What Are Restricted Funds?

Definition

Restricted funds are donations or grants that a donor has limited to a specific purpose or time period.

When a donor writes a check for "wherever it's needed most," the nonprofit can use it however it supports the mission. When a foundation awards a grant for a literacy program in 2027, the organization can only spend that money on literacy, and only in 2027. That second gift is a restricted fund, and the nonprofit has to prove it was used as promised.

With vs. without donor restrictions

U.S. nonprofit reporting standards split net assets into two classes:

• Without donor restrictions: money the organization can use for any mission purpose. A board may choose to set some aside (a "board-designated" fund), but that is the board's decision, not a donor restriction.
• With donor restrictions: money limited by the donor, either by purpose, by time, or both. Some restrictions are permanent, such as an endowment where only the earnings can be spent.

Common examples of restricted funds

• Program grants: a grant that can only be spent on a named program.
• Capital campaigns: gifts for a new building or major equipment.
• Endowments: gifts where the original amount is held permanently and only investment returns are used.
• Time-restricted gifts: pledges or donations meant for a future year.
• Scholarship or named funds: gifts for a specific use set by the donor.

Releasing restrictions

A restriction is released when the nonprofit meets it, for example by spending grant money on the program or reaching the year the gift was meant for. The accounting entry moves the amount from net assets with donor restrictions to net assets without donor restrictions, where the related expense is reported.

Releases are easy to miss when they are tracked in a spreadsheet. A missed release understates available funds. A release recorded too early overstates them. Either way, the audit takes longer.

Tracking restricted funds against the general ledger

The most reliable approach is to tag every restricted gift and every related expense with the same fund or grant dimension in the general ledger. Then the organization can see, at any time:

• How much of each restricted gift has been received and spent.
• How much remains available, and by when it must be used.
• Which releases should be recorded this period.

Systems built for fund accounting, such as Sage Intacct, can calculate releases automatically from tagged expenses. That keeps grant reports, board reports, and audited statements in agreement. See how Acumen supports nonprofits.

Example: a $100,000 program grant

A youth services nonprofit receives a $100,000 grant restricted to its after-school program for the calendar year. The full amount is recorded as revenue with donor restrictions when the grant is awarded.

Each month, after-school salaries and supplies are tagged with the grant. By June, $48,000 has been spent, so $48,000 has been released from restriction, and the grant report shows $52,000 remaining. The finance team doesn't rebuild this in Excel; it comes straight from the tagged transactions.