Donated funds are clearly categorized as unrestricted, temporarily restricted or permanently restricted in the organization’s financial statements and communications in accordance with the donor or grantor wishes/stipulations. Restricted funds are accounted for and segregated in the financial statements.

November 1, 2021

By Megan Pierce, Donor Services Director

Donors may legally restrict the use of their contributions to nonprofits.

Without Donor Restrictions

These funds are free from any external restrictions and available for general use. These types of contributions used to be known as unrestricted funds, and are often called general operating or general support. Many individual contributions are given without donor restriction.

With Donor Restrictions

These funds include what used to be termed temporarily restricted (funds restricted to a particular use or time) and permanently restricted (funds that carry a restriction permanently, like some endowments or scholarship funds). They have donor-imposed restrictions that can be satisfied by the passage of a defined period of time (time restriction) or by performing defined activities (purpose restriction). These can be funds from a grant received to operate a specific program, project, or individual contributions given with the intent of supporting a particular program or campaign.

Funds of this type may also be restricted with the intent that the principal balance of the contribution will remain as an investment forever, and the nonprofit may utilize the interest and investment returns, such as with an endowment.

Once a contribution or grant is identified as restricted, the accounting and record keeping must recognize the income in the year the funds are received, regardless of when the related expenses will occur. These principles add a complexity to nonprofit financial reports due to the timing of funding, which makes accurate and reliable accounting especially important.