Restricted vs. Unrestricted Funds: How to Track Them, Release Them and Report Them Right
The short answer: Restricted funds are gifts a donor has limited to a specific purpose or time period. Under GAAP they're reported as net assets with donor restrictions. Unrestricted funds have no donor-imposed limits and are reported as net assets without donor restrictions. When you meet the restriction (you run the program, the time passes, or the asset is placed in service), you record a release: an entry that moves the amount from "with" to "without" donor restrictions. A release isn't revenue and it isn't an expense.
Most explanations stop there. This guide goes further. It covers how restrictions differ from board designations and from conditional grants, the exact journal entries, a full worked example with a restricted-funds rollforward you can copy, and the mistakes that most often turn into audit adjustments.
The two classes of net assets
Since FASB's ASU 2016-14, nonprofits report two classes of net assets instead of the old three (unrestricted, temporarily restricted and permanently restricted):
Class | What's in it | Examples |
Net assets without donor restrictions | Everything the board controls, including amounts the board has set aside | General donations, earned revenue, board-designated reserves |
Net assets with donor restrictions | Resources limited by a donor, by purpose, by time or in perpetuity | Program grants, capital campaign gifts, multi-year pledges, endowment gifts |
The old "temporary" and "permanent" ideas still exist. They're now described in the notes rather than as separate columns. ASU 2016-14 also requires you to disclose the composition of net assets with donor restrictions and how those restrictions affect the use of resources, plus information about liquidity and availability of financial assets to meet general expenses within one year (ASU 2016-14).
The three kinds of donor restrictions
Purpose restrictions: "for the after-school program," "for scholarships," "for the new van."
Time restrictions: "for use in 2027," or a pledge payable in a future year. A promise to give with payments due in future periods is generally treated as time-restricted, even if the donor never said so, unless the circumstances make clear the gift was meant for current activities (ASC 958-605-45-5; see PwC Not-for-profit guide 7.3).
Perpetual restrictions: endowment gifts, where the original gift must be maintained and typically only the earnings may be spent, according to the donor's terms and applicable state law.
A restriction can come from the donor's explicit words, or from the circumstances of the gift. For example, a gift sent in response to an appeal for a specific program is restricted to that program (ASU 2018-08, ASC 958-605-45-4).
Three things that are often confused with restrictions
1. Board-designated funds are unrestricted
When your board votes to set aside $50,000 as an operating reserve, that money is still net assets without donor restrictions. The board imposed the limit, and the board can undo it. You can show board designations as a separate line within "without donor restrictions," and in the notes. Just don't put them in the restricted column (ASU 2016-14 glossary: "Board-designated net assets").
2. Conditional grants aren't revenue yet
Under ASU 2018-08, a contribution is conditional if the agreement has both:
a barrier you must overcome (such as a matching requirement, a measurable performance target, or a requirement to incur specific qualifying expenses), and
a right of return (or a right for the funder to be released from paying) if you don't.
You don't recognize conditional contributions as revenue until the barrier is overcome. Cash received in advance is a refundable advance, which is a liability. Many government cost-reimbursement grants work this way: you earn the revenue as you incur allowable costs.
Restricted ≠ conditional. A restriction limits how you can use a gift you've already earned. A condition determines whether you've earned it at all.
3. Exchange transactions aren't contributions
If a funder is buying a service for its own benefit at roughly fair value (a contract to deliver services to the funder itself, for example), that's an exchange transaction accounted for under ASC 606, not a contribution. ASU 2018-08 clarified how to tell the two apart (ASU 2018-08).
When a restriction is released
Restriction type | Released when… |
Purpose | You incur expenses that meet the purpose. Often that's when you pay or accrue a qualifying cost. |
Time | The time period passes, or a pledge payment comes due |
Purpose + time | The last remaining restriction is met (ASC 958-205-45-9, via PwC) |
Gift for a building or equipment | When the asset is placed in service, unless the donor says otherwise (ASU 2016-14) |
Perpetual (endowment corpus) | Generally never. Earnings are handled under the donor's terms and the board's spending policy. |
The release entry
When a $10,000 purpose restriction is met:
Account | Debit | Credit |
Net assets with donor restrictions: released from restriction | 10,000 | |
Net assets without donor restrictions: released from restriction | 10,000 |
No cash moves. The expense itself is recorded separately, the normal way, in "without donor restrictions." Under GAAP, all expenses are reported in net assets without donor restrictions, and the release brings the restricted money over to meet them.
The simultaneous release option
If a restricted gift comes in and its restriction is met in the same reporting period, GAAP lets you elect a policy of reporting it directly as unrestricted support. You have to apply it consistently and disclose it, and there's a parallel requirement for investment gains and income (ASC 958-605-45-4A, ASU 2018-08). There's a separate election just for restricted contributions that started out as conditional ones (958-605-45-4B). This option can simplify your books a lot. Decide it deliberately with your auditor; don't let it happen by accident.
Worked example: one year at a youth nonprofit (hypothetical)
Every number below is hypothetical, for illustration only. To keep it simple, we're ignoring pledge discounts and allowances.
A youth services nonprofit with a calendar fiscal year has these transactions in 2026:
1. January: $60,000 foundation grant for the after-school program. It's unconditional, with no barriers and no right of return.
Account | Debit | Credit |
Cash | 60,000 | |
Contributions: with donor restrictions | 60,000 |
2. Through December: $38,000 spent on the after-school program. Record the expenses normally, then release:
Account | Debit | Credit |
NA with donor restrictions: released | 38,000 | |
NA without donor restrictions: released | 38,000 |
3. March: $100,000 gift restricted to buying a program van. In September, the van is bought for $92,000 and placed in service. Release $92,000 at that point. The remaining $8,000 stays restricted until it's used the way the donor allowed. (If the gift letter is silent about leftover funds, ask the donor in writing.)
4. June: the board designates $50,000 as an operating reserve. No change to restricted net assets. Show it as "board-designated" within net assets without donor restrictions.
5. September: a county offers $40,000 if the nonprofit raises $40,000 in new matching gifts by next June 30. If it doesn't, the county doesn't have to pay. That's a barrier plus a right of release, so it's conditional. Record no revenue. Disclose the conditional promise in the notes.
6. November: a donor pledges $25,000, payable next March, with no purpose stated. Because payment is due in a future period, it's time-restricted:
Account | Debit | Credit |
Pledges receivable | 25,000 | |
Contributions: with donor restrictions | 25,000 |
It releases in March 2027, when the payment comes due.
The restricted-funds rollforward (use this as your template)
Fund / restriction | Type | Beginning balance | New restricted gifts | Released | Ending balance | Release trigger |
After-school program grant | Purpose | 0 | 60,000 | (38,000) | 22,000 | Qualifying program expenses |
Program van | Purpose (capital) | 0 | 100,000 | (92,000) | 8,000 | Asset placed in service |
Unrestricted pledge, due 3/2027 | Time | 0 | 25,000 | 0 | 25,000 | Payment due date |
Total with donor restrictions | 0 | 185,000 | (130,000) | 55,000 |
Rule: the ending total on this schedule must equal "net assets with donor restrictions" on your balance sheet, every month. If it doesn't, something has been coded wrong.
How it looks on the statement of activities (excerpt)
Without donor restrictions | With donor restrictions | Total | |
Restricted contributions | — | 185,000 | 185,000 |
Net assets released from restrictions | 130,000 | (130,000) | — |
Change in net assets (from these items) | 130,000 | 55,000 | 185,000 |
Two things to note. Expenses for the program appear in "without donor restrictions," and the release covers them. The van itself doesn't show up as an expense when it's bought; it goes on the balance sheet and is depreciated, and depreciation is an expense of net assets without donor restrictions.
A quick cash coverage check
At year-end, compare unspent restricted cash-type balances ($22,000 grant + $8,000 van = $30,000; the $25,000 pledge isn't cash yet) to actual cash on hand. If cash is less than what you owe restricted funds, restricted money has been used for general operations. That's a conversation for the board, and possibly the donor, right away.
Step by step: how to set up restricted fund tracking
Capture the restriction at intake. Every gift record in your donor CRM (Bloomerang, DonorPerfect, Little Green Light or Salesforce Nonprofit Cloud) should say restricted or not, for what, and until when. Keep the gift letter, grant agreement or appeal.
Read every grant agreement for conditions (barriers plus a right of return) separately from restrictions. Log both.
Set up your accounting system for restrictions. In QuickBooks, use classes (or locations) for the restriction or program, plus separate revenue accounts for "with donor restrictions." Aplos is built around fund accounting. Sage Intacct can use dimensions. The structure matters more than the brand.
Code expenses to the restricted purpose at the time you approve them, not at year-end.
Book releases monthly. For each open restriction, ask: did we meet any of it this month?
Reconcile the rollforward to the balance sheet monthly.
Report back to funders using the same numbers. Your grant reports and your books should agree.
Revisit open restrictions at year-end with your auditor in mind. Expired time restrictions, finished programs and leftover balances all need a decision.
Restricted funds checklist
[ ] Every gift over your threshold has documentation of restrictions (or a note that it has none)
[ ] Gifts from purpose-specific appeals are coded as restricted to that purpose
[ ] Multi-year pledges are recorded with time restrictions
[ ] Grant agreements are reviewed for conditions vs. restrictions; conditional amounts are disclosed, not booked
[ ] Refundable advances are recorded as liabilities
[ ] Releases are booked monthly; capital gifts are released when the asset is placed in service
[ ] The simultaneous release policy is decided, documented and applied consistently
[ ] The restricted rollforward agrees with the balance sheet
[ ] Board-designated funds are shown within without donor restrictions
[ ] The cash coverage check is done quarterly
[ ] Year-end notes are drafted: composition of restricted net assets, liquidity and availability, allocation methods
Common mistakes
Calling board reserves "restricted." They're board-designated, which means unrestricted.
Booking conditional grants as revenue the day the award letter arrives.
Never releasing restrictions, so restricted net assets grow every year while the programs have long been funded and run.
Releasing too early, before qualifying expenses are actually incurred.
Recording multi-year pledges as unrestricted. Future payments carry a time restriction unless the circumstances say otherwise.
Recording restricted expenses in the restricted column. Expenses go in "without donor restrictions"; the release moves the money.
Letting the CRM and the general ledger disagree. If development says $185,000 is restricted and the books say $140,000, the audit will find it.
Spending restricted cash on payroll in a tight month without a plan or a conversation with the board.
Where the Form 990 fits
Your Form 990 preparer will need your net asset balances by class, your contribution detail and your functional expenses. We don't prepare or file 990s. What we do is get the books, schedules and reconciliations ready, and work directly with whoever files, so the return matches your financial statements.
When to bring in a CPA
Get help from a CPA-led accounting team when:
Your restricted net asset balance hasn't been reconciled to a rollforward in a while, or ever
You're facing your first audit, or your auditor proposed adjustments to net assets last year
You have a mix of government grants (often conditional) and foundation grants (often restricted)
You're running a capital campaign, or have received an endowment gift
Your board is asking how much is really "available" to spend
Development and finance keep arriving at different numbers
We set up the structure, book the releases monthly, keep the rollforward tied to the balance sheet, and prepare the schedules your auditor will ask for.
FAQ
What is the difference between restricted and unrestricted funds?
Restricted funds are limited by a donor to a specific purpose, time period or, for endowments, in perpetuity. Unrestricted funds have no donor limits and can be used for any purpose within your mission, as decided by your board and management.
Are board-designated funds restricted?
No. Board-designated funds are net assets without donor restrictions, because the board set the limit and can change it. You can show them separately within unrestricted net assets.
What is the journal entry to release restricted funds?
Debit "net assets with donor restrictions: released from restriction" and credit "net assets without donor restrictions: released from restriction" for the amount of the restriction you've met. The related expense is recorded separately, in the unrestricted column.
Is a conditional grant the same as a restricted grant?
No. A conditional grant has a barrier you must overcome and a right of return or release. It isn't revenue until the barrier is met. A restricted grant is already revenue, but its use is limited.
When is a restriction on a building or equipment gift released?
When the asset is placed in service, unless the donor's terms say something different. That's the approach required by ASU 2016-14.
Can we use restricted funds for something else if we really need to?
Only with the donor's permission (or, in some cases, a legal process). Talk with the donor in writing and with your attorney before redirecting restricted money.
Want to know where your restricted funds really stand?
Our Free Financial Checkup is a 30-minute call with a CPA. We'll look at how you're tracking restrictions today, whether your balances tie out, and what to fix before your next audit or board meeting. Honest next steps, no pressure.
This article is general information, not legal or tax advice. Talk with your CPA and attorney about your organization's specific gifts and agreements.
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