Recording and Releasing Donor Restricted Funds

Donor Restricted Funds

Written by Briana Peters

October 11, 2022

When a donor makes a contribution, nonprofits must have the proper policies and procedures in place to ensure the funds are being spent in accordance with the donor’s intent. Identifying when there is a restriction on a contribution and complying with that restriction is one of the most difficult aspects of nonprofit accounting. When a donor gives funds and specifies those funds have to be spent on a certain item, for a certain purpose, or in a certain timeframe, that donation qualifies as a donor-restricted contribution and requires more tracking related to the spending of those funds. When the donation is received, revenue with donor restrictions must be recorded.

It is very important to keep documentation of the donor restrictions and to track these restrictions either in the general ledger or other software, such as Microsoft Excel. This will help when monitoring net assets released from restriction. By keeping proper documentation of the restrictions and spending of the restricted dollars, it becomes easier to demonstrate to the donors, auditors, and the Board of Directors that the funds were spent in accordance with donor restrictions.

Once the organization has spent the funds in accordance with the donor’s intent, a release from restriction is recorded to decrease net assets with donor restrictions and increase net assets without donor restrictions. There are times when funds are received in one year and carry over to the next fiscal year before they are spent; it is important to note that deferred revenue should not be recorded in these situations.

If the restriction has been met in the same period the funds were received, organizations are able to adopt a policy that would allow for restricted funds to be considered unrestricted. In order to adopt this policy, the organization must treat all donor-restricted contributions similarly and consistently follow the policy. Also, the policy must be disclosed in the notes to the financial statements.

Please contact your Hawkins Ash CPAs representative if you have questions related to recording and releasing donor-restricted funds.

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Briana Peters
As a Partner in the Firm’s Green Bay office, Briana provides audit, review, and tax services to nonprofit organizations. In addition, she works on audits of employee benefit plans and commercial entities. She is also the Director of Training for the Firm.

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