Managing nonprofit restricted funds can be challenging due to strict rules. Our advisor answers questions on donor restrictions placed on donations and grants.
What Are Nonprofit Restricted Funds?
By definition, a restricted fund is revenue set aside for a donor designated purpose. Restricted funds have strict legal obligations and cannot be used for other programs or expenses.

Editor’s Note: The following questions and answers represent real world challenges nonprofits encounter managing nonprofit restricted funds. Our advisor column is intended to provide basic advice on questions related to the topic. Answers to these questions are simply the view and opinion of our nonprofit accounting pros. Nonprofit Accounting Pro shall not be liable, answerable or accountable for any loss or damage resulting from the advice given by our advisor.
Q&A on Nonprofit Restricted Funds
Answer: If the designation of the restriction has been met, then you need to match the restricted revenue against the expense. Even though you don’t need it, you need to recognize the revenue. The revenue would then be incorporated in your unrestricted net assets carry over to the next fiscal year.
Answer: The restriction is based on the donor’s intent for the use of the funds. If the funds are used before the three year period, you can release the revenue to match the revenue against the expenses.
Answer: When receiving a donation and the donor specifies the intent for the donation, then it is restricted for that specific intent. For example, if the donation is designated for your counseling center, then the donation should be credited to the charitable donations income account linked to the counseling center. You cannot use a designated gift as you see fit. If your donation forms list specific areas that the donor can designate where their donation is used, then that constitutes as ‘restricted – designated’ gift.
Answer: If your intent is to match the expenses against the grant, then all expenses should be classified using the same class code used when recording the grant revenue.
Bottom Line
In the normal course of navigating the myriad of issues related to restricted funds, you may have encountered some of these questions. It is essential to follow the restrictions placed on donated funds in order to remain compliant and accountable to your funding sources.
We hope our answers provide clarification. We welcome your questions and feedback. Feel free to comment below.
About the Author
Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.