If you run a nonprofit, you’ve probably heard the phrase “restricted funds,” often right before someone asks whether a dollar can be spent on something. Here’s what it means and why it shapes how your books are kept.
What “restricted” means
When a donor or grantor gives money for a specific purpose, or for use in a specific time period, that gift comes with a restriction. Money with no such strings attached is unrestricted, and your board decides how to use it for the mission. Under current U.S. nonprofit accounting standards, these show up on financial statements as net assets without donor restrictions and net assets with donor restrictions.
Why it matters for your books
- Trust. Funders expect to see that their money was used the way it was promised.
- Accurate reports. Your financial statements should show how much is available for general use versus set aside for a purpose.
- Audits and grant reporting. Clear tracking turns year-end questions and funder reports from a scramble into a quick lookup.
Practical habits that help
- Keep the paperwork. Save grant agreements and donor letters, and note the restriction when the gift is recorded.
- Tag every gift. Use classes, funds, or a similar feature in your accounting software so each restricted gift stays identifiable.
- Record the release. When you spend money for its intended purpose, or the time period ends, the restriction is “released.” Your books should show that move.
- Report on a schedule. A short monthly summary of restricted balances keeps program staff and the board on the same page.
If you can’t tell where a grant dollar went, a funder can’t either.
Where to start
If your fund tracking has gotten tangled, you’re in good company; it’s a very common challenge for nonprofits. Your auditor and your grant agreements have the final word on how specific funds must be handled, and we’re glad to work alongside them. Reach out and we’ll take a look.
General information only — not tax, legal, or accounting advice for your specific situation. Your CPA can confirm what applies to you.
