Charity Accounting & Nonprofit Bookkeeping: A UK Reconciliation Guide

Why charity accounting is different

If you've ever moved from bookkeeping a limited company to bookkeeping a charity, the first week is a rude awakening. Commercial accounts answer one question: did the business make a profit? Charity accounts answer a different, more complicated set of questions: did the charity spend its money the way its donors and trustees intended?

That distinction changes everything about how you structure the books.

Fund accounting

The single biggest difference. Instead of one pot of money, a charity maintains multiple funds - sometimes dozens. Every transaction must be assigned to a specific fund, and each fund has its own rules about how the money can be spent. A £10,000 grant for youth literacy and a £10,000 general donation might land in the same bank account on the same day, but they are not the same money. Treating them as interchangeable is a breach of trust - and potentially a regulatory offence.

SORP compliance

UK charities prepare their accounts under the Charities SORP (Statement of Recommended Practice), which sits on top of either FRS 102 or FRS 102 Section 1A depending on the charity's size. SORP requires specific formats for the Statement of Financial Activities (the SOFA - the charity equivalent of a profit and loss statement), the balance sheet, and the notes to the accounts. It also requires fund-by-fund reporting throughout.

Gift Aid reclaims

Gift Aid lets a charity reclaim 25p for every £1 donated by a UK taxpayer. It's essentially free money, but the bookkeeping isn't trivial. The charity collects the donation, records it, collects a Gift Aid declaration from the donor, submits a claim to HMRC (usually quarterly via the Charities Online service), then waits weeks or months for HMRC to pay. That means the reclaim sits as a debtor on the balance sheet between claim and receipt, and you need to track which donations the claim relates to in case HMRC queries it.

Trustee reporting requirements

Trustees have a legal duty to ensure funds are used properly. That means the bookkeeper - whether a volunteer treasurer or a paid professional - must produce reports that clearly show income, expenditure, and fund balances broken down by fund. "We spent £47,000 this quarter" isn't enough. The trustees need to know how much of that was unrestricted, how much came from the youth literacy grant, how much from the building fund, and whether any restricted fund is overspent.

Charity Commission thresholds

Regulatory scrutiny scales with income. Here's the current threshold structure:

Even below the £25,000 threshold, the Charity Commission can request accounts at any time. Sloppy books are never consequence-free.

Understanding fund types

Fund accounting is the backbone of charity bookkeeping. Get it wrong and everything downstream - reports, reconciliations, annual accounts - is unreliable. There are four categories to understand.

Unrestricted funds

Money the charity can spend however the trustees decide, in pursuit of its charitable objects. General donations, fundraising event proceeds, trading income, and most investment income fall here. This is the charity's "operating capital" - flexible, discretionary, and usually the fund that pays for day-to-day costs like rent, salaries, and admin.

Restricted funds

Money that the donor has specified must be used for a particular purpose. If a funder awards a £50,000 grant "for the delivery of after-school clubs in Tower Hamlets," that money can only be spent on delivering after-school clubs in Tower Hamlets. Not on the charity's electricity bill, not on its marketing, and not on a very similar programme in Hackney.

Designated funds

A subset of unrestricted funds that the trustees have earmarked for a specific purpose. The distinction from restricted funds is crucial: the restriction comes from the trustees, not the donor, which means the trustees can un-designate the money if priorities change. Think of it as internal budgeting rather than a legal obligation. Common examples: a building maintenance reserve, a redundancy fund, or a technology upgrade pot.

Endowment funds

Capital that the charity must preserve, either permanently or for a specified period. The charity can spend the investment income from an endowment, but not the endowment itself (in the case of permanent endowment) or not until a particular date or event (expendable endowment). Universities and large trusts are the most common holders of endowment funds, but smaller charities occasionally receive endowment gifts too.

Worked example: monthly reconciliation for a small charity

Let's walk through a realistic month. Imagine a small education charity with two active funds: a General Fund (unrestricted) and a Youth Literacy Fund (restricted, funded by a Big Lottery grant). The charity uses a single current account.

Opening bank balance: £18,450.00

Now here's what the reconciliation summary looks like, broken out by fund:

The critical check: the sum of all fund balances must equal the bank balance. If it doesn't, either a transaction is coded to the wrong fund, something is missing from the books, or the bank statement has items you haven't recorded. The bank holds one lump of cash. Your fund accounting explains who that cash belongs to.

Common charity reconciliation challenges

The worked example above is deliberately tidy. Real charity bookkeeping is messier. Here are the recurring problems we see.

Allocating costs across funds

Some costs serve multiple purposes. Your office rent benefits both the general operation and the youth literacy programme. Your finance software subscription supports all fund activities. SORP allows - and in many cases expects - charities to allocate shared costs across funds on a reasonable basis.

The standard approach: decide on an allocation basis (staff time, floor space, or a simple percentage) and apply it consistently. If the programme coordinator spends 80% of their time on youth literacy, allocate 80% of shared office costs to the Youth Literacy Fund. Document the basis in your accounting policies. Change it only when circumstances genuinely change, not when it produces a more convenient number.

Gift Aid timing

Gift Aid reclaims create a persistent timing headache. You receive a donation in January, submit the claim to HMRC in April (after the quarter ends), and receive payment in May or June. That's a five-month gap between the donation landing and the Gift Aid supplement arriving. During that period, the reclaim amount sits as a debtor on the balance sheet.

For reconciliation, this means your bank balance will always be lower than the total income the charity has earned - sometimes by thousands of pounds. Track Gift Aid debtors separately. Reconcile the HMRC payment back to the specific claim when it arrives, and check the amount against your original submission. HMRC occasionally adjusts claims downward if declarations are missing or invalid, and you need to catch that immediately rather than discovering it at year-end.

Grant drawdowns vs spend

Large grants are rarely paid in full upfront. Most funders release money in tranches, often tied to milestones or quarterly reporting. This creates a timing mismatch: the charity may incur programme costs before the next drawdown arrives, temporarily funding restricted activities from unrestricted cash.

This is allowed - it's effectively an inter-fund loan - but it must be tracked and reversed when the grant money arrives. If the Youth Literacy programme spends £3,000 in January but the next drawdown doesn't land until February, the books should show a £3,000 inter-fund transfer from General to Youth Literacy in January, reversed in February. Your bank reconciliation won't catch this because it's an internal allocation, not a bank transaction. But your fund reconciliation must.

Volunteer expense reimbursements

Charities rely heavily on volunteers, and many reimburse out-of-pocket expenses - travel, materials, refreshments. These reimbursements often come in batches, with volunteers submitting claims weeks after incurring the cost. The amounts are typically small (£10–£50), making them easy to overlook or code to the wrong fund.

Best practice: use a standardised expense claim form that captures the fund, the activity, and the date the expense was incurred. Reimburse from a regular run (fortnightly works well) rather than ad hoc bank transfers that are harder to track. When the bank statement shows six separate £25 transfers to volunteers on the same day, your accounting records should show exactly which fund and activity each relates to.

Multiple income streams with no reference

A charity's bank statement is often a parade of anonymous £5, £10, and £20 standing orders with no useful reference. "J SMITH" and "DONATION" doesn't tell you whether this is Gift Aid eligible, which fund it's intended for, or whether it's a regular or one-off gift. Online platforms like JustGiving and CAF process donations in bulk, depositing a lump sum that represents dozens of individual gifts (minus their platform fee), with the breakdown available only by logging into their portal.

Reconciling this kind of income requires cross-referencing the bank statement against your donor management system, the giving platform's reports, and the Gift Aid declarations on file. It's exactly the kind of repetitive, cross-dataset matching that takes hours manually but collapses to minutes with the right tools.

Automating charity bookkeeping

Charity bookkeeping has two bottlenecks: classifying transactions across the right funds and nominal codes, and then reconciling the bank statement against the accounting records. Both are well-suited to automation.

Transaction coding with CodeIQ

CodeIQ is our intelligent automated bookkeeper. It connects to your accounting platform - Xero, QuickBooks, Sage, or Pandle - learns your chart of accounts and fund structure, and then classifies bank transactions to the correct nominal codes, fund categories, and VAT treatments automatically.

For charities, this means:

Reconciliation with ReconcileIQ

Once your transactions are coded, the reconciliation itself needs to match the bank statement entries to your accounting records. ReconcileIQ handles this by comparing both datasets - the bank statement CSV (or PDF, which it converts automatically) and your accounting software export - and matching transactions by amount, date, and description.

For charities with a single bank account serving multiple funds, the reconciliation confirms that every bank transaction has a corresponding entry in the books. Where items don't match - perhaps a standing order donor changed their amount without telling you, or a platform fee was deducted before the deposit - ReconcileIQ surfaces the discrepancies for investigation rather than burying them in a spreadsheet.