Charity accountant reviewing SORP 2026 fund accounting statements showing restricted unrestricted designated and endowment charity funds
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Charity Accounting & SORP 2026

SORP 2026 and Fund Accounting: Restricted, Unrestricted, Designated and Endowment Funds

SORP 2026 fund accounting explained for charity trustees. Learn how restricted, unrestricted, designated and endowment funds work, how fund transfers and deficits are treated, and what the new SORP means for your charity accounts.

Written by a senior charity accountant
12 minute read
Updated September 2026

SORP 2026 and fund accounting go hand in hand. If your charity prepares accruals accounts, correctly identifying unrestricted, designated, restricted and endowment funds is essential to producing reliable accounts, protecting donor money and demonstrating that trustees have used charitable resources for the purposes for which they were given.

Charities SORP 2026 applies to accounting periods beginning on or after 1 January 2026. Fund accounting remains one of the distinctive features of charity accounting, but SORP 2026 places greater emphasis on transparent fund movements, reserves reporting and explaining how trustees manage different classes of charitable funds.

Key Takeaways

For charities preparing accruals accounts under SORP 2026:

  • Unrestricted funds can normally be spent on any of the charity's purposes.
  • Designated funds are unrestricted funds voluntarily earmarked by trustees for a particular future purpose.
  • Restricted funds can only be used for the purpose imposed by the donor, appeal, grant terms or other legally binding restriction.
  • Endowment funds represent capital held subject to particular legal restrictions and may be permanent or expendable.
  • Designating money does not make it legally restricted.
  • Restricted funds are generally not part of a charity's free reserves.
  • Material designated funds should be explained in the Trustees' Annual Report.
  • Material fund deficits need proper investigation and explanation.
  • Trustees cannot simply move restricted money into unrestricted funds because a project has changed or ended.
  • Fund records should be maintained throughout the year rather than reconstructed at year end.

What is fund accounting under SORP 2026?

Fund accounting under SORP 2026 means identifying and accounting separately for resources according to the legal terms on which the charity holds them. The fundamental distinction is between unrestricted funds that trustees can apply across the charity's purposes and restricted funds whose use is limited by legally enforceable restrictions.

This matters because a charity may have £200,000 in the bank but only £30,000 genuinely available for general expenditure. The rest could relate to:

  • a restricted grant for a youth programme
  • money raised specifically for a building project
  • permanent endowment
  • unrestricted money designated by trustees for future expenditure

A healthy bank balance therefore does not automatically mean a charity has healthy free reserves. The Charity Commission stresses that trustees need to understand whether funds are unrestricted, restricted income or endowment when assessing reserves and financial resilience.

Our charity fund management FAQs cover the day to day questions trustees ask most often, and our charity bookkeeping services keep fund ledgers accurate all year round.

What are the main types of charity funds under SORP 2026?

SORP 2026 fund accounting starts with two broad legal classes, unrestricted and restricted funds. Unrestricted funds may include general and designated funds. Restricted funds include restricted income funds and endowment funds, with endowment divided further according to the legal terms governing the capital.

Fund type Can trustees spend it freely? Typical example Key accounting point
General unrestricted Yes, within charitable objects General donations Normally available for general purposes
Designated Trustees have earmarked it Future roof replacement Still legally unrestricted
Restricted income Only for the specified purpose Grant for youth services Track separately until the restriction is fulfilled
Expendable endowment Subject to endowment terms Long term capital gift Capital may be converted to income where trustees have the legal power
Permanent endowment Normally capital must be retained Investment fund or donated property Special legal rules apply to capital

For a plain English walk through the differences, see our page on charity restricted and designated funds. You can also read the official Charities SORP 2026 summary of changes.

What are unrestricted funds?

Unrestricted funds are resources trustees may use for any of the charity's charitable purposes, subject to the governing document and their general trustee duties. They normally include general donations, unrestricted grants, unrestricted trading income and other income received without a specific legal restriction.

For example, suppose a charity receives:

  • £10,000 general public donations
  • £3,000 unrestricted membership income
  • £5,000 general fundraising proceeds

Provided no restrictions apply, the resulting £18,000 would normally form part of the charity's unrestricted funds.

However, unrestricted funds are not necessarily the same as free reserves. Some unrestricted resources may be tied up in buildings used by the charity, equipment, social investments, contractual commitments or designated funds set aside for essential future expenditure.

This is why reserves calculations should start with unrestricted funds and then consider amounts that are not genuinely available for general spending. ICAEW's SORP 2026 guidance specifically highlights the need for the reserves figure in the Trustees' Annual Report to agree with, or reconcile clearly to, the accounts.

Read our charity investments and reserves policy FAQs

What are designated funds under SORP 2026?

Designated funds are unrestricted funds that trustees have deliberately earmarked for a particular future project or commitment. The important distinction is that the trustees themselves created the designation, so they can normally change or cancel it if circumstances change.

Suppose trustees have £100,000 of unrestricted funds and agree before the year end to allocate £30,000 towards replacing the charity's roof. The accounts might show general unrestricted funds of £70,000 and a designated roof fund of £30,000. Total unrestricted funds remain £100,000.

The £30,000 has not become restricted income merely because trustees gave it a project name.

The Charity Commission defines designated funds as unrestricted funds earmarked by trustees without legally restricting the money. Trustees may normally cancel a designation if they subsequently decide not to proceed with the project.

Can trustees designate funds after the year end?

Trustees should be careful about creating designations retrospectively simply to reduce the level of reported reserves. Where trustees want a designation reflected at the reporting date, the underlying decision should genuinely exist at that date and be supported by appropriate records, such as trustee meeting minutes. The Charity Commission warns against retrospective designations designed to disguise the true amount of unrestricted reserves.

What are restricted funds?

Restricted funds are resources that can only be used for a particular charitable purpose because a legally enforceable restriction applies. The restriction may arise from the wording of a grant, donor instructions, a fundraising appeal, the charity's governing arrangements or the circumstances in which the funds were received.

Consider a charity receiving a £50,000 grant stating:

"The grant must be used solely to provide counselling services for young people in Bedfordshire."

That £50,000 should not simply be treated as general income available for rent, unrelated projects or general cash flow. The charity needs to identify:

  1. 1the restriction
  2. 2the income received
  3. 3expenditure charged against that fund
  4. 4any remaining balance
  5. 5any relevant commitments
  6. 6whether expenditure actually satisfies the funder's terms

Poor restricted fund accounting is one of the problems we frequently see when charity records are prepared using ordinary business bookkeeping principles. A transaction may be correctly categorised as wages or rent but still allocated to the wrong fund. Our charity bookkeeping and records FAQs explain how to keep fund coding clean.

Can trustees transfer money from restricted to unrestricted funds?

Trustees cannot normally convert restricted funds into unrestricted funds simply by passing a board resolution. A restriction arises from the legal terms on which the charity holds the money, so trustees need proper legal authority before removing or altering that restriction.

If restricted money is no longer required for its original purpose, trustees should first establish what the legal terms allow. Depending on the circumstances, this might involve:

  • contacting the funder
  • reviewing the original appeal wording
  • applying an available statutory power
  • considering whether Charity Commission authority is required
  • obtaining legal advice for significant or complex funds

Do not simply post a bookkeeping journal from "restricted" to "general". The accounting entry must follow the legal position, not create it.

What happens if a restricted fund is in deficit?

A restricted fund deficit should be investigated immediately. A deficit may indicate expenditure has been charged to a fund without enough restricted income, costs have been allocated incorrectly, anticipated grant income has not been recognised, or unrestricted resources may need to support expenditure where legally appropriate.

Trustees should ask:

  • Was expenditure correctly coded?
  • Was all entitled income recognised?
  • Does the grant allow overhead recovery?
  • Was expenditure incurred outside the permitted period?
  • Does the charity have an obligation to fund the shortfall?

Current Charity Commission annual reporting guidance requires charities to explain where funds are in deficit, including how the deficit arose and the action being taken to address it.

What are endowment funds?

Endowment funds are capital funds that trustees must hold and administer according to particular legal restrictions. Endowment can be expendable or permanent. Permanent endowment is broadly property the charity is required to keep rather than simply spend as ordinary income.

The Charity Commission describes two common forms of permanent endowment: money or investments that must be retained to generate investment return, and property that must continue to be used for a particular charitable purpose, such as land used as a recreation ground.

What is permanent endowment?

Permanent endowment is charity property that normally has to be retained rather than spent as income. It may consist of investment capital intended to produce income or functional property, such as land or buildings, that must continue to be used for a particular charitable purpose.

This leads to a useful practical distinction:

  • Investment permanent endowment: capital held principally to generate returns.
  • Functional permanent endowment: property held for direct charitable use, such as a village hall, school site or recreation ground.

The legal documentation matters enormously. Trustees should never assume that an old investment, property or legacy is unrestricted merely because nobody currently remembers the original restriction.

What is expendable endowment?

Expendable endowment remains an endowment fund, but trustees have a legal power to convert the capital into income in appropriate circumstances. Until that power is exercised, the fund should continue to be accounted for according to its endowment status.

The Charity Commission distinguishes expendable endowment from ordinary income because trustees are not necessarily under an immediate duty to spend the capital.

Endowment interacts closely with investment powers and reserves. See our charity investments and reserves policy FAQs.

How does fund accounting affect the Statement of Financial Activities?

SORP accounts must make the different classes of charity funds understandable to readers. Income, expenditure, gains, losses and transfers need to be attributed to the appropriate funds so trustees, donors, funders and regulators can see how resources were received and applied.

A simple example is:

Transaction Amount Fund classification
General donation £5,000 Unrestricted
Grant for children's project £20,000 Restricted
Trustees set aside future IT budget £8,000 Designated unrestricted
Permanent investment gift £50,000 Endowment

The important discipline is to classify the fund when the transaction arises, not several months later when the accountant asks questions at year end. Our SORP and charity accounting framework FAQs cover the wider framework.

How does SORP 2026 affect charity reserves?

SORP 2026 requires greater clarity between fund balances and reserves. Restricted funds do not normally form part of free reserves, while some unrestricted resources are also excluded because they are not readily available for general spending.

Under current Charity Commission guidance, free reserves commonly start with unrestricted funds and then consider amounts such as:

  • tangible fixed assets used in charitable activities
  • social investments
  • designated funds committed to essential future spending
  • certain commitments not already recognised as liabilities

For periods beginning on or after 1 January 2026, trustees should make sure the reserves figure stated in the Trustees' Annual Report can be reconciled to the financial statements. Material designations should also be quantified and explained, including their purpose and likely timing of expenditure. Read the official Charity Commission guidance on charity reserves.

Trustees' Annual Report requirements explained

Does SORP 2026 apply to every charity?

SORP 2026 applies where a charity is required, or chooses, to prepare accruals accounts under the SORP framework for accounting periods beginning on or after 1 January 2026. Charities legitimately preparing receipts and payments accounts do not prepare those accounts under the SORP accruals accounting framework.

SORP 2026 introduces three income based reporting tiers:

  • Tier 1gross income up to £500,000
  • Tier 2gross income above £500,000 and up to £15 million
  • Tier 3gross income above £15 million

The tiering system makes some reporting requirements proportionate to charity size, but correct fund identification and stewardship remain fundamental. See our guide to charity accounting thresholds from 30 September 2026 and the Charity Commission guidance on preparing a trustees' annual report.

What should trustees do to prepare for SORP 2026 fund accounting?

Trustees should review every material fund before preparing SORP 2026 accounts. Start with the original source of the money, establish whether any legal restriction exists, reconcile the balance and document how remaining funds can lawfully be used.

01

List every active fund

Include unrestricted, designated, restricted and endowment funds.

02

Find the original documentation

Keep grant letters, funding agreements, appeal wording, donor correspondence and governing documents.

03

Confirm the legal restriction

Do not rely solely on the fund name used in bookkeeping software.

04

Reconcile each fund

Opening balance plus income and gains plus transfers, less expenditure, equals closing balance.

05

Investigate deficits

Do not leave unexplained negative restricted fund balances.

06

Review old dormant funds

Establish why money remains and whether further action is needed.

07

Review designations

Confirm they remain genuine and supported by trustee decisions.

08

Calculate free reserves

Reconcile the Trustees' Annual Report figure back to the accounts.

09

Document transfers

Record why each material transfer was made and the authority supporting it.

10

Keep fund reporting current

Give trustees fund level management information during the year, not just at the annual accounts.

Where to get help

If your charity needs support with fund reconciliations or small charity accounts, see our small charity annual accounts service, our charity bookkeeping services, and our guide to the independent examination new rules from 30 September 2026.

FAQs

SORP 2026 fund accounting FAQs

Straight answers to the questions charity trustees ask most about restricted, designated and endowment funds under SORP 2026.

Conclusion: get the fund classification right before year end

SORP 2026 and fund accounting are not simply year end presentation issues. They are about trustees understanding whose money they hold, why they hold it and what they are legally permitted to do with it.

The most common mistake is to think only in terms of income and expenditure categories. Charity accounting requires another question:

Which fund does this transaction belong to?

Getting that question right throughout the year makes annual accounts easier, improves trustee decision making, protects restricted money and gives funders greater confidence in the charity's financial management.

At Charity Accountants, we help CIOs, charitable companies, trusts and unincorporated charities prepare SORP compliant accounts, reconcile restricted funds, review reserves and establish practical fund accounting systems. You can explore our full range of charity accounting services or see the different charity structures we support on our who we help page.

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Important: This article provides general information. Fund restrictions are determined by the legal terms applying to the individual charity and fund, so specific professional or legal advice may be necessary in complex cases.