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.
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