How to Track Restricted vs. Unrestricted Funds in a Nonprofit
For nonprofits, not all dollars are created equal. Some donations and grants come with specific rules for how they can be spent—others can be used more freely. Understanding the difference between restricted and unrestricted funds (and tracking them properly) is essential for transparency, compliance, and trust with donors.
What Are Restricted Funds?
Restricted funds are donations or grants given with conditions or limitations. The donor specifies how the money must be used.
Examples:
A foundation grant restricted to funding a food pantry program
A donation earmarked for scholarships
A capital campaign gift restricted to building renovations
You cannot use restricted funds for general operating costs or programs outside of the donor’s intent.
What Are Unrestricted Funds?
Unrestricted funds are flexible dollars that your organization can use where they’re needed most.
Examples:
General donations without donor stipulations
Membership dues
Program service fees
These funds often cover vital needs like payroll, rent, or technology—expenses that keep the organization running but are less exciting to donors.
Why Tracking Matters
Failing to track funds properly can create serious issues:
Loss of donor trust if money is misused
Compliance issues during audits or grant reviews
Inaccurate financial statements that confuse your board and funders
Accurate tracking ensures you honor donor intent and maintain credibility.
How to Track Restricted vs. Unrestricted Funds
1. Use Fund Accounting in Your Chart of Accounts
Set up accounts that clearly separate restricted and unrestricted funds. Nonprofit accounting software like QuickBooks Online (nonprofit edition), Aplos, or Sage Intacct can help.
2. Label Donations at the Point of Entry
As soon as a gift is received, flag whether it’s restricted or unrestricted. Don’t wait until year-end.
3. Reconcile Regularly
Run monthly reports to ensure restricted funds are being spent according to donor intent and balances are correct.
4. Report to Donors Transparently
Show donors how their restricted gifts were used. This builds trust and increases the likelihood of future giving.
5. Train Your Team
Make sure staff and board members understand the difference between restricted and unrestricted funds—so spending decisions are made correctly.
Final Takeaway
Nonprofits thrive on trust, and one of the best ways to build it is through clear, responsible fund tracking. When you honor donor intent and keep your reporting transparent, you not only stay compliant—you strengthen your mission’s credibility.
Need help setting up or cleaning up your restricted fund tracking? I work with nonprofits to build systems that make it simple and audit-ready.
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