In the nonprofit world, transparency and accountability are everything, especially when it comes to how you handle donor contributions. One key area that often raises questions during audits and reporting is how to properly account for restricted vs. unrestricted funds. Getting this right is essential for maintaining donor trust, staying compliant with accounting standards, and presenting accurate financial statements under ASC 958.

What are restricted contributions?

A restricted contribution is any donation a donor gives with a specific purpose or time restriction. These details are typically outlined in a grant agreement, donor letter, or funding application.

Here’s how the accounting works:

• Accrual basis: Restricted contribution revenue is recorded when the agreement is entered into, even if cash hasn’t been received yet, resulting in offsetting accounts receivable.
• Modified cash basis: Revenue becomes recognizable once the cash is received.

The nonprofit organization must track restricted revenue separately from unrestricted revenue and monitor when the donor’s restriction has been met. Restricted funds appear on the financial statements as net assets with donor restrictions until the purpose is fulfilled or the time period passes, at which point the contribution is released from restriction and reclassified as an unrestricted net asset.

Types of Restrictions

What are unrestricted contributions?

Unrestricted contributions have no donor-imposed stipulations. Organizations can use these funds wherever they’re needed most: operations, staffing, programming, or strategic initiatives.

While they’re simpler to manage, unrestricted contributions should still be tracked carefully. Clear documentation shows responsible stewardship, especially when reporting to boards or donors who assess the organization holistically.

Common Mistakes in Fund Accounting

Even well-run nonprofits face challenges with restricted fund tracking. Some of the issues we commonly see include:

• Recording restricted contributions incorrectly under the accrual method by failing to record associated receivable, specifically on multi-year grant or pledge agreements.
• Not maintaining a running schedule of restricted net assets or reviewing fund balances throughout the year.
• Treating conditional contributions as revenue prematurely.
• Allowing expenses to be charged to the wrong grant or spending against funds before the restrictions are met.

These issues can lead to audit adjustments, cash-flow surprises, and unintentionally misstated financial statements.

How to Stay Compliant

To stay on top of your fund tracking and reporting obligations, keep these practices in place:

• Track every grant and contribution: Document the date of application, approval, and expected funding.
• Maintain signed agreements: Keep copies of donor communications and grant commitments for reference.
• Review expenses monthly: Align spending with related grants or donor restrictions to determine when funds can be released.
• Revisit your schedule of restricted net assets regularly: This helps ensure accuracy and provides clear visibility into what’s been earned and what’s still restricted.
  
  

Partner with Lutz for Confidence in Compliance

Accurate fund accounting is important to ensure compliance and credibility. Our nonprofit accounting solutions help organizations strengthen financial reporting, track donor restrictions, and maintain transparency across all funding sources. From implementing proper tracking systems to preparing audits, Lutz provides the guidance you need to manage contributions. Contact us to learn more.