The difference between Restricted and Designated funds

When a charity has funds that are not intended for general use, it can be difficult to establish whether the funds should be classed as restricted or designated.

Restricted funds can only be lawfully used for a specific charitable purpose. The purpose will be declared by the donor at the time of the gift or set out in the terms of a grant. This imposes a legal restriction on how the funds can be spent by the charity and such funds should be shown as restricted funds in the charity’s accounts.

There can be more than one restricted fund and the total is shown in a separate ‘restricted funds’ column in the Statement of Financial Activities, with a more detailed breakdown of the income and expenditure of each individual restricted fund set out in the notes to the accounts.

On the other hand, designated funds are a type of unrestricted fund, and they can legally be spent for any charitable purpose.  Funds become designated when they are earmarked for a particular use. This can happen when the trustees decide to earmark funds, or when a donor suggests (as opposed to restricts) how funds may be used. The trustees may decide to show designated funds separately from general unrestricted funds as it helps to illustrate the level of reserves available for the day to day running of the charity, as opposed to funds intended for specific projects.

There can be more than one designated fund and the income and expenditure of each designated fund will be shown in the notes to the accounts. However, the total designated funds will be included within the ‘unrestricted funds’ column on the Statement of Financial Activities.