In this guide 6 sections
Restricted funds get mixed because one bank balance hides who gave what for which purpose. Money arrives, a bill is paid from the same account, and nobody records the purpose. Tag every receipt and payment with a fund when it is entered, and the mix-up stops.
The bank balance is the first culprit
Most small organisations hold one current account. A project grant lands in it on Monday, a member’s donation for the library lands on Tuesday, and the electricity bill goes out on Friday.
By month end the passbook shows a single number. It says nothing about the grant, the library gift or the general fund, so the treasurer trusts memory and a few scribbled notes.
Memory fails when a grant has a spending window and the donor wants a report. That is when the mix-up turns into a finding.
Where the mixing actually happens
It rarely happens through dishonesty. It happens through convenience. The grant account is empty and the rent is due. The general fund has cash in the same bank, so a cheque goes out with no note saying which pot paid for it.
Other cases are quieter. A donor sends a transfer with a one-line narration, the receipt is issued without a purpose, or a cash gift rides along in the weekly collection deposit.
Each case is small. Together they leave a ledger that cannot show what remains of any single grant.
- Borrowing from a grant for running costs
- Gifts deposited without a recorded purpose
- Grant spending past its approved heads
- Refunds and returns posted to the wrong fund
- Bank interest credited to no one in particular
What an auditor looks for
An auditor reads the grant letter or the donor’s note, then asks for proof that the money was used as stated. That proof is a fund-wise statement showing opening balance, receipts, payments by head and closing balance.
If the ledger holds only a cash book and a bank book, someone must rebuild that statement by hand. Rebuilding is where errors and awkward questions appear.
A misuse finding needs no bad intent. It needs money spent on a head the donor never approved, and no record to say otherwise. Utilisation certificates and donor reports then become a print job, not a week of digging through vouchers.
Tag the fund at the moment of entry
The fix is a habit backed by software. Every receipt carries a fund, every voucher carries a fund and an expense head, and the screen refuses to save without both.
Software adds safeguards a spreadsheet cannot. It can block a payment that would push a restricted fund below zero, and it can warn when spending on one head passes the amount in the approved budget.
Name each fund exactly as the grant letter does. Then the statement you print matches the document the donor holds.
- Fund field required on receipts and vouchers
- Warning when a fund would go negative
- Expense heads copied from the grant budget
- Inter-fund loans recorded with a repayment date
Clean up before the next audit
Start with the money you hold today. List each grant and gift still open with its conditions and end date, work out what should be left in each, and compare that with the books.
Where the figures differ, correct them openly. Post an inter-fund transfer with a note, approved in a committee minute. A visible correction beats a hidden gap.
Then set a monthly habit. Print the fund-wise statement when the bank statement arrives, and have the secretary sign both together.
- Open grants and gifts with end dates
- Committee minute for each inter-fund transfer
- Monthly signed fund statement
Fund position worksheet
One page holds a line for each fund. Columns: donor or grant name, purpose, approved heads, receipts to date, payments to date, balance, end date and report due. A bottom line compares the sum of fund balances against the bank statement and shows any difference still to be explained.
Open a blank worksheet to printQuestions owners ask
What is a restricted fund?
It is money given for a named purpose, such as a building, a scholarship or a project. The organisation holds it, but may not spend it on anything else without the donor’s permission.
Can we borrow from a restricted fund temporarily?
Only if the donor’s terms allow it and the committee records the loan and its repayment date. Without that record, the borrowing reads as misuse at audit.
Is a separate bank account needed for each grant?
Some donors require one. Where they do not, a single account can work if the ledger tags every entry by fund and reconciles to the bank each month.
How do we handle gifts that arrive with no stated purpose?
Treat them as general funds and say so on the receipt. If the donor later names a purpose, move the amount with a dated, approved entry.