How should a nonprofit track restricted and unrestricted donations?
Nonprofit accounting standards (ASC 958) require net assets to be reported in two categories. Net assets with donor restrictions and net assets without donor restrictions. Form 990 follows the same split on the balance sheet. If your books don’t track this throughout the year, you end up reconstructing it at filing time and your board reports show available funds that aren’t actually available.
Donor restrictions come from the donor, not from your organization. A grant award letter that says funds must support a youth literacy program is a purpose restriction. A pledge payable over five years that specifies use after 2026 is a time restriction. Restrictions only exist when the donor imposes them in writing through a gift agreement, grant contract, or solicitation language the donor responded to. Document the restriction at the moment you record the deposit. Save the letter, the grant agreement, or the appeal copy with the transaction. Without that record, you can’t defend the classification during an audit or 990 review.
Board designations are different and frequently get miscategorized. When the board votes to set aside funds for an operating reserve or a future building, those dollars remain without donor restrictions. The board can undesignate them at any time. Track board-designated amounts as a sub-category within unrestricted net assets on internal reports, but report them as without donor restrictions on Form 990. Mixing the two inflates your restricted balances and understates what the organization can actually spend.
In QuickBooks Online, use classes (or locations) to tag each transaction by restriction type and by individual grant or fund. A typical structure has a parent class for restricted with sub-classes for each grant or restricted purpose, plus a parent class for unrestricted with sub-classes for general operations and any board-designated funds. This lets you run a Statement of Activities filtered by class and see revenue, expenses, and net change for each fund separately. Doing this through the chart of accounts instead clutters the reporting and makes program-level analysis harder.
Releases from restriction happen when you spend money on the restricted purpose or when the time restriction lapses. Record the release as a transfer that reduces restricted net assets and increases unrestricted net assets within the same period. Without this step, restricted balances accumulate indefinitely and your unrestricted column never reflects the funds you’ve actually earned the right to use. On Form 990, the release shows up on the Statement of Activities and reconciles the change in net assets between categories.
Grants need their own tracking because each one has a defined purpose, period, reporting schedule, and sometimes matching requirements. Set up each active grant as its own class or sub-fund. Record the award amount, restricted purpose, performance period, and any line item budget (staff, supplies, travel). When the funder asks for a report mid-year, you can pull actual spending against the budget without sorting through general ledger detail. Nonprofit bookkeeping done this way also makes the Schedule of Functional Expenses on Form 990 much easier to produce because program costs are already tagged.
Board reports should show four things clearly. Revenue by restriction type for the period. Releases from restriction during the period. Ending net asset balances split between with donor restrictions and without donor restrictions. Board-designated amounts called out as a separate line within the unrestricted category. When the treasurer presents these numbers, the board understands what’s truly available, what’s committed externally, and what they’ve committed internally.
If your books are already mixed together, the cleanup is doable but takes time. Going forward, the structure pays off every month and especially at year end when 990 prep, audit fieldwork, and grant reporting all draw from the same clean data. GMJ Accounting provides bookkeeping, tax and consulting services for nonprofits across the Carolinas, including the setup and ongoing tracking that keeps restricted fund accounting straightforward.
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