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Restricted vs. Unrestricted Funds: What Boards Should Know
If your organization takes designated gifts or grants, understanding restricted and unrestricted funds is not optional. Here is the difference, in plain terms, and how to track it.
The basic difference
Unrestricted funds can be used wherever your organization needs them. Restricted funds come with a string attached: the donor or grantmaker specified what the money is for, and you are obligated to use it that way.
Under current non-profit accounting standards, net assets are reported in two buckets: without donor restrictions (unrestricted) and with donor restrictions (restricted).
Real examples
- A gift given ‘for the youth mission trip’ is restricted.
- A grant awarded for a specific program is restricted.
- Money dropped in the offering plate with no designation is unrestricted.
- An endowment gift where only the earnings can be spent is restricted in a lasting way.
Board-designated is not the same
Mixing these up is one of the most common errors we correct in non-profit bookkeeping engagements.
How to track it
The mechanics are straightforward once the structure is right:
- Give each restricted purpose its own fund or class.
- Record incoming gifts to the correct fund.
- Release funds from restriction as you spend on the stated purpose.
- Report each fund balance so leadership always knows what is truly available.
Why it matters at reporting time
Restricted and unrestricted balances show up on your Statement of Financial Position and feed directly into your Form 990 if you file one. Getting them right all year means no scramble at audit or filing time. Learn whether your organization has to file a Form 990.