A donor who gave £25,000 to a named mental health programme rings your Finance Director to ask where it went. The FD who can answer on the call, with the fund balance to hand and the spend already tied to the programme, keeps the relationship. The one rebuilding the answer from a spreadsheet the last finance manager left behind in January does not.
That scenario plays out in different forms every quarter. A trustee asks for a fund-by-fund position. An auditor wants restricted-fund reconciliations, and the National Lottery Community Fund requests original receipts for a grant now in year three. Whether you can answer any of them in an afternoon depends on the infrastructure underneath, not on how diligent the team is. And most charity finance teams run that infrastructure on systems that make it structurally hard.
So this piece goes past the definitions to the operational question: what good fund accounting looks like in 2026, and what the system underneath has to be able to do.
Fund Accounting Is a Donor Relationship Question, Not Just a Compliance One
The UK donor base has thinned over the last decade. The proportion of UK adults donating to charity fell from 69% in 2016 to 55% in 2025, a fall CAF’s UK Giving Report counts as roughly six million fewer donors and an estimated £12.4 billion of lost giving. Total public giving fell from £15.4 billion in 2024 to £14 billion in 2025, the first annual decline since 2021.
But the donors who remain watch the money more closely. The Charity Commission’s Public Trust in Charities 2025 found that 53% of the public cite “most funds raised are used directly for the cause” as the single most important driver of trust in a charity.
Trust comes from the reporting that follows the donation. Fund accounting is what lets you keep the promises you made when the money came in. The audit tells you what was true last year; what matters week to week is whether your system can tell a trustee or a funder what they need to know without a two-day preparation exercise.
What Restricted and Unrestricted Funds Actually Mean in Practice
The definitions are settled. The operational reality usually isn’t.
- Restricted funds carry donor-imposed conditions that specify how the money must be used. A Lottery grant restricted to a specific community programme, a trust donation restricted to capital works, a foundation grant for a named research project: the charity holds all of these as a legal obligation. Spending them on anything else is a breach of trust and potentially a regulatory matter.
- Unrestricted funds are available for the charity’s general purposes, subject to trustee discretion. No donor conditions doesn’t mean no discipline. The trustees decide how to deploy them, and accountability to the board is just as real. Designated funds are a subset: unrestricted funds the trustees have earmarked for a specific purpose. Designation is an internal decision, so it can be reversed, and these funds should never be reported as if they carry external conditions.
- Endowment funds are capital that must be preserved; typically only the investment income is available to spend.
Where the operational reality diverges is in the coding. The Charity Commission’s accounts monitoring review found that small charities frequently exclude restricted funds from income and expenditure reporting, and misclassify designated funds as restricted. Those are recurring patterns rather than one-offs: eleven of the 21 charities that made restricted-fund errors in one annual return made the same errors again the following year. That looks less like misconduct and more like what happens when the system makes correct coding hard.
Knowing the definitions is necessary but not sufficient. The question is whether your system makes them easy to apply at source, every time.
What Good Fund Accounting Looks Like in Practice
Good isn’t “we track restricted and unrestricted funds separately”. Good is an operational standard that holds up under funder scrutiny and at year-end. Five properties, and what each asks of the system underneath.
Fund balances are live, not reconciled
Trustees and finance leadership should see fund positions at any point, not seven working days after month-end. Balances that depend on a monthly exercise to become accurate go stale within days. When a funder asks for a current restricted-fund position, the FD who needs a day’s notice is in a weaker spot than the one who pulls it up on the call. It matters below board level too: a programme manager checking what’s left in a restricted grant before committing a contractor shouldn’t have to raise a finance request.
Grant compliance is evidenced, not asserted
The National Lottery Community Fund’s guidance on financial controls requires grant holders to produce original receipts, invoices, and bank statements on demand, and where a charity can’t produce them, the funder can claw the money back. For grants over £20,000 lasting two years or more, annual progress updates against an evaluation plan are mandatory.
‘We have a filing system’ is a long way short of evidenced compliance.
The receipt has to hang off the transaction itself. A shared drive doesn’t count, and neither does an email to the FD in audit week. The document is part of the record.
Reporting is dimensional
The board asks one question across fund and funder, and most systems answer one dimension at a time. The same transaction should be reportable by fund, programme, funder, and activity simultaneously, with no pivot table to rebuild. A charity running five restricted programmes with three funders and a statutory contract needs those views on demand. Assembling them the night before a trustee meeting is a different thing.
The SoFA comes out of the ledger
The Statement of Financial Activities is the core statutory disclosure for charities. Reformatting a trial balance in Excel each year is slow and error-prone, and the result is only ever as reliable as the manual steps behind it, which nobody has written down in full. The SoFA should be a generated output, not an annual formatting exercise.
Year-end is not a reconstruction
The audit shouldn’t surface fund-accounting questions that take days to resolve because the workings live in someone’s spreadsheet. Restricted-fund balances should reconcile cleanly, and the auditor should get answers out of the system rather than out of somebody’s memory. Anything short of that adds days to year-end. A stretched finance team feels it. More than four in five UK finance leaders surveyed for AccountsIQ’s Mindset Report 2.0 in 2024 said they’d need a six-day working week to manage their workload. Some of that sixth day is fund-accounting work the system should have absorbed.
Where Most Charity Finance Systems Fall Short
Most charity finance teams are running software that solves a different problem at a different scale. Entry-level tools grew up around single-fund bookkeeping, with tracking categories bolted on later to approximate multi-dimensional reporting. Those workarounds were adequate at two funds and one funder. With four funders, a Lottery grant in year three of five, a statutory contract, and SORP 2026 now live, they buckle.
To be fair to Xero, nobody built it for this. It caps at two active tracking categories organisation-wide, so a charity FD reporting by fund and by programme has spent both dimensions before adding funder, let alone restricted versus unrestricted within each programme. The limits are architectural, not a failure of the finance team. Our Sage Intacct vs Xero comparison covers the specifics, and the signs your finance system has outgrown its remit are worth reading before the next year-end cycle.
How Sage Intacct Supports Fund Accounting and Donor Transparency
Sage Intacct treats fund accounting as a core function rather than a workaround. The organising principle is dimensional accounting: the system tags every transaction at source with fund, programme, funder, department, location, and activity, and those dimensions sit inside the ledger rather than on top of it. That’s what makes the same transaction reportable by fund and by programme and by funder at once.
The rest follows. SoFA and SORP-formatted reports generate from the ledger. The grant tracking module keeps grant documents in one place and captures reimbursable costs against conditions and milestones. The audit trail is structural: the receipt and the approval attach to the record, so when the National Lottery Community Fund asks for evidence, the answer comes out of the system in minutes.
Lifeworks, a neuro-disability support charity, moved from paper-based purchasing and outdated accounting software to Sage Intacct, and financial reporting dropped from a four-week delay to two or three days. That follows from the architecture, not from an exceptional finance team.
Those outcomes follow from the architecture, not from an exceptional finance team.
The SORP 2026 Factor
The Charities SORP (FRS 102) Second Edition landed on 31 October 2025 and applies to accounting periods commencing on or after 1 January 2026. Charities are preparing the first audited accounts under the new regime now. Three changes matter most for the system underneath:
Three changes matter most for the system underneath:
- Three-tier reporting replaces the two-tier model. Charities over £15 million income sit in tier three with the fullest obligations; £500,000 to £15 million is tier two. Requirements now scale explicitly by tier, and Sayer Vincent’s read on the new SORP sets out how.
- Operating leases for land, property, vehicles, and equipment now come onto the balance sheet as right-of-use assets with matching liabilities. Most charities have at least one, and a few have a photocopier contract they’d stopped calling a lease.
- Revenue recognition follows a five-step model aligned with IFRS 15. Income carrying performance conditions has to sit in deferred income until the charity meets them, so the system needs to model deferred income natively rather than as a manual journal at year-end.
Each of these changes asks more of the system than it asks of the finance team. If the current setup handles fund accounting through workarounds, SORP 2026 is the moment those workarounds start to give.
Making the Shift
None of this comes down to how careful the finance team is. Two tracking-category slots won’t hold five restricted funds, three funders, and a restricted-versus-unrestricted split. The charities doing this well run infrastructure that makes the right approach the easy one: live restricted-fund balances, evidence already attached to the transactions, and a year-end you run rather than rebuild.
With six million fewer UK donors than a decade ago, and the ones who remain watching where the money goes, the £25,000 donor is the test. If your FD can answer on the call, your fund accounting is doing its job. If not, you already know.
Accord implements Sage Intacct for UK charities and stays involved after go-live, as finance people who know the trustee-board cycle and what SORP does to a year-end.
