What's the difference between restricted and unrestricted net assets?
Net assets on a nonprofit’s financial statements fall into two categories under current accounting standards: without donor restrictions and with donor restrictions. The distinction comes down to whether a donor has placed conditions on how their gift can be used.
Without donor restrictions (formerly called unrestricted) is money the organization can spend on anything that supports its mission. General donations, membership dues, program fees, and fundraising revenue typically land here. The board decides how to allocate these funds based on operational needs and strategic priorities. This is the money that keeps the lights on and programs running.
With donor restrictions (formerly temporarily restricted or permanently restricted) is money that comes with strings attached. A donor gives $50,000 but specifies it must fund a specific program launching in 2026. Or a foundation awards a grant exclusively for capital improvements. That money can only be used for the stated purpose or within the stated timeframe. Until those conditions are met, it sits in the “with donor restrictions” category.
If you’ve seen references to three categories (unrestricted, temporarily restricted, and permanently restricted), that was the old framework. ASU 2016-14, which took effect for fiscal years after December 15, 2017, simplified it to just two categories. Permanently restricted funds like endowment principal still exist, but they now fall under the broader “with donor restrictions” label. The distinction between temporary and permanent restrictions still gets disclosed in the notes to financial statements, but the face of the statement of financial position only shows two lines.
The bookkeeping piece that trips up many nonprofit organizations is tracking the release of restrictions. When a time restriction expires or a purpose restriction is fulfilled, those funds move from “with donor restrictions” to “without donor restrictions” through a reclassification entry. If your books don’t capture these releases properly, your financial statements will overstate restricted funds and understate what’s actually available for general use. That creates real problems when your board is trying to make spending decisions based on reports that don’t reflect reality.
Every restricted gift needs documentation of the donor’s intent and a system to flag when conditions are met. A grant that funds a 2025 after-school program should release when those program expenses are incurred, not when the check arrives. Getting this wrong doesn’t just affect your internal reporting. It affects your Form 990 and can raise questions during an audit.
For nonprofits managing multiple grants and donor-restricted funds, this tracking becomes a meaningful part of the monthly bookkeeping workload. It’s not something you can sort out once a year at tax time. Each month’s close should include a review of restricted funds, what’s been spent against them, and whether any releases need to be recorded.
If your organization is growing and the volume of restricted gifts is increasing, working with bookkeepers in Fairfax who understand nonprofit fund accounting will save you from the headaches that come with tangled net asset classifications. Clean tracking from the start is always easier than untangling misclassified funds after the fact.
Northern Virginia's Bookkeeping & Advisory Firm
First Step:
Tell Us About Your Business
Every engagement starts with a conversation. Tell us what's going on with your books and we'll give you our honest assessment.
More Questions
What's involved in setting up Xero for a brand-new business?
Xero setup goes well beyond creating an account. It involves configuring your chart of accounts, connecting bank feeds, building invoice templates, setting tax rates, and training you to use it properly from day one.
Read answerHow do I register a new business in Virginia and what filings are required?
Start by choosing your entity type, then register with the Virginia State Corporation Commission if forming an LLC or corporation. From there, get your EIN from the IRS, register with Virginia Tax, and obtain a business license from your local jurisdiction. Each Northern Virginia locality has its own licensing requirements.
Read answerHow do I prepare financial statements for a surety bond application?
Sureties want reviewed or audited financial statements prepared on a percentage-of-completion basis, a current WIP schedule, aging reports for receivables and payables, an equipment schedule, and personal financial statements from owners. Clean monthly bookkeeping is what makes this package possible without delays.
Read answerWhat are the bookkeeping challenges for a multi-partner law firm or consulting firm?
Every partner needs their own capital account tracking contributions, draws, distributions, and allocated profit or loss. Guaranteed payments require separate treatment from distributions, and K-1 accuracy depends entirely on clean partner-level books throughout the year.
Read answerWhat is an Enrolled Agent and how is it different from a CPA?
An Enrolled Agent is a tax professional federally licensed by the IRS to represent taxpayers in audits, collections, and appeals. CPAs are state-licensed with a broader scope, but when it comes to tax representation, EAs and CPAs carry equal authority.
Read answerHow should a consulting firm handle retainers and deposits?
Retainers and deposits paid in advance are not revenue. They're a liability on your balance sheet called deferred revenue. You only recognize the income as you perform the work.
Read answer
