Definition

Donors to a nonprofit organization may designate or "restrict"

the use of their donations to a particular purpose or project. An
example is a gift to a special scholarship fund at a university.

"Unrestricted" funds are donations the nonprofit may use for any
purpose. Unrestricted funds usually go toward the operating
expenses of the organization or to a particular project that the
nonprofit picks.

How Are Restricted Funds Designated?

Only the donor can determine if a donation is restricted or

not. The designation can be made by a letter from the donor or
through an explicit agreement with the nonprofit.

Often grants from foundations are restricted to a particular

program or purpose, and that restriction is set out in the
documentation that accompanies the award.

Most nonprofits ask for unrestricted funds when they solicit

donors by email or direct mail. A clause often states this on the
donation form and in the gift acknowledgment. Exceptions could
be when donors are asked to give to a capital campaign, a building
fund, or a scholarship fund.

Nonprofits must be clear when asking for gifts.

Some charities have experienced donor backlash when it

appeared that donors were donating for a particular purpose only
to find out that the charity used their gift in an unrestricted way.
One way to avoid confusion is to give donors a choice of
designation at the time of the donation. For instance, the
American Red Cross on its online donation page offers several
options for the donor to direct his donation, such as Disaster
Relief, Where it is needed most, and Your Local Red Cross.

Most direct mail solicitations include a statement that implies the

donor is giving an unrestricted gift. For instance, Partners In
Health included this statement in its letter: YES! I believe every
child has a right to grow up happy and healthy. Heres my gift to
help end the senseless deaths of young children from
malnutrition.

What Are the Legal Obligations of a Restricted Gift?

There are good reasons to be entirely clear about how the charity
plans to use the gift when making a solicitation. There is not only
a moral obligation for nonprofits to honor a donors wishes, but
they are also required by law to do so.

If a donor restricts a donation to a particular purpose and the

nonprofit does not comply, the donor can demand a refund. The
donor can take legal action if needed and report the charity to
the Office of the Attorney General in the state where the charity
resides.

The Types of Restricted Funds

Restricted gifts fall into two categories, specified in the gift

instrument. That is the document that determines how the
donated funds will be used. The gift instrument might be an
award letter from a foundation or a letter from an individual
donor.

Temporarily Restricted

Donors sometimes impose time-limited restrictions.

Time-restricted means that the donation can be used for a

particular purpose for a specified period, or it must support a
specific program or campaign.

When the time is up, or the project is done, the funds become
unrestricted or stopped. Examples include a grant, graduation of
a scholarship recipient, or the completion of a building project.

Permanently Restricted

Permanently restricted funds never expire. Usually, this means

that the charity invests the gift and then uses the interest and
investment returns in perpetuity. Permanently restricted funds
often go into an endowment that supports a particular activity or
the organization in general.

Whatever type of restricted fund is set up, the nonprofit must

keep track of it and report it appropriately in its financial
statements. Consult the Accepted Accounting Principles (GAAP)
at the Financial Accounting Standards Board (FASB) for detailed
information.

unrestricted funds
Definition
Popular Terms
Money given to a non-profit organization by a donor that the organization is
free to use as they see fit. For example, when given a donation of unrestricted
funds by an individual, a non-profit organization might allocate their use
toward helping offset the organization's operating costs such as rent, labor
costs and utility bills.

Read more:
http://www.businessdictionary.com/definition/unrestricted-funds.html

RESTRICTED VS.
UNRESTRICTED FUNDS
CHARLES "HIPBONE" CAMERON

Senior Analyst, The Arlington Institute

1 minute read | May 7, 2010

Turn on easy reading

3
Your discretion -or theirs?
The issue of restricted vs. unrestricted funds is a tough one. A
New York Times article in 2008 spoke of a growing tyranny
of donors.
Are things that bad?
Whats this all about, what do the terms mean, and what
does it all mean to you as a donor and/or as a recipient?
According to the article on Managing Restricted
Funds provided (in pdf format) by the Nonprofits Assistance
Fund, funds received by a non-profit fall under three heads:
Unrestricted: These funds are free from any external
restrictions and available for general use. Many individual
contributions are unrestricted, as are general operating and
unrestricted grants.
Temporarily Restricted: These funds have donor-imposed
restrictions that can be fulfilled in one of two ways passage
of a defined period of time (time restriction) or by
performing defined activities (purpose restriction). These
funds most often come from a grant received to operate a
specific program or project or individual contributions given
with the intent of supporting a particular program or
campaign.
Permanently Restricted: These funds are restricted by the
donor for a designated purpose or time restriction that will
never expire. The intent is that the principle balance of the
contribution will remain as an investment forever, and the
nonprofit will utilize the interest and investment returns,
such as with an endowment.
Heres the issue in a nutshell, as quoted from Kathleen
Enright, President and CEO of Grantmakers for Effective
Organizations in another New York Times article:
A majority of foundation leaders polled in the studies
acknowledged that unrestricted operating funds were
better and more effective for grantees. But they
continue to focus their grant-making on project support,
they said, because they prefer its clear-cut results and
because their boards often mandate project support as a
way to show a foundations prominence in a specific
funding area.
Enright went on to say:
The presumption is that the donor knows more about
how to address a given problem than its grantees, and I
think thats usually not a correct presumption More
operating support can shift the locus of action and ideas
to the people who are closest to the problem.
So here are my questions please feel free to pose further
questions on the same topic that fit your own organization,
its needs and experiences
Do you find restricted funding cramps your style?
Are you just, frankly, enormously grateful for any
amount of money you can raise, restricted or not?
Both of the above?
Are there things you have been unable to accomplish
because too high a percentage of your funding comes with
restrictions?
Is the issue for your organization one of
general operating expenses?
Is the issue the need for greater flexibility in allocating
funds to emerging crises in different parts of the world?
Do you have abundance years and slump years
when reporting restricted funding thats time
dependent?
Are the complex legal necessities of accountancy
themselves a barrier to performance?
Are things differently organized in your part of the
world? How?
Whats an ideal arrangement, one that both inspires
donors and facilitates necessary actions?

Nonprofits Restricted vs. Unrestricted Funds

The Average Joe may believe that the way donations to nonprofits work is that a check is
written to the nonprofit who then turns around and spends the money however the
nonprofit sees fit. Thats actually not entirely true. When money is donated to a nonprofit,
 the funds are categorized as unrestricted, temporarily restricted, or permanently restricted.
The only way a donation can carry a temporarily or permanently restricted title is if the
donor imposes one at the time the money is donated. The below offers a quick description of
each of these types of funds:

Unrestricted Funds Funds which do not contain donor-imposed restrictions and

are available for general operational use by the nonprofit organization;
Temporarily Restricted Funds Funds which contain a temporary donor-imposed
restriction for either a particular period of time or for a particular purpose. The restriction
on these types of funds expires after the passage of that period of time or the fulfillment of
that particular purpose;
Permanently Restricted Funds Funds for which the corpus of the fund has to be
maintained in perpetuity, with their purpose fulfilled using earnings from interest or
investments.
If a nonprofit depends on all three donation types to fulfill the organizations mission, what
happens when it runs out of unrestricted funds used for day-to-day operational needs but
has a large stash of restricted funds at hand? Some organizations choose to borrow against
their restricted funds to pay the immediate expenses required to keep them in business.

The problem against borrowing restricted funds is the potential for the nonprofit to be out
of compliance it is a legal obligation for nonprofits to use restricted funds in the way they
were designated to be used by the donor. If restricted funds are misused, donors could
potentially ask for their money back or even seek legal action against the nonprofit.

One manner applied by nonprofit organizations to mitigate the unrestricted fund/cash flow
problem is to have disclaimers when fundraising, clearly stating that the nonprofit can
move or use money as it sees fit. For example, The Wikimedia Foundation, the nonprofit
organization that manages and runs the popular website Wikipedia, fundraises so that they
do not have to sell ad space on their websites. On their fundraising page, Wikimedia states
that the donation from that specific solicitation goes to technology, people, and projects in
general. Donations that come from a specific fundraiser or appeal are called solicited
funds and must be used for that specific purpose; in Wikimedias case, theyve generalized
the solicitation to be used for a wide-range of the nonprofits efforts.

The Difference Between Permanently

Restricted and Temporarily Restricted Net
Assets
by John Cromwell
 Related Articles

1Definition of Permanently Restricted Assets

2Non-Profit Accounting Definitions

3Deferred Revenue vs. Temporarily Restricted

4Accounting for Endowments

Permanently and temporarily restricted assets are items that are donated to nonprofits that have varying
degrees of conditions on how they are to be used. These types of assets differ from assets that have
conditions in that these donations cannot be rescinded by the donor. Restricted assets are required to be
identified separately on the nonprofits financial statements.
Ads by Google

Start Download - View PDF

Convert From Doc to PDF, PDF to Doc Simply With The Free On-line App!
www.fromdoctopdf.com

Nonprofit Rules

Most charities or nonprofits are organized under section 501(c)(3) of the tax code. Charities organized under
this section of the tax code are exempt from paying taxes on their income and the donations they receive.
These charities also are able to offer donors personal tax deductions based on the amount of their donation.
With these benefits comes obligations, as charities are required to maintain a certain level of financial
transparency to both the Internal Revenue Service and prospective donors. Therefore, charities are required
to disclose financial records. The required public disclosures are filings with the IRS. However, many
charities prepare financial reports in addition to their required tax filing to provide additional clarity to
donors. The Financial Accounting Standards Board is the authority on American accounting practices and
maintains the generally accepted accounting principles (GAAP), which define how financial statements are
to be prepared. The FASBs Statement of Standards No. 116 defines and governs how permanently restricted
and temporarily restricted assets are reported.

Condition vs. Restriction

It is important to clarify the difference between a condition and a restriction, as it clarifies what financial
items you need to classify. A condition grants the donor the ability to retake the property granted or not
provide the property promised if a certain event occurs or fails to occur. An example of a condition would be
a donor retaining the right to rescind his gift of land if the charity fails to raise the funds necessary to build a
structure on that property by a certain time. A restriction is a limitation a donor places on his donation
regarding how it can be used. An example of a restriction is the donor providing a charity a car but
stipulating that it can only be used to transport children to and from the charitys events.

Permanently Restricted

Permanently restricted assets are donated items that have limitations on use that are attached to it for
perpetuity. Assets that are classified as permanently restricted must be listed as a separate category of assets
on the charitys Statement of Activities.
 Temporarily Restricted

Temporarily restricted assets are those that are donated subject to restrictions that are limited to a specific
period of time. An example would be property donated that could only be used for a certain purpose for a
period of five years. Temporarily restricted assets must be listed separately from permanently restricted and
unrestricted assets on the charitys Statement of Activities. When the restriction period runs out on
temporarily restricted assets, the asset value must be transferred into the unrestricted section of the Statement
of Activities. This is a distinct type of transaction known as reclassification, which should be reported
separately from the charitys other transactions that it participates in during the year.

Considerations

When preparing a charitys financial statements, consult with a certified public accountant. If you wish to
make a donation subject to a condition or restriction, consult with a licensed attorney in your area to ensure
that the gift is properly structured. This information is not meant to be legal advice; it is for educational
purposes only.

Journal Entry for Cash Placed in a Restricted

Fund
by Michael Marz

Related Articles

1Deferred Revenue vs. Temporarily Restricted

2How to Record a Donation for Bookkeeping

3Accounting for Endowments

4How to Track Restricted Funds in QuickBooks

When you take cash out of your business and put it into a restricted fund, -- meaning it's set aside for a
specific purpose -- the transaction must be recorded in accordance with generally accepted accounting
principles, or GAAP, on company financial statements. Whether you have to set up a restricted fund because
you run a non-profit, a client contract requires it or you just want to preserve some cash for certain business
expenses, the journal entry is always the same.
Ads by Google

Start Download - View PDF

Convert Any File to a PDF. Get the Free From Doc to Pdf App!
www.fromdoctopdf.com

Two Sides to Every Journal Entry

Every transaction your business engages in must be recorded on company books using journal entries. A
journal entry always has at least one debit and one credit, and the sum of the debits have to equal the sum of
all credits that make up the journal entry. By recording journal entries, you can figure out the current balance
of each account on your books. At any point in time, combining the debits and credits for each account with
its beginning balance gives you the account's current balance.

Credit to Cash Account

Placing money into a restricted fund requires a journal entry to show the transfer of funds from one asset
account to another. For example, suppose you withdraw $10,000 from your business's bank account and
deposit it into a different account classified as a restricted fund that's reserved for equipment purchases only.
To record the decrease to your company's available cash, a credit entry of $10,000 to the cash account is
necessary.

Debit to Restricted Fund Account

When dealing with an asset account, a debit will increase the account balance. Therefore, completing the
journal entry requires a debit to the restricted fund account for $10,000. Taken together, the debit and credit
entries essentially show the transfer of funds from one account to another -- the restricted fund. If other
parties, such as creditors from which you need to borrow money, review your company's financial
statements, you may want to include a footnote to the balance sheet explaining what the restricted fund is
and what the money can be used for.

Journal Entry's Impact on Balance Sheet

Your company's balance sheet will report a cash balance that reflects the $10,000 withdrawal, but it also
includes a separate line to report the balance in the restricted fund. Overall, the total amount of assets
reported on the balance sheet is unaffected by the entry, since both accounts are classified as assets. To
illustrate, suppose your company's only asset before the transfer is a $50,000 cash balance. Once you
withdraw the cash, the credit entry brings the balance down to $40,000. The debit to the restricted fund
account, however, increases its balance from zero to $10,000. Regardless of how you classify the business's
cash, total assets will still equal $50,000 ($40,000 + 10,000).