Charities Fund accounting for reports.
The main difference between maintaining accounts in business and charity is accounting for funding. Fund accounting for charities splits the income and expenditure charges into several categories according to the purpose of funding received from the funders.
Let me look at the different types of funding that a charity receives when running it.
Unrestricted funding
Funding was received from a funder, not for any particular purpose they mentioned. The charity can use this fund for any expenses in running a charity set by the trustees.
Restricted funding
The charity could use only for the charitable purpose that is said in the donor’s information document when it is donated to the charity.
Designated funds
Some charities seek this type of funding for unexpected repairs or some purchase of special equipment. When they receive it, this funding needs to spend on that purpose.
Endowments funding
It represents the capital funding that some charities receive from the donors; the trustees take responsibility for investing or spending on the charitable purpose.
Charities Fund accounting for reports.
When the charity’s accounting staff doing the accounts have to allocate the income and expenditure according to the funding they have received. Then it becomes possible to find the balance of the funds at any time. It needs regular doing, and if someone discovers mistakes in the spending pattern of the restricted funding, they could face a severe problem.
Therefore, the urgency to maintain the funding accounts is unavoidable.
The reason for you to account for restricted funds carefully?
If you mistake allocating the expenditure for the restricted funds, the accounts at the end of the year will show a surplus in the limited funds. That is not correct. They might ask you to pay back or expect to do more activities using the surplus fund. Therefore, what will happen is you will end up spending money that you do not have and face a severe cash flow problem in the end. That might put pressure on you to raise additional funding.
That will make you aware that your reserves policy has some issues.
It indicates that most of your funding is restricted; therefore, you must look for other funding sources to cover these deficits from your specified budget. Do not use limited financing for anything other than its purpose, even if you intend to pay it back.
Reserves policy
Every charity needs to have a reserve policy and establish appropriate funds kept in reserves for the charity to use in the event of losing some of the funding. The restricted fund does not contribute to the reserves policy, but It will impact it.
A charity having some reserves will influence the funders to take action to help the charity.