Understanding Restrictions and Releases

When a donor gives money and says "use this for youth programs," that's a restriction. Your organization can't spend that money on rent or salaries -- it has to go toward youth programs. Tracking these promises is one of the most important things nonprofit accounting does, and it's one of the key differences between nonprofit and business bookkeeping.

NP Ledger tracks restrictions through funds. Each fund has a type -- restricted, unrestricted, or endowment -- that determines how the money can be used and how it appears on your financial statements. When you record a donation, assign it to the right fund, and NP Ledger handles the rest: your Statement of Activities, Statement of Financial Position, and 990 all reflect the correct net asset classifications.

Under current accounting standards, every dollar your organization has falls into one of two categories:

Without Donor Restrictions

This is money your organization can spend on anything. It includes: - General donations with no strings attached - Earned revenue (program fees, event ticket sales) - Board-designated funds (the board set these aside for a purpose, but could change their mind -- the restriction came from inside the organization, not from a donor)

This is your operating budget -- the money that keeps the lights on and programs running.

With Donor Restrictions

This is money that comes with strings attached from the donor. It includes: - Grants restricted to a specific program - Donations earmarked for a specific purpose - Pledges that can't be used until a future date - Endowment gifts where only the investment income can be spent

You must honor these restrictions. Using restricted money for the wrong purpose is a serious compliance issue.

Purpose Restrictions

The donor specifies what the money can be used for.

Example: "This $5,000 is for the after-school tutoring program." You can only spend this money on tutoring program expenses. When you do, the restriction is released.

Time Restrictions

The donor specifies when the money can be used.

Example: "This $10,000 pledge is for your fiscal year starting July 2027." You record it now but can't spend it until that fiscal year begins. The restriction releases automatically when the time arrives.

Both (Purpose and Time)

Some gifts have both types of restriction.

Example: "This $20,000 grant is for building renovations, to be started after January 2027." You can't spend it until January 2027, and when you do, it must be on building renovations.

Setting Up Funds

When you create a fund, you set its type:

• Unrestricted -- money without donor restrictions (your general operating fund)
• Restricted -- money with donor restrictions; you also select the restriction type (purpose, time, or both)
• Endowment -- permanently restricted gifts where only the investment earnings can be used
• Board-Designated -- unrestricted money that the board has set aside; reported as "without donor restrictions" with optional disclosure

Go to Managing Your Books > Funds to create or edit funds. See Funds and Programs for the full setup guide.

Recording Restricted Donations

When you receive a restricted gift: 1. Record the donation using Quick Entry or through a donation connection 2. Assign it to the correct restricted fund 3. NP Ledger records it as revenue "with donor restrictions"

Releasing Restrictions

When you spend restricted money on its intended purpose, you "release" the restriction. This is an accounting entry that moves money from "with donor restrictions" to "without donor restrictions" on your financial statements.

What happens in your reports: - The Statement of Activities shows a line called "Net assets released from restrictions" -- this is the amount of restricted money that was spent on its intended purpose during the period - The Statement of Financial Position shows the updated balances for each net asset category

NP Ledger handles restriction releases through the fund structure. When you record an expense against a restricted fund, the closing process recognizes the restriction has been satisfied.

The Garcia Foundation gives your organization a $10,000 grant restricted to after-school tutoring.

1. Receive the grant: Record a $10,000 donation in the "Tutoring Fund" (a restricted fund with purpose restriction). Your books now show $10,000 in net assets with donor restrictions.

2. Spend on tutoring: Over the year, you spend $8,000 on tutoring supplies, tutor salaries, and snacks. Each expense is recorded in the Tutoring Fund.

3. At year end: When you close the period, $8,000 is released from restrictions (spent on the intended purpose). $2,000 remains in net assets with donor restrictions, available for tutoring next year.

4. On your reports:

5. Statement of Activities shows: "Net assets released from restrictions: $8,000"
6. Statement of Financial Position shows: "With donor restrictions: $2,000" (the remaining balance)

• When receiving any large donation or grant -- ask "are there restrictions?" If yes, create a restricted fund or use an existing one
• When setting up funds -- choose the right fund type and restriction type
• When running reports -- check that restricted and unrestricted amounts make sense
• When closing a period -- the closing entry moves net income into the correct net asset categories per fund
• When preparing your 990 -- Part X (Balance Sheet) and Part XI (Financial Statements) report net assets by restriction category

Accountant Note: The two-class net asset model (with and without donor restrictions) was established by ASU 2016-14, replacing the former three-class model (unrestricted, temporarily restricted, permanently restricted). Board-designated funds are classified as net assets without donor restrictions per ASC 958-210-45-10, with optional disclosure. Endowment funds are classified as net assets with donor restrictions per ASC 958-205-45-5. Underwater endowments (fair value below original gift amount) require disclosure per ASC 958-205-45-8.

There's an important distinction between money restricted for your own programs and money you hold on behalf of another organization:

• Restricted gift -- A donor gives you $5,000 for your youth program. That's revenue with donor restrictions. You must spend it on youth programs, but it's your organization's money.
• Pass-through contribution -- A donor gives you $5,000 to forward to another organization. That's not revenue at all -- it's a liability. The money belongs to the beneficiary until you send it.

If you're collecting donations on behalf of another organization, the Pass-Through and Agency Contributions guide explains how to set up the correct accounting treatment.

"Can the board restrict money?" Yes, but it's not a donor restriction. Board-designated funds are reported as "without donor restrictions" because the board could reverse the designation. Only donor-imposed restrictions create "with donor restrictions" net assets.

"What if a donor changes their mind?" A donor can release or modify a restriction, but you should get it in writing. Update the fund type in NP Ledger and document the change.

"What about investment earnings on restricted funds?" Unless the donor specified otherwise, investment earnings on restricted funds are generally unrestricted. Check the gift agreement.