Moving money between bank accounts requires a bank transfer
You may have many more funds than bank accounts	You may have just one or two bank accounts for all funds

Why do people confuse funds with bank accounts?

In everyday language, we talk about ‘putting money into a fund’ in much the same way we say ‘putting money into an account’. Both seem to describe a pot of money set aside for a particular purpose.

Within fund accounting for charities, however, a fund has a very specific meaning. A fund is a way to track the purpose for which money has been given. Using funds correctly ensures the money is spent in line with what the donor or grant maker gave the money for.

A fund is something that exists within your charity accounts structure or software (rather than being a bank account).

Those unfamiliar with fund accounting often try to manage charity finances the way they manage personal finances. They might open a separate bank account for each thing they want to track.

While this works for personal savings, it is not how charities should operate. When charities try this approach, it leads to:

• reinforcing the mistaken idea that a fund equals a bank account
• assuming that bank balances equal fund balances – they do not
• unnecessary administration and extra bank charges
• ongoing confusion about how charity finances should be managed.

What is a fund in charity accounting?

In charity accounting, a fund represents money that has been given for a specific purpose. It provides a way of tracking what the charity’s money is set apart for and helps ensure that money is spent on the purposes for which it was given. It is not about tracking where money is held.

The Charities SORP (FRS 102) – the Statement of Recommended Practice – requires charities to account for and report on their funds separately.

This is because different donations and grants may have been given for different purposes and may have different conditions attached.

There are two main types of funds:

• Unrestricted funds: These can be spent at the discretion of the trustees on any charitable purpose. Most general donation income (along with all non-donation income) is unrestricted.
• Restricted funds: These have been given for a specific purpose, as defined by the donor or grant funder. The charity must use the money only for that stated purpose and must account for it separately.

Note: Designated funds are where trustees have chosen to set money aside for a particular purpose. This restriction is self-imposed and can be reversed. Designated funds are still classified as unrestricted under the Charities SORP (FRS 102).

Find out more here about fund accounting and different fund types.

How do funds work in practice?

When a charity receives income, it is allocated to a fund within the accounting software, based on the purpose for which it was given. Most charities receive at least some restricted income, and will therefore have multiple funds running simultaneously.

For example, a small charity might hold the following funds:

• Roof Repairs Fund (Restricted) – donations received specifically for roof repairs
• Foodbank Fund (Restricted) – donations received specifically for the foodbank
• Youth Worker Fund (Restricted) – a grant received to employ a youth worker
• Reserves Fund (Designated) – money set aside as reserves by the trustees
• General Fund (Unrestricted) – all other income.

Tracking money by fund enables a charity to:

• know exactly what income has been received for each specific purpose
• ensure that restricted and unrestricted funds are spent appropriately
• track how much has been spent from each fund, and what balance remains
• meet the reporting requirements of the Charities SORP (FRS 102).

What is a bank account?

A bank account is a financial account held with a bank or building society. It is where money is held, and transactions take place. It is not for tracking what money is for.

While the total cash held across all bank (and petty cash) accounts will always equal the total cash balances across all funds, the money held in any particular bank account does not correspond to a specific fund.

If a bank account balance appears to match a fund balance, it is most likely because someone has opened a bank account for each fund, then manually moved money between bank accounts to make the bank balance match the fund balance. Doing this is unnecessary and creates extra work.

Recording transactions correctly in fund accounting for charities

When reconciling bank transactions in your charity accounting software, each transaction is allocated to both a fund and a category.

Note: A category (which is also known as a nominal code) provides a way to break down income and expenditure within a fund for management reporting purposes.

The fund to which a transaction is recorded is not determined by which bank account the money comes into or is paid out from. Rather the fund is determined by the purpose to which the transaction relates. This is one of the most critical points in charity fund accounting and is something that those not familiar with the Charities SORP (FRS 102) often get wrong.

Example: A charity is raising money for a building project and opens a savings account to earn a higher rate of interest on money already received. If a donor gives a restricted donation for the building project, it must be allocated to the Building Project Fund – regardless of which bank account it is paid into. Expenditure relating to the building project also needs to be allocated to the Building Project Fund – regardless of which bank account it was paid out from. It’s the fund accounting software, not the bank account, that tracks the income, expenditure, and remaining balance of the Building Project Fund.

Common mistakes when recording transactions

A core responsibility of charity trustees is ensuring that restricted income is recorded and spent correctly. When recording restricted income, avoid these mistakes:

• Recording it to an unrestricted fund – this misrepresents the nature of the income and creates a compliance risk
• Recording it to a designated fund – designated funds are still unrestricted, which conflicts with the donor’s conditions
• Recording it to a restricted fund with different restrictions – even where the general purpose seems similar, the funds must correspond precisely.

Note: While you can record unrestricted income into a restricted fund, doing so will make that money restricted – and you lose the ability to spend it flexibly. It’s best to avoid this unless it is intentional.

When recording expenditure from a restricted fund, ensure it falls within the specific restrictions for which the money was given. Where expenditure can legitimately be covered from a restricted fund, it should be recorded to the restricted fund, rather than being recorded to an unrestricted fund.

When should a charity open multiple bank accounts?

Many charities operate more than one bank account, and this is perfectly normal. Good reasons to open additional bank accounts include:

• opening a savings account to earn a higher rate of interest on reserves
• opening a credit or debit card account to make purchases easier for staff
• spreading cash across banks to stay within the FSCS protection limit of £120,000 per banking group (previously £85,000).

None of these reasons relates to funds or to tracking fund balances.

If your charity has ten different funds but only one bank account, this will not prevent you from producing accurate charity accounts.

It is your charity accounting software that tracks fund balances, and therefore you do not need a separate bank account for each fund.

There are two further reasons to open an additional bank account:

• a grant funder requires their money to be held in a dedicated bank account – this is rare
• to help identify income as it arrives, making correct classification easier – this is about identification, not fund tracking.

Choosing the right charity fund accounting software

Fund accounting for charities is fundamentally different from business accounting. Software packages like Sage, QuickBooks, and Xero are built for businesses and lack essential features which charities need, including:

• the ability to track and manage finances by restricted and unrestricted funds
• the ability to create and submit Gift Aid claims to HMRC
• donation reporting and donor management
• SORP-compliant year end accounts templates.

The Charities SORP (FRS 102) requires charities to break down income, expenditure, and fund balances in their year end accounts – whether they prepare accounts on an accruals basis or the simpler receipts and payments basis. This reporting is driven by the funds your charity holds, not by your bank accounts. Charity fund accounting software is designed to handle this automatically.

Moving money between bank accounts: what to record

It is common for charities to move money between bank accounts. For example, from a current account to a savings account, or to top up petty cash. This is straightforward, but it must be recorded correctly.

Moving money between bank accounts does not change any fund balances. The location of the cash has changed; nothing else has.

Example: A charity has three funds – Building Fund (£3,000), Youth Worker Fund (£2,000), and General Fund (£10,000). All these funds are all held in one current account. The trustees transfer £4,000 into a new savings account. Every fund balance remains exactly as it was. Only the location of the cash has changed.

When recording bank transfers, it is really important not to record the outgoing amount as expenditure and the incoming amount as income. Doing so will result in your total income and expenditure figures being overstated. It may also result in your fund balances being incorrect.

To summarise:

• bank accounts are not funds – they are simply places where money is held
• bank transfers are not fund transfers – they do not change your income, expenditure, or fund balances.

If your trustees wish to move money between funds – for example, transferring £5,000 from the General Fund into a designated Reserves Fund – this is done entirely within the accounting software via a journal entry. No bank transfer is needed.

Why bank account balances and fund balances will not match

To account for your charity’s finances correctly, you need fund accounting software designed for charities – not multiple bank accounts.

If your charity has been attempting to use bank accounts as a proxy for funds, you will quickly discover that account balances and fund balances diverge. One reason for this is that a single bank transaction may relate to multiple funds. For example:

• credit or debit cards are typically linked to a bank account, but the purchases made on these cards may relate to different funds
• Gift Aid income from HMRC received into one bank account will need to be allocated to the funds it relates to.

Thus, even if bank account balances have been made to match fund balances, these will quickly diverge from each other. In addition, in accruals accounting, cash isn’t the only factor in your fund balances as fixed assets and investments will also impact your fund balances.

Charities that have opened a bank account per fund usually respond to this by moving money between accounts to force bank balances to match their fund balances.

This achieves nothing useful as the fund balances in your charity accounting software are already correct. The extra bank transfers simply create unnecessary administration. If your charity is currently maintaining one bank account per fund, it is worth consolidating down to one or two bank accounts and letting your fund accounting software track your finances as it was designed to do.

Conclusion

Bank accounts track where money sits and are where transactions happen, while funds track how money must legally be spent. Keeping this distinction clear – in your accounting records and in the minds of everyone involved in the financial management of your charity – will help your charity stay compliant, produce accurate reports, and demonstrate proper stewardship of its finances.

Watch out for these common misconceptions:

• funds being considered the same as bank accounts
• believing a separate bank account is needed for each fund
• recorded transactions based on which bank account they happen within.

Charities do not need multiple bank accounts to manage their finances well. Instead, a charity needs fund accounting software designed for the specific requirements of the Charities SORP (FRS 102), such as ExpensePlus – a software that tracks restricted and unrestricted funds, supports Gift Aid claims, and produces compliant year end accounts.

Frequently Asked Questions

Do I need a separate bank account for each fund?

No. There is no legal or accounting requirement to hold restricted funds in a separate bank account – and grant funders rarely require this.
 
What matters is that transactions are correctly recorded against the right fund in your charity accounting software. The software tracks fund balances.
 
Your bank account is simply where the money is held and where transactions take place.

What is the difference between restricted and unrestricted funds in charity accounting?

Restricted funds have been given for a specific purpose defined by the donor or grant funder, and must be spent accordingly.
 
Unrestricted funds can be spent at the trustees’ discretion on anything within your organisation’s charitable purposes.
 
Designated funds are a subset of unrestricted funds – money set aside by trustees for a particular purpose, but which they can reallocate if needed.
 
The Charities SORP (FRS 102) requires restricted and unrestricted funds to be reported separately in a charity’s year end accounts.

Can I have more funds than bank accounts?

Yes – and this is very common. A charity with one current account might have unrestricted funds, designated funds, and several restricted funds all relating to that single bank account.
 
Charity fund accounting software tracks the split between funds automatically. The number of bank accounts is irrelevant to the number of funds.

What happens if a charity spends restricted funds incorrectly?

This is a serious matter. If restricted funds are spent outside the terms of a grant or donation, the charity may need to repay the money to the grant funder or donor.
 
Trustees could also be in breach of their legal duties. If this happens, seek advice from the Charity Commission promptly. The Charity Commission’s website provides guidance on reporting serious incidents.
 
A good fund accounting software like ExpensePlus, alongside good fund accounting knowledge, is the best way to prevent this from happening.
 
If you are responsible for managing your charity’s finances and haven’t had any formal training, then it may be worth considering a course which covers the essentials of fund accounting, such as this course by the School of Charity Finance.

How should a bank transfer between two bank accounts be recorded?

A transfer between bank accounts simply changes the bank balances. It’s a reduction in one bank account balance and an increase in another.
 
It must not be recorded as income or expenditure, and it does not change any fund balances.
 
Incorrectly recording transfers as income and expenditure will result in your charity’s income and expenditure being overstated, and may also cause your fund balances to be incorrect.

What charity fund accounting software do you recommend for UK charities?

Business accounting software like Sage, QuickBooks, or Xero is not designed for fund accounting. Business accounting packages lack key features for charities such as Gift Aid management and SORP-compliant reporting.
 
Charities should use accounting software specifically built for the charity sector. Software such as ExpensePlus supports fund tracking, Gift Aid management, donation reporting, and year end accounts on either a receipts & payments or accruals basis.