If your nonprofit receives grants, large donations, or fiscal sponsorships, you’re likely working with restricted funds—and if you’re not handling them correctly, you could be risking donor trust or IRS compliance. Understanding how to account for restricted versus unrestricted funds is key to running a financially healthy, mission-aligned nonprofit.
That’s why we’ve created a Restricted vs. Unrestricted Fund Reporting Template—so your team can track, separate, and report on fund usage clearly and confidently.
TL;DR
- Restricted funds are money given to an organization with specific conditions about how the funds must be used. This means donors, grantors, or agreements limit the purpose or timing of spending, unlike unrestricted funds that can be used anywhere.
- Restrictions can be temporarily restricted (e.g., for a project or period), permanently restricted (endowment principal that can’t be spent), or board-designated (internal policies). Knowing the difference helps with proper accounting and reporting.
- Managing restricted funds requires tracking them separately so you never spend outside the donor’s intent. Combining restricted and unrestricted funds can lead to compliance issues and loss of trust.
- Proper handling includes clear documentation, consistent categorization in your chart of accounts, and reporting that shows how restrictions were honored. This protects compliance, supports transparency, and reassures donors.
- Mishandling restricted funds can trigger auditor findings, regulatory consequences, or damaged credibility. A compliance calendar and clear internal policies help prevent mistakes.
What Are Restricted Funds?
Restricted funds are donations or grants that must be used for a specific purpose, time period, or project as defined by the donor. These restrictions are legally binding, and spending outside of them can result in audits, penalties, or loss of future funding.
Examples of donor restrictions:
- A $50,000 grant that must be used for a youth education program
- A $10,000 gift restricted to capital improvements only
- A foundation grant that must be spent by the end of the fiscal year
These funds cannot be moved to cover general operations unless the restriction is lifted in writing.
Restricted vs. Unrestricted Funds: Key Differences
Unrestricted funds provide flexibility—paying salaries, rent, utilities, or new initiatives. Restricted funds, on the other hand, require careful tracking and strict usage according to donor intent.
Accounting for Restricted Funds in a Nonprofit
Restricted funds accounting requires clear financial separation between restricted and unrestricted revenue—and the expenses tied to each.
Best practices include:
- Tagging income by restriction type at the time of receipt
- Assigning expenses to their corresponding fund category
- Regularly reconciling restricted balances
- Documenting usage for board, audit, or funder reporting
Many nonprofits rely on complex spreadsheets or siloed systems—but that opens the door to errors.
Free Download: Restricted vs. Unrestricted Fund Reporting Template
To help you stay compliant and audit-ready, we’ve created a simple but powerful Restricted vs. Unrestricted Fund Reporting Template.
- Track income and expenses across multiple fund types
- View fund balances at a glance
- Organize donor restrictions by program, project, or grant
- Designed for EDs, COOs, and finance leads managing small to midsize nonprofits
Get the Restricted vs. Unrestricted Fund Reporting Template
Creative Art Grant Proposal Ideas to Spark Your Next Project
Still deciding what to propose? Here are some strong art grant project ideas to consider:
- Community-based murals or storytelling workshops
- Interactive public installations in parks or transit spaces
- Digital art or AR/VR storytelling experiences
- Healing arts projects in hospitals or grief centers
- Environmental or sustainability-focused exhibits
- Cross-cultural or multi-disciplinary collaborations
Many successful art grant examples focus on intersectional themes—such as climate, equity, wellness, or accessibility.
Crowded: Simplify How You Track and Report Restricted Funds
Managing restricted funds doesn’t have to mean manual spreadsheets or guesswork at audit time.
Crowded gives nonprofits the structure and visibility they need to stay compliant and transparent.
With Crowded, you can:
- Create clear financial boundaries between programs, grants, and projects
- Automatically generate reports for board, donor, or 990 filing
- Ensure financial separation between programs or projects
→ Especially useful for fiscal sponsors or organizations with multiple funding streams
Whether you’re a new nonprofit building your financial systems—or a growing organization tired of juggling compliance manually—Crowded helps you manage your funds with confidence.
Final Thoughts: Turn Restrictions Into Clarity
Donor restrictions aren’t just rules—they’re promises. How well you uphold them impacts your nonprofit’s integrity, funding opportunities, and operational trust.
With the right systems in place, accounting for restricted funds in a nonprofit becomes a strategic advantage—not a stressor.
Download the free template to get started—and see how Crowded can help you stay aligned, compliant, and grant-ready.
Your questions, answered.
Can a donor change their restriction after the donation is made?
Yes, but it must be formally documented in writing by the donor. Verbal approvals or board assumptions aren’t enough. If a donor agrees to release or modify a restriction, that change should be kept on file and reflected in your financial system.
What happens if restricted funds are accidentally used for the wrong purpose?
If misused, the nonprofit may need to reimburse the restricted fund from unrestricted resources. This could also result in donor fallout, negative audit findings, or IRS penalties if it affects your 990 reporting.
That’s why separating funds clearly from the start—and using tools to track them—is essential.
How do fiscal sponsors handle restricted funds?
Fiscal sponsors often manage multiple projects, each with its own restricted grants and donations. They must:
- Isolate funds by project
- Report back to both funders and project leads
- Ensure that restricted funds are never co-mingled
Platforms like Crowded are especially helpful here, as they allow sponsors to manage multiple entities, accounts, and restriction types in one place.
Is restricted funds accounting required on Form 990?
Yes. Form 990 requires you to differentiate restricted vs. unrestricted revenue in your financial statements (Schedule A and Part VIII). Improper categorization can trigger audit flags or public scrutiny, so tracking and classifying these funds correctly is crucial.
