Not all nonprofit donations are created equal!
Some contributions can be used wherever your organization needs them most, while others come with specific instructions about how or when the money can be spent.
Understanding the difference is essential for accurate nonprofit bookkeeping and responsible financial management.
So, what’s the difference between restricted and unrestricted funds?
Simply put, restricted funds must be used according to donor-imposed restrictions, while unrestricted funds are generally available to support your nonprofit’s operations and mission.
Let’s break it down.
What Are Unrestricted Funds?
Unrestricted funds are resources that aren’t subject to donor-imposed restrictions.
For example, if someone makes a general donation to your nonprofit without specifying how it must be used, that contribution is typically unrestricted.
These funds can generally support expenses such as:
- Program activities
- Rent and utilities
- Employee salaries
- Office supplies
- Other operating expenses
Unrestricted resources give your organization flexibility to respond to changing needs and priorities.
However, unrestricted doesn’t necessarily mean completely uncommitted. Your board may designate certain resources for a specific purpose, such as building an operating reserve.
Unlike donor-imposed restrictions, board designations can generally be changed by the board.
What Are Restricted Funds?
Restricted funds are resources subject to restrictions imposed by donors.
These restrictions may specify how funds must be used, when they can be used, or both.
For example, a donor might contribute money specifically for:
- Purchasing equipment for a youth program.
- Funding scholarships.
- Supporting a particular community outreach initiative.
- Activities during a future fiscal year.
Your nonprofit must track these contributions appropriately to ensure the restrictions are honored.
Under U.S. nonprofit accounting standards, these resources are generally reported as net assets with donor restrictions until the applicable restrictions are satisfied.
Restricted vs. Unrestricted Funds: What’s the Difference?
Here’s a quick comparison:
| Unrestricted Funds | Restricted Funds | |
|---|---|---|
| Donor restrictions | None | Specific purpose or time requirements |
| Spending flexibility | Generally flexible | Must follow donor restrictions |
| Accounting classification | Without donor restrictions | With donor restrictions |
| Common example | General operating donation | Donation designated for a scholarship program |
One important distinction: A nonprofit’s own budget allocations or board designations don’t automatically create donor-restricted funds.
The restriction must come from the donor or another external stipulation that qualifies under the applicable accounting guidance.
What Happens When Restricted Funds Are Used?
When your nonprofit satisfies a donor-imposed restriction, the related amount is generally reclassified from net assets with donor restrictions to net assets without donor restrictions.
This is commonly referred to as a release from restriction.
For example, suppose a donor contributes money specifically for new classroom equipment.
Once your organization purchases qualifying equipment and satisfies the applicable restriction, the related net assets may be released from restriction.
Proper bookkeeping ensures these changes are reflected accurately in your financial records.
Do Restricted Funds Need Separate Bank Accounts?
Not necessarily!
This is a common misconception.
In many cases, restricted and unrestricted contributions can be held in the same bank account, provided your organization maintains adequate accounting records to track the restrictions.
However, certain grants, contracts, or other agreements may require separate accounts.
The key is having a reliable system that identifies restricted resources and monitors how they’re used.
Why Proper Fund Tracking Matters
Accurate tracking of restricted and unrestricted funds helps your nonprofit:
- Honor donor intentions.
- Maintain reliable financial statements.
- Monitor available operating resources.
- Support grant and donor reporting.
- Make informed financial decisions.
- Demonstrate responsible stewardship.
Without appropriate tracking, your organization may mistakenly assume money is available for general expenses when it’s actually restricted for another purpose.
Frequently Asked Questions
Can a nonprofit use restricted donations for operating expenses?
Only when those expenses satisfy the donor’s restrictions. For example, a donation restricted to a particular program may be used for qualifying program operating expenses, but not unrelated general expenses.
Can restricted funds become unrestricted?
Yes. When donor-imposed restrictions are satisfied, the related net assets are generally released from restriction. In some circumstances, a donor may also agree to modify or remove a restriction.
Are grants always restricted funds?
No. Grant accounting depends on the terms of the agreement. Some grants involve donor restrictions, while others may be conditional contributions or exchange transactions requiring different accounting treatment.
What’s the difference between restricted funds and board-designated funds?
Donor-restricted funds are subject to restrictions imposed by the donor. Board-designated funds are resources without donor restrictions that the organization’s board has set aside for a particular purpose.
Keep Your Nonprofit’s Financial Records Organized
Tracking restricted and unrestricted funds is an important part of nonprofit bookkeeping, but it doesn’t have to become overwhelming.
At Busy Bean Bookkeeping®, I understand the unique financial responsibilities nonprofit organizations face.
With professional experience in nonprofit and government accounting, including general ledger accounting, reconciliations, and financial reporting, I help nonprofits maintain accurate, organized financial records that support informed decision-making.
Whether your organization needs dependable monthly bookkeeping or assistance getting its records back on track, I’d love to learn about your needs.
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