Updated 2025: This article has been expanded into a complete guide to help you track and manage restricted funds with ease, from definitions to best practices.
If you’ve ever scrambled to pull together a donor report, felt unsure whether you were spending funds in compliance with donor intent, or wondered how much unrestricted cash you really have, you’re not alone.
For nonprofits, funds with donor restrictions are both a gift and a responsibility. They allow you to carry out mission-critical work, but they come with rules — and not following them can put your credibility, funding, and compliance at risk.
In this guide, you’ll learn:
- ⏺ What “with donor restrictions” and “without donor restrictions” really mean
- ⏺ Why proper restricted fund tracking matters for compliance, donor trust, and decision-making
- ⏺ The systems and tools you need to track restricted funds accurately
- ⏺ Common mistakes nonprofits make (and how to avoid them)
1. What Are Restricted Funds in Nonprofits?
Without Donor Restrictions
- ⏺ Can be used for any purpose that supports your mission — operations, programs, fundraising, overhead
- ⏺ No specific donor-imposed stipulations
- ⏺ The most flexible and essential funds you have
With Donor Restrictions
- ⏺ Given with specific donor-imposed stipulations that must be met by:
- 1. Passage of time (e.g., funds for use in 2026)
- 2. Mission purpose (e.g., funds for a particular program or project)
- ⏺ Once the restriction is met, the funds are “released” and reclassified as without donor restrictions
- ⏺ Given with specific donor-imposed stipulations that must be met by:
How about a few examples?
The Jones Family Foundation gives $10,000 to your organization. Their pledge letter, dated June 1, 2025, states that their gift is for “operational support”.
Are these funds with donor restrictions or without donor restrictions?
If you guessed without donor restrictions, you’re right! (Operational support means that you can use the funds at your own discretion, assuming it is furthering the mission of your organization.)
Susan Jones gives $5,000 and the post-it attached to her check says “for 2025 adult education program”.
Are these funds with donor restrictions or without donor restrictions?
If you guessed with donor restrictions, you’re right! (The donor has specified the exact program where she wishes her funds to be spent.)
The World Education Foundation pledges $100,000 over four years – $25,000 in 2025, 2026, 2027, and 2028 – but did not specify a project to fund.
If you guessed with donor restrictions, you’re right! (The donor has specified the years in which the funds must be used.)
Pro Tip: Board-designated funds are still without donor restrictions — because the board can change its decision. Donor restrictions are legally binding.
2. Why Restricted Fund Tracking Matters
Accurate restricted fund tracking allows you to:
- ⏺ Honor donor intent and meet compliance requirements
- ⏺ Build donor trust and secure future funding
- ⏺ Understand your true financial position so you can make better decisions
- ⏺ Pass audits confidently and avoid stress during grant reporting
Without it, nonprofits risk:
- ⏺ Audit findings or compliance issues
- ⏺ Loss of donor trust and funding
- ⏺ Internal confusion about available resources and potential accidentally spending restricted funds on something else
💡 Related reading: How to Ensure a Stress-Free Nonprofit Audit and Best Practices for Nonprofit Financial Sustainability.
3. The Two-Part System for Managing Restricted Funds
You need both your accounting system set up properly and an offline tracking schedule to be fully confident in managing your restricted money.
A. Set Up Restricted Funds in Your Accounting System
Whether you use QuickBooks Online or another accounting platform, you need to be able to tag and report on restricted funds.
- ⏺ In QBO, turn on Class Tracking (Settings → Advanced → Categories → Track Classes)
- ⏺ Create a class structure by program and major donor-restricted funding sources
💡 Related reading: Check out this blog post for details on how to set up your class structure in Quickbooks Online to make tracking restricted funds a breeze!
B. Maintain an Offline Schedule for Donor Restricted Funds
Even with great in-system tracking, you still need an offline schedule (formerly called a TRNA schedule) that includes:
- ⏺ Opening balance by program/fund
- ⏺ Additions (new restricted income)
- ⏺ Releases (spending that meets donor restrictions)
- ⏺ Ending balance (ties to your audited balance sheet)
Your auditors will ask for this schedule and it’s another good way to make sure your accounting system ties with your grant agreements and offline records.
4. Compliance & Documentation Requirements
- ⏺ Review every grant agreement and donor letter for exact restrictions
- ⏺ Keep all documentation in one accessible place
- ⏺ Understand when to release restrictions (when purpose or time stipulations are met)
- ⏺ Follow FASB and GAAP standards for nonprofit financial reporting
💡 Related reading: Nonprofit Chart of Accounts and Bookkeeping Best Practices podcast episode.
5. Common Mistakes Nonprofits Make With Restricted Funds
- Mixing restricted and unrestricted funds in reports without clear separation.
→ Solution: Always run reports that distinguish between with and without donor restrictions. - Over-reliance on restricted funding for core operations.
→ Solution: Diversify revenue so core operations aren’t dependent on restricted grants. - Spending too quickly before program deliverables are met.
→ Solution: Align spending with program milestones. - Spending too slowly, delaying impact and eroding donor trust.
→ Solution: Maintain a spend plan that balances compliance with timely impact. - Lack of communication between fundraising and finance teams.
→ Solution: Hold regular reconciliation meetings to ensure donor reports match financial records.
6. Three Steps to Handle 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?
7. Your Next Step: Go From Theory to Action
Reading about restricted funds management is a great first step — but setting up the system, building your offline schedule, and running donor-ready reports is where the real transformation happens.
That’s why I created the Manage Your Restricted Funds for Nonprofit Leaders Masterclass. For just $27, you’ll get:
- ⏺ My exact restricted funds tracking template
- ⏺ Step-by-step video tutorials for setting up your accounting system
- ⏺ My monthly reconciliation process
- ⏺ Real examples of donor-ready reports
