Open a nonprofit's financial statements and you will find a term that does not appear on a typical for-profit balance sheet: net assets. In nonprofit accounting, net assets are divided into two categories: net assets without donor restrictions and net assets with donor restrictions.
The difference matters because a nonprofit can show a healthy bank balance and still have less money available for general operations than its statements first suggest. Some resources arrive with donor instructions about how or when they can be used.
Donor restrictions are more than an accounting technicality. They are commitments. Once a nonprofit accepts a restricted gift, it is responsible for honoring the restriction and keeping records that show how the funds were used.
This guide answers five questions nonprofit leaders ask most often:
What is the difference between net assets with and without donor restrictions?
What makes a contribution restricted?
How should restricted resources be tracked?
When is a restriction released?
How much money is actually available for operations?
Net Assets in Nonprofit Accounting: Two Categories
Net assets are what remains after a nonprofit subtracts its liabilities from its assets. They are the nonprofit version of owner's equity. Under the Financial Accounting Standards Board (FASB) standard for not-for-profit financial statements, ASU 2016-14, those net assets are reported in two classes based on whether a donor has placed limits on them.
Net Assets Without Donor Restrictions
Net assets without donor restrictions are resources that no donor has limited. The nonprofit can use them to advance its mission, subject to normal budgeting, board decisions, contracts, and other applicable requirements.
The key word is donor-imposed. A board may set aside money for a future project, create an operating reserve, or designate funds for a program. Those amounts are board-designated, but they remain net assets without donor restrictions because the board can generally change or remove its own designation.
For example, a nonprofit has $200,000 in net assets without donor restrictions, and its board sets aside $50,000 as an operating reserve. The nonprofit can track that $50,000 as a board-designated reserve, and ASU 2016-14 requires the amounts and purposes of board designations to be disclosed in the financial statements. The $50,000 is still part of net assets without donor restrictions.
Net Assets With Donor Restrictions
Net assets with donor restrictions are resources subject to limits set by the donor. A restriction narrows how a gift can be used beyond the broad purposes of the organization. Donors generally restrict gifts in three ways:
Purpose restriction: The gift must be used for a specific program or activity, such as $25,000 for an after-school program.
Time restriction: The gift can only be used in or after a specific period, such as $50,000 for a program beginning January 1, 2027. Pledges payable in future years generally carry an implied time restriction as well.
Perpetual restriction: The gift is meant to be held permanently. A donor-restricted endowment is the most common example. The original gift stays invested, and only a portion of the investment return is spent for the donor's stated purpose.
Purpose and time restrictions can also apply together. A donor might give $100,000 in December 2026 to fund a summer program that will run in 2027.
The table below compares the two categories side by side.
| Without Donor Restrictions | With Donor Restrictions | |
|---|---|---|
| Who sets the limits | No donor limits (the board may designate) | The donor |
| Can the board change it? | Yes, for its own designations | No, the donor's terms control |
| Common examples | General operating gifts, earned revenue, board-designated reserves | Program gifts, future-year gifts, multi-year pledges, endowments |
| When it can be spent | Now, subject to budget and board decisions | When the purpose is met or the time period arrives |
What Happened to “Temporarily Restricted” Net Assets?
Many nonprofit finance professionals learned three categories: unrestricted, temporarily restricted, and permanently restricted net assets. FASB replaced those three classes with today's two through ASU 2016-14, effective for annual periods beginning after December 15, 2017.
The change simplified financial statement presentation while still requiring nonprofits to disclose the nature and amounts of their donor restrictions. A gift restricted by purpose or time now sits in net assets with donor restrictions until the restriction is met, alongside perpetual endowment gifts.
The older terms still come up in conversation, and the distinction still matters in practice. Management needs to know what type of restriction applies and when it is expected to be released.
How to Track Restricted Funds in Nonprofit Accounting
For every significant restricted gift, a nonprofit should be able to answer these questions:
Who gave the gift, and how much was received?
What was the gift restricted for?
Is there a time restriction?
Which expenses qualify?
How much has been spent on qualifying costs?
How much has been released, and how much remains restricted?
Track the Restriction, Not Just the Money
A single general ledger account called “Restricted Funds” is usually not enough. Imagine a nonprofit receives three restricted gifts: $25,000 for a youth program, $40,000 for capital equipment, and $15,000 for a 2027 program. That is $80,000 in net assets with donor restrictions, but each gift follows different rules.
If all three are combined in one account, it becomes difficult to tell whether a specific expense qualifies under a specific gift. The accounting system needs to track each restriction, not only the total.
No single software setup fits every organization.
Depending on size and complexity, tracking may use funds, classes, programs, projects, donor records, grant tracking tools, or dedicated general ledger accounts. What matters is that each gift connects to its restriction and each qualifying expense connects back to that gift.
This fund accounting structure is a core part of Mission Edge's nonprofit accounting services.
Keep the Documents That Created the Restriction
A $50,000 check does not say whether the gift is unrestricted, restricted to a program, restricted to a future year, or meant to establish an endowment. The supporting documents do. Keep the donor letter, grant agreement, pledge agreement, award letter, endowment agreement, or correspondence describing the donor's intent with the accounting records.
Clear documentation also supports the audit readiness discussed in our post on why accurate accounting is critical for small nonprofit organizations.
Does Restricted Money Need a Separate Bank Account?
Not necessarily. The accounting restriction and the physical location of the cash are two separate issues. One operating account can hold cash related to both restricted and unrestricted net assets. What matters is that the records identify each restriction and that restricted resources are not spent in ways that conflict with the donor's terms.
A nonprofit may choose a separate bank or investment account when it simplifies management or when an agreement requires it. A separate account does not create a restriction, and a shared account does not remove one.
When Is a Donor Restriction Released?
A restriction is released when the nonprofit meets the donor's terms. For a purpose restriction, that generally happens when the nonprofit incurs qualifying expenses or otherwise fulfills the stated purpose. For a time restriction, it happens when the specified period arrives.
For example, a donor gives $20,000 for a youth program. During the year, the nonprofit spends $12,000 on qualifying program costs. The restriction is satisfied for $12,000, and the remaining $8,000 stays in net assets with donor restrictions.
Restrictions vs. Conditions
A donor restriction is not the same as a donor condition. Under FASB ASU 2018-08, a condition is a barrier the nonprofit must overcome, paired with the donor's right to take back or withhold the money if the barrier is not met. A conditional gift is not recognized as revenue until the condition is met. A restricted gift is recognized when it is received or promised, as net assets with donor restrictions.
What a Release From Restriction Looks Like
Spending restricted money and releasing a restriction are related, but they are separate accounting steps. The nonprofit records an expense because it incurred a cost. It records a release because it satisfied the donor's requirement.
Suppose a nonprofit receives $50,000 restricted to a program and later spends $10,000 on qualifying costs:
| Step | With Donor Restrictions | Without Donor Restrictions |
|---|---|---|
| $50,000 restricted gift received | +$50,000 | No change |
| $10,000 qualifying expense incurred | No change | −$10,000 (expense) |
| Release from restriction recorded | −$10,000 | +$10,000 |
| Net result | $40,000 remains restricted | Net change of $0 |
The nonprofit has not received another $10,000 in cash or earned new revenue. The classification changes because the donor's requirement has been met, and the release offsets the expense in net assets without donor restrictions.
Do Restrictions End at Year-End?
No. Restrictions do not disappear when the fiscal year closes. If a nonprofit receives $100,000 in December for a program that runs the following year, the unspent balance stays restricted until the donor's terms are met.
As part of the month-end and year-end close, review each significant restricted balance with a simple roll-forward:
| Roll-Forward Line | What It Shows |
|---|---|
| Beginning restricted balance | What remained restricted at the start of the period |
| + New restricted contributions | Restricted gifts and pledges received this period |
| + Other increases | Items such as investment returns on donor-restricted endowments |
| − Releases from restriction | Amounts freed up by qualifying spending or passage of time |
| = Ending restricted balance | Net assets with donor restrictions at period end |
This reconciliation gives management and the board a clear picture of what remains restricted and what has become available.
Using Net Assets to Guide Financial Decisions
A nonprofit can report $1 million in total net assets and still have far less available for general operations. For example:
$600,000 in net assets without donor restrictions
$300,000 restricted for specific programs
$100,000 restricted as a donor endowment
Only $600,000 is free of donor restrictions, and part of that may be tied up in assets that are not cash, such as buildings or equipment.
FASB addressed this gap directly. ASU 2016-14 requires nonprofits to disclose how they manage liquid resources and how much of their financial assets are available to meet general spending needs within one year of the balance sheet date.
The gap is common across the sector. According to Nonprofit Finance Fund's 2022 State of the Nonprofit Sector Survey, only 36% of nonprofits received half or more of their fiscal year 2021 funding as unrestricted.
Nonprofit Accounting FAQs on Donor Restrictions
📊 Is a board-designated reserve a restricted fund?
No. It stays in net assets without donor restrictions because the board can change it. Only a donor can impose a donor restriction.
📊 Do restricted funds become unrestricted at year-end?
No. A restriction stays in place until the nonprofit meets the donor's purpose or time requirement.
📊 Does restricted money have to be kept in a separate bank account?
Usually not. Accurate tracking in the accounting records matters more than where the cash is held, unless an agreement requires a separate account.
📊 What is a release from restriction?
It is the entry that moves an amount from net assets with donor restrictions to net assets without donor restrictions once the donor's terms are satisfied. It is not new cash or new revenue.
📊 Where do these categories appear on Form 990?
According to the IRS Instructions for Form 990, organizations that follow FASB standards report net assets with and without donor restrictions on the Form 990 balance sheet in Part X.
Key Takeaways: Restricted Funds in Nonprofit Accounting
Nonprofit accounting reports net assets in two categories: with donor restrictions and without donor restrictions.
Only donors create donor restrictions. Board-designated funds remain without donor restrictions.
Track each restriction individually and keep the documents that created it.
A release moves amounts between categories when the donor's terms are met. It is not new revenue, and restrictions do not expire at year-end.
Strong restricted-fund accounting matches donor intent, accounting records, and actual spending.
Mission Edge's nonprofit accounting team helps organizations set up restricted-fund tracking, record releases accurately, and present board-ready reports that show what is truly available to spend.
Connect with our team to strengthen your restricted fund accounting.
