Temp restricted…what…what?

Today’s as good a day as any to tackle unrestricted vs. temporarily restricted income, both the bane and the lifeblood of so many nonprofits’ existence. Donor restrictions are often the first thing the auditors look at, and often the hardest thing to track accurately and appropriately. What it boils down to is:

• How you’re tracking and spending your donor-restricted funds
• How you’re using your cash and whether you have enough to cover all restricted future activity
• Whether you’re dipping into one restricted pot to cover another while you wait for cash to come in. Or maybe you’re dipping into unrestricted cash to pay for your programs, meaning you’re not charging enough for services.

These are all very important things to consider – donor intent is the lifeblood of your organization! – and if you don’t have a solid system to properly track restricted activity, you may not know the answers to any of the above.

Let’s start with the basics.

Unrestricted income has no donor requirements. We can use it when we want, how we want, for operating expenses or program expenses. We are not necessarily obligated to report on those specific funds. You may also see it called: Without donor restrictions. Temporarily restricted income, on the other hand, is subject to donor imposed stipulations that will be met by the actions of the organization (i.e. programmatic accomplishments) and/or the passage of time. And contrary to what many nonprofit accountants probably wish, temporarily restricted income must be tracked separately from unrestricted income in the books and a schedule must be created offline. You may also see it called: With donor restrictions. When donor-imposed restrictions are met (like the time period has passed or we’ve spent all the money on the designated programs), temporarily restricted net assets are released and reclassified to unrestricted net assets.

How about a few examples?

The Jones Family Foundation gives $10,000 to your organization. Their pledge letter, dated June 1, 2023, states that their gift is for “operational support”. Unrestricted or temporarily restricted? Susan Jones gives $5,000 and the post-it attached to her check says “for 2024 adult education program”. Unrestricted or temporarily restricted? The World Educate Foundation pledges $100,000 over four years – $25,000 in 2023, 2024, 2025, and 2026 – but did not specify a project to fund. Unrestricted or temporarily restricted? Did you get all the answers right? Keep reading…

So now that we know what unrestricted and temp restricted funds are, how should we be tracking them? The answer is twofold.

First, the funds need to be marked in your accounting system as unrestricted or temp restricted. That can be accomplished by creating an account code for temp restricted income, or perhaps a class that identifies the type of revenue, then every single income entry must be tagged to the appropriate restriction. (Want to know how to set up your accounting system to track temp restricted net assets? Go to our post here >>>) The second method for tracking is offline in Excel. Your auditor will want to see a temp restricted net assets (TRNA) schedule that shows opening balance of temporarily restricted net assets by program, additions throughout the year, releases (aka how much you spent) throughout the year, and ending balance. This number will flow directly onto your balance sheet of your audited financials so it’s important the numbers tie!

To recap, here are the three steps you need to take to ensure you’re handling temporarily restricted income properly:

1. Are you identifying income restrictions as they come in? Are you tracking in both the donor database and accounting system?
2. Are you tagging/coding income restrictions into your books?
3. Are you preparing a schedule outside of the accounting books on a regular basis (annually at the bare minimum) that shows opening balance, additions, releases, and ending balance, that then flows into our balance sheet?

If you can’t shout YES from the rooftops to any of these questions, then we should talk! We can help you get set up and on the right track so that you, your donors, and your auditors are confident that you’re both tracking and using your funds as intended. Hip hip hooray, TRNA!

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I created Master Your Restricted Funding to help you do just that! For $27, you get a Masterclass, a template to track all of your restricted grants and expenses, and I walk you through step-by-step on how to use it. This will help you revolutionize how you’re managing, analyzing, and spending your restricted funds!

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More Resources:

Here’s a detailed step-by-step process to tracking temporarily restricted net assets in Quickbooks Online >>> Still feeling stuck? Set up a time to chat with us and see how we might be able to help >>>