How to track restricted versus unrestricted funds in a nonprofit

Track restricted funds by class and grant code inside your accounting records, not by opening a separate bank account for every donor. Under current US GAAP, a nonprofit reports two classes of net assets: without donor restrictions and with donor restrictions. Record each restricted gift into the with-donor-restrictions class on receipt, release it to unrestricted as you spend on the restricted purpose, keep a grant and donor schedule, and reconcile the restricted balances every month. The whole system answers one question: how much money do we have, and how much of it can we actually spend for a particular purpose?

Get the terminology right

This is where a lot of nonprofit books show their age. Since FASB ASU 2016-14 updated ASC 958, there are only two net asset classes, and the old three-bucket labels are retired. Using the retired terms on a financial statement signals books that are behind the standard.

The two classes are simple. Net assets without donor restrictions are available for general operations at the board's discretion. Net assets with donor restrictions carry a donor's stipulation, and within that class you still track the type of restriction: purpose-restricted for a specific program, time-restricted for a future period, and perpetual for endowment principal that must stay intact while its earnings may be spent under the donor's terms.

How to actually track it

Four mechanics turn the concept into books an auditor and a funder can trust.

1. Code every restricted gift. Use a class, fund, or grant-code structure in your accounting platform, and assign a unique code to each donor-restricted contribution. This is what lets one bank account hold cash for many purposes while the ledger keeps them cleanly separate.

2. Record restricted revenue in its own class. When a restricted gift or pledge arrives, book it as revenue in net assets with donor restrictions. Never route a restricted contribution into general operating revenue, even temporarily; that is how restrictions quietly get lost.

3. Release from restriction as you spend. As qualifying expenses are incurred, record the expense in operations and release the equal amount from the restricted class to the unrestricted class. No new cash arrives; it is a reclassification that shows the restriction being satisfied.

4. Keep a grant and donor schedule. Maintain a master record of each award: donor, date, amount, the specific restriction, the deadline, and cumulative releases to date. Reconcile the restricted net asset balances against it at every monthly close.

A worked example

Say a nonprofit receives 50,000 dollars in general donations and 30,000 dollars restricted to a food program. It now holds 80,000 dollars in the bank, but the ledger tells a fuller story.

Spending the 12,000 dollars triggers a release from restriction: the expense hits operations and 12,000 dollars moves from the restricted class to the unrestricted class. The bank balance and the restricted schedule stay in agreement, which is exactly what an auditor checks.

The biggest control issue

Do not confuse restricted cash with cash in a separate bank account. A nonprofit can hold everything in one account and still track restrictions perfectly, and it can hold money in three accounts and still lose track of what is restricted. The control that matters is the fund tracking in the ledger, coded to each grant and backed by the donor agreement or grant document that created the restriction. That documentation is what proves the restriction exists and what the money can be spent on.

Where Numetix fits

Restricted-fund tracking is where a general bookkeeper who treats a nonprofit like any other business gets it wrong, and where an audit finding usually starts. Numetix sets up the class, fund, and grant-code structure, records restricted revenue in the correct net asset class, runs the release-from-restriction entries as money is spent, maintains the grant and donor schedule, and reconciles restricted balances at every monthly close, in current ASC 958 terms, inside the platform an organization already uses, QuickBooks Online, Sage Intacct, Blackbaud, or Aplos.

Across more than 40 nonprofits and over 25 million dollars in grants managed, Numetix holds 95 percent accuracy on restricted-fund tracking and 99 percent fund-tracking accuracy overall, files Form 990 on time 100 percent of the time, and has zero missed funder deadlines. When a funder or an auditor asks how much of your money is committed and to what, the answer is ready.

The short version

Track restricted funds by class and grant code in the ledger, not by separate bank accounts. Use current ASC 958 terms, net assets without and with donor restrictions, and drop the retired unrestricted, temporarily, and permanently restricted labels. Book restricted gifts into their own class, release them as you spend, keep a grant and donor schedule, and reconcile every month. Restricted cash is a tracking discipline, not a second checking account.

This page describes nonprofit fund tracking under FASB ASC 958 and is general information, not legal, tax, or audit advice. Example figures are illustrative. Numetix figures reflect its nonprofit client base as of the date above and may change.