Charity bookkeeping must distinguish donations, grants, trading income, restricted funds, payroll liabilities, Gift Aid and expenditure on different charitable activities. The records need to support trustees throughout the year while also providing the information required for the annual accounts, HMRC claims and any independent examination or audit.
A charity may receive money through standing orders, online platforms, cash collections, fundraising events, grants, shops and membership arrangements. Recording only the amounts arriving in the bank can conceal processing fees, donor restrictions and income that needs separate treatment.
The bookkeeping process should reflect the charity’s governing document, activities and reporting basis. A small community group may require a relatively simple structure, while a larger charity operating several projects may need detailed fund and activity reporting.
What charity bookkeeping should record
Charity bookkeeping should provide a complete record of income, expenditure, assets, liabilities and fund movements. Every material transaction should be supported by appropriate evidence and allocated according to its nature and purpose.
Supporting records may include donation reports, bank statements, grant agreements, invoices, receipts, payroll reports, Gift Aid declarations, fundraising summaries and trustee approvals. The records should allow a transaction to be traced from its original document through to the accounting system and annual accounts.
Charity trustees remain responsible for overseeing the organisation’s financial affairs even where bookkeeping is delegated to an employee, volunteer or external provider. They should receive information frequently enough to identify financial problems and confirm that funds are being used for their intended purposes.
The Charity Commission’s guidance on charity finance and trustee responsibilities explains the importance of suitable financial controls, records and reporting.
Separating restricted and unrestricted funds
One of the most important features of charity bookkeeping is the separation of restricted and unrestricted funds. Unrestricted income can generally be applied by the trustees in support of the charity’s objects, subject to any internal designations they have made.
Restricted funds have been given for a particular purpose or are subject to conditions that limit how the money may be used. The restriction may arise from a grant agreement, donor appeal, governing document or another legally binding arrangement.
The accounting records should identify restricted income when it is received and allocate related expenditure against the correct fund. The remaining balance for each restricted fund should be available without reconstructing the transactions at year end.
A separate bank account is not necessarily required for every restricted fund, but the bookkeeping system must still show clearly how much is held and what it may be spent on. The total cash held by the charity is not the same as the amount freely available for general expenditure.
Trustees should review restricted-fund balances regularly, particularly before approving spending from the main bank account. Using restricted money temporarily for general purposes can create governance and cash-flow problems even where the trustees expect to replace it later.
Designated funds are not the same as restricted funds
Trustees may decide to set aside part of the charity’s unrestricted reserves for a particular future purpose. This creates a designated fund rather than a restricted fund.
A designation is an internal decision and can generally be changed by the trustees where circumstances justify it. A restriction imposed by a donor or legal document cannot normally be removed through a simple trustee decision.
The bookkeeping should therefore distinguish unrestricted general funds, designated funds and restricted funds. Combining these categories can make the charity appear to have either more or less freely available money than it actually holds.
Minutes supporting significant designations should be retained so that the purpose and trustee decision can be explained during the annual accounts process.
Recording donations and fundraising income
Donations may arrive by cash, cheque, standing order, card, online platform or direct bank transfer. The charity should record the gross donation and any separate platform or processing fee.
If a donor gives £100 through a platform and the charity receives £97 after a £3 charge, recording only the bank deposit understates both donation income and fundraising costs.
Collection records should show when money was counted, who was present and how the total was banked. Cash income should not be reduced directly by expenses paid from the collection without preserving records of both the income and expenditure.
Fundraising events may involve ticket income, sponsorship, donations, merchandise and event costs. These should be separated sufficiently to understand the event’s financial result and identify which receipts may qualify for Gift Aid.
Gift Aid declarations and donor records
Gift Aid allows an eligible charity or community amateur sports club to reclaim basic-rate tax on qualifying donations made by eligible donors. A £1 eligible donation currently allows the charity to claim an additional 25 pence.
The charity must hold a valid Gift Aid declaration containing the required donor details and confirmation that the donor wants Gift Aid to apply. The donor must have paid enough UK Income Tax or Capital Gains Tax to cover the Gift Aid claimed by all charities on their donations for the tax year.
A declaration may be written, made online or given verbally where the required confirmation process is followed. HMRC’s guidance on Gift Aid declarations explains the information required and how declarations should be retained.
The donation record should link clearly to the correct donor declaration. A charity should not allocate anonymous cash retrospectively to known Gift Aid donors merely because declarations are already held for those individuals.
Cancelled declarations, address changes and other relevant donor communications should also be recorded. If a declaration no longer applies, future donations should be excluded from the claim from the appropriate date.
How long Gift Aid records must be kept
Most charities and community amateur sports clubs must retain Gift Aid declaration records for six years after the end of the accounting period to which they relate. Enduring declarations covering continuing donations should be retained while they remain active.
When donations under an enduring declaration stop, the retention period generally runs from the final donation covered by that declaration. Records should be retained for longer where HMRC has opened an enquiry that remains unresolved.
Electronic copies can be used where the records remain legible, accessible and capable of being produced when required. Scanning documents without a dependable naming and retrieval system can still leave the charity unable to support a claim.
HMRC’s detailed Gift Aid guidance explains the audit trail and record-retention expectations applying to declarations and donations.
Reconciling Gift Aid claims to donation income
A Gift Aid claim should be reconciled to the charity’s donor and accounting records before submission. The claim should contain only eligible donations supported by valid declarations.
The charity should be able to explain how each donor and donation included in the claim links to the underlying bank receipt, collection record or platform report. Duplicate donations and cancelled declarations should be identified before the claim is sent.
The Gift Aid received from HMRC should be recorded separately from the original donation income. This allows trustees to see the value of donations and the additional tax repayment independently.
Where HMRC identifies an invalid or unsupported claim, the charity may need to repay the amount received. Regular reconciliation reduces the risk of submitting claims containing duplicated, ineligible or undocumented donations.
Membership fees, tickets and donor benefits
A payment is not automatically an eligible Gift Aid donation simply because it is made to a charity. Payments for goods, services, admission, membership benefits or another material advantage may not qualify.
Fundraising events can therefore produce a mixture of donation income and trading or ticket income. The bookkeeping should preserve the distinction rather than recording the whole amount under donations.
Where a donor receives a benefit, the value and nature of that benefit may affect Gift Aid eligibility. The charity should apply HMRC’s rules consistently and obtain specialist advice where the arrangement is unclear.
The bookkeeper can maintain the records and apply a treatment already confirmed by the charity’s adviser. Decisions about eligibility should not be made solely from the description shown on a bank transaction.
Grant income and funding conditions
Grant agreements should be retained with the bookkeeping records because they explain the purpose, reporting period and conditions attached to the funding.
A grant may be restricted to a named project, particular type of expenditure or defined delivery period. The payment date does not necessarily determine when all of the income should be recognised in accruals accounts.
Project expenditure should be allocated consistently so that the charity can report to the funder and identify any unspent balance. Shared costs may need to be apportioned on a documented and reasonable basis.
Where a grant becomes repayable because conditions have not been met, the potential liability should be identified promptly. Waiting until the annual accounts are prepared can leave trustees unaware that money shown in the bank is not available for general use.
Charity trading and sales income
Charities may generate income through shops, events, cafés, publications, room hire, training and other activities. The tax and VAT treatment depends on the nature and scale of the activity and whether it directly furthers the charity’s purposes.
Trading income should be kept separate from voluntary donations. Payments for goods or services should not be treated as donations merely because the customer supports the charity.
A charity-owned trading subsidiary may also make payments to its parent charity. Transactions between the charity and subsidiary should be recorded clearly and supported by suitable documentation.
Questions about primary-purpose trading, non-primary-purpose activity, VAT and payments from subsidiaries should be referred to an appropriately qualified charity accountant or tax adviser.
Payroll, employees and volunteers
Charities employing staff generally have the same PAYE, National Insurance, pension and reporting responsibilities as other employers. Payroll records should show gross pay, deductions, net wages and amounts owed to HMRC or pension providers.
The figures entered into the accounting system should reconcile to the payroll reports and bank payments. Outstanding payroll liabilities should remain visible until they are settled.
Payments to volunteers should be distinguished from wages. Reimbursement of genuine expenses supported by records differs from a fixed allowance or reward for work performed.
Where volunteer payments exceed actual costs or create another form of benefit, employment and tax questions may arise. The charity should obtain appropriate advice rather than assuming that the description volunteer determines the treatment.
Charities using cloud payroll can review our guide to setting up payroll in Xero. The software must still reflect the charity’s confirmed PAYE registration, staff details and pension responsibilities.
Churches and faith organisations
Churches and other faith organisations often receive income through regular giving, cash collections, card donation machines, hall hire, shops, fundraising and grants. They may also need to track designated giving, restricted appeals and payments to a diocese or wider organisation.
These transactions can be difficult to understand when different income streams are combined or cash records are incomplete. Our guide to church bookkeeping and financial reporting explains how organised records can improve visibility for treasurers, trustees and governing bodies.
Church bookkeeping should still follow the same fundamental principles as other charity records. Each receipt and payment should be supported, restricted funds should remain identifiable and reports should show what the organisation holds, owes and has already committed.
Bank and payment-platform reconciliation
Every bank account, credit card and payment platform should be reconciled to the bookkeeping records. This confirms that the recorded balance agrees with the underlying financial account.
Donation platforms may combine several donations into one payment and deduct charges before transferring the balance. The settlement report should be used to record the gross donations and separate fee.
Unidentified receipts should not remain indefinitely under a general donations category. They should be investigated while the source and purpose can still be established.
Our guide to bank reconciliation explains why imported transactions alone do not prove that the charity’s records are complete.
Internal financial controls
Bookkeeping records form part of the charity’s wider system of financial control. The person entering transactions should not automatically have unrestricted authority to approve expenditure and make payments.
Trustees should agree approval limits, banking permissions, expense procedures and arrangements for handling cash. Changes to suppliers’ bank details and unusual payments should receive suitable independent review.
Regular financial reports should be considered at trustee meetings and significant concerns should be documented. A report that is produced but never reviewed provides little practical protection.
Cloud access should also be controlled. Former employees, trustees and volunteers should have their permissions removed promptly when their role ends.
Preparing charity accounts and the Statement of Financial Activities
Charities preparing accruals accounts generally need to follow the applicable Charities Statement of Recommended Practice. SORP 2026 applies to reporting periods beginning on or after 1 January 2026.
Accruals accounts normally include a Statement of Financial Activities, balance sheet and supporting notes. The Statement of Financial Activities reports incoming resources and expenditure across the charity’s different fund categories and activities.
The bookkeeping should therefore distinguish restricted, unrestricted and endowment funds where applicable and provide the activity analysis needed for the annual accounts.
The Charity Commission’s guidance on the Charities SORP explains which version applies according to the reporting period.
A bookkeeper can maintain the underlying ledgers and provide fund reports. Preparation of statutory charity accounts, independent examination and audit should be carried out by appropriately qualified people where required.
Reporting information to trustees
Trustees should not have to wait until the annual accounts are prepared to understand the charity’s position. Regular management reporting can show income, expenditure, bank balances, liabilities and remaining restricted funds.
A simple report may be sufficient for a small charity, while a larger organisation may need comparisons by project, location, fund or charitable activity.
Reports are useful only where the underlying records are current and reconciled. Missing grant expenditure, unrecorded supplier invoices and unidentified donations can create a misleading impression of available reserves.
The reporting format should help trustees answer practical questions about cash, commitments, funding restrictions and progress against budget without requiring them to interpret a commercial profit and loss account unaided.
When outsourced charity bookkeeping helps
Volunteer treasurers and small finance teams often manage records successfully while transaction levels remain modest. External support becomes more useful when the charity operates several funds, employs staff, makes Gift Aid claims or has reporting requirements that exceed the time available internally.
The scope should identify the bank accounts, donation platforms, funds, payroll responsibilities and reports covered. It should also distinguish routine bookkeeping from statutory accounts, independent examination, audit and specialist tax advice.
Bookkeeping Packages Ltd provides outsourced bookkeeping support for charities and non-profit organisations. Our outsourced bookkeeping service can support regular transaction processing, reconciliation and fund reporting according to the agreed scope.
To discuss your charity’s current records, Gift Aid process and trustee-reporting requirements, use the Bookkeeping Packages enquiry form.
About the Author
Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses and organisations maintain reliable financial records and useful management information.
This article is provided for general information only. Stuart Kerr is a professional bookkeeper, not a charity accountant, independent examiner, auditor, tax adviser, solicitor or regulated financial adviser. Nothing in this article constitutes tax, legal, regulatory or financial advice. Advice specific to your charity should be obtained from an appropriately qualified professional.