Can a restricted fund be in deficit

Q: Why do restricted funds go into deficit?

Timing of grant income. Under FRS 102 paragraph PBE34.67, income subject to specified future performance related conditions is recognised only when the conditions are satisfied. A charity that delivers activity before the condition is met can carry costs in the fund ahead of the income. Claims in arrears. A funder that pays on receipt of a claim after the period can leave the fund temporarily short if the income is not yet receivable at the year end. Genuine overspends. The project simply cost more than was raised. Cost allocation. A fair share of support costs charged to a fund can push it below zero if the funder will not meet those costs. Bookkeeping errors. Income posted to general funds while the costs were charged to the restricted fund. Check the last of these first. If the income was in fact received or receivable for the restricted purpose, the answer is to correct the posting, not to report a deficit. Paragraph PBE34.67 requires income without performance conditions to be recognised when received or receivable, and paragraph PBE34.68 confirms that a restriction does not stop recognition. A grant already earned at the year end therefore belongs in the restricted fund as income and a debtor, which removes the apparent deficit. Our guide to recognising donations and grants covers the timing rules.

Q: How does this work in practice?

Illustration only. A charity runs a restricted family support project. The opening balance is nil. A council grant of £40,000 is paid in two halves; the second half becomes receivable only once the charity reports that 50 families have been supported, which happened after the year end. Costs in the year were £32,000. Family support fundAmount Income recognised: first instalment£20,000 Expenditure(£32,000) Closing balance(£12,000) The second £20,000 was conditional at the year end, so it is not income yet. Further income is realistically expected, so the trustees can carry the £12,000 deficit forward. The annual report explains the timing and that the deficit will be eliminated when the second instalment is recognised. If instead the council had cut the grant, the trustees would transfer £12,000 from unrestricted funds and explain why.

A restricted fund can show a negative balance in a charity’s accounts, but only as a temporary position that the trustees can justify, usually because future income for that purpose is realistically expected. A deficit means the charity has spent more on the restricted purpose than the fund holds, so the shortfall has in effect been met from other money. Trustees must either clear it, normally by a transfer from unrestricted funds, or explain in the annual report how it arose and the steps being taken to eliminate it.

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What does a negative restricted fund actually mean?

A restricted fund holds money that can only be used for a purpose narrower than the charity’s objects. Our guide to restricted, unrestricted and endowment funds explains how funds are classified. When expenditure charged to a fund exceeds the income and opening balance credited to it, the fund goes negative. The money paid out did not vanish: it came from the charity’s bank balance, which in substance belongs to other funds. The question for trustees is which fund has really paid, and whether that is allowed.

If the shortfall has been met from unrestricted funds, the trustees can choose to make that permanent by a transfer, because unrestricted money can be spent on any purpose. If it has been met from another restricted fund, that is a problem: money given for one restricted purpose cannot be used for another. The Charity Commission’s appeals guidance is direct that donations raised for a specific purpose must be used only for that purpose.

Why do restricted funds go into deficit?

Timing of grant income. Under FRS 102 paragraph PBE34.67, income subject to specified future performance related conditions is recognised only when the conditions are satisfied. A charity that delivers activity before the condition is met can carry costs in the fund ahead of the income.
Claims in arrears. A funder that pays on receipt of a claim after the period can leave the fund temporarily short if the income is not yet receivable at the year end.
Genuine overspends. The project simply cost more than was raised.
Cost allocation. A fair share of support costs charged to a fund can push it below zero if the funder will not meet those costs.
Bookkeeping errors. Income posted to general funds while the costs were charged to the restricted fund.

Check the last of these first. If the income was in fact received or receivable for the restricted purpose, the answer is to correct the posting, not to report a deficit. Paragraph PBE34.67 requires income without performance conditions to be recognised when received or receivable, and paragraph PBE34.68 confirms that a restriction does not stop recognition. A grant already earned at the year end therefore belongs in the restricted fund as income and a debtor, which removes the apparent deficit. Our guide to recognising donations and grants covers the timing rules.

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When is it acceptable to carry a deficit forward?

Material presented at an ICAEW fund accounting webinar lists negative funds carried forward as a common error and says a restricted fund should only go into deficit when there is a realistic expectation that future income will be received to cover the shortfall. A typical acceptable case is a multi year project where the next instalment of a confirmed grant depends on a condition the charity expects to meet early next year.

If no further income is realistically expected, carrying the deficit forward overstates the free funds available elsewhere. The trustees should instead decide whether to transfer from unrestricted funds to clear it.

What must the trustees do and disclose?

Regulation 40(2)(c)(i) of the Charities (Accounts and Reports) Regulations 2008 requires the annual report of a charity preparing accruals accounts to give particulars of the steps taken by the trustees to eliminate a deficit where any fund was in deficit at the beginning of the financial year. The Commission’s guidance on the trustees’ annual report also asks, in its financial review section, that where any funds are in deficit the report explains how the deficit occurred and the steps being taken to remove it.

In practice the trustees should record a decision covering:

the cause of the deficit and whether any posting needs correcting;
whether further restricted income is realistically expected, with evidence such as a grant letter;
if not, whether to make a transfer from unrestricted funds, and when;
whether any other restricted fund has been used and how it will be restored.

The funds note should show the deficit fund separately. Where a transfer clears it, the reason should be given, as explained in our guide to transfers between charity funds.

What if a donor may want the money back?

Sometimes a deficit sits alongside a breach of the grant terms, for example where restricted money was spent outside the agreed purpose and the funder is entitled to recover it. FRS 102 paragraph PBE34.71 requires a liability to be recognised for a resource previously received and recognised as income where, because of a failure to meet restrictions or performance related conditions, repayment becomes probable. Where the repayment is possible but not probable, consider disclosure under the rules on provisions and contingencies.

The Commission’s reserves guidance (CC19) reminds trustees that those who act in breach of their legal duties can be held responsible for any loss the charity incurs as a result.

How does this work in practice?

Illustration only. A charity runs a restricted family support project. The opening balance is nil. A council grant of £40,000 is paid in two halves; the second half becomes receivable only once the charity reports that 50 families have been supported, which happened after the year end. Costs in the year were £32,000.

Family support fund	Amount
Income recognised: first instalment	£20,000
Expenditure	(£32,000)
Closing balance	(£12,000)

The second £20,000 was conditional at the year end, so it is not income yet. Further income is realistically expected, so the trustees can carry the £12,000 deficit forward. The annual report explains the timing and that the deficit will be eliminated when the second instalment is recognised. If instead the council had cut the grant, the trustees would transfer £12,000 from unrestricted funds and explain why.

How does a deficit affect reserves and going concern?

CC19 defines reserves as freely available unrestricted funds. Where the shortfall on a restricted fund has in substance been funded from unrestricted cash, the free reserves are lower than the unrestricted column suggests until the deficit is cleared. Trustees should take that into account in the reserves figure in their reserves policy. Large or repeated deficits can also signal wider financial pressure relevant to the going concern assessment.

What mistakes come up most often?

Reporting a deficit that is really a posting error, with restricted income sitting in general funds.
Carrying deficits forward year after year with no realistic source of new income.
Netting a deficit on one restricted fund against a surplus on another.
Not accruing grant income that was receivable at the year end.
Leaving the annual report silent on how the deficit arose and how it will be removed.
Ignoring a probable repayment to a funder after restricted money was misapplied.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.