Restricted and unrestricted funds, worked through in numbers
Updated 16 October 2026
A donor can give a nonprofit money for any use, or for one stated use. Money given for any use is unrestricted. Money given for one program, one period or to be held permanently carries a donor restriction. Both kinds sit in the same bank account, and only the unrestricted part pays for rent, salaries and the other general costs. Each section below shows the idea with round figures. The figures are an illustration.
One balance, three kinds of money
A bank statement shows one number. The books divide that number by fund. A restricted program grant can pay only for that program. A building gift can pay only for the building. The remainder, with no donor condition attached, is the money the organization can spend on anything within its mission.
Spending restricted money on a purpose the donor did not set can break the grant agreement. The funder may ask for the money back or decline to give again.
The figures are an illustration. A nonprofit holds $520,000 at the bank. A program grant accounts for $380,000 and a building gift for $60,000. That leaves $80,000 unrestricted. General spending runs $64,000 a month. The full balance would cover 8.1 months, and the unrestricted money covers 1.25 months.
The categories in the financial statements
Nonprofit financial statements report net assets in two classes. Net assets without donor restrictions are the unrestricted money. Net assets with donor restrictions hold everything a donor has limited.
The restricted class has two kinds inside it. Some restrictions end, either when the organization spends the money on the named purpose or when the named period arrives. Others are permanent, as with endowment principal that the organization holds indefinitely while it spends the investment income.
The figures are an illustration. A $36,000 gift arrives for use next year, so it stays restricted until next year begins. A $500,000 endowment gift is held as principal, and in the year it earns $20,000 of investment income for the organization to use. A $15,000 gift with no condition goes straight to net assets without donor restrictions.
Releasing a restriction as the money is spent
When the organization spends restricted money on its stated purpose, the books move that amount from the restricted class to the unrestricted class. The move is called a release. The release shows in the financial statements, so readers can see restricted money turning into program spending.
Comparing the share of the grant spent with the share of the grant period that has passed tells staff whether spending is on pace.
The figures are an illustration. A $90,000 grant funds a tutoring program over nine months. The program spends $8,000, $11,000 and $12,000 in its first three months, for $31,000 released. The restricted balance is $59,000. Spending sits at 34.4% of the grant after 33.3% of the period.
How a large restricted grant leads to a cash shortfall
A large grant raises the bank balance in a single month. Staff and board members who read the balance alone may take on new costs. The new costs fall on unrestricted money, because the grant can pay only for its own program. The organization then holds plenty of cash that it cannot use for the new costs.
The figures are an illustration. After the $380,000 grant arrives, the organization adds a general staff role at $5,500 a month. General spending rises from $64,000 to $69,500 a month. The $80,000 of unrestricted money now covers 1.15 months, down from 1.25. The $380,000 cannot pay for the new role.
The opposite problem: a grant left unspent
Some organizations hold back on restricted money and leave part of a grant unspent near its end date. The program serves fewer people than the funder paid for, and the funder sees that in the final report. A monthly comparison of the remaining balance with the months left shows the gap early.
The figures are an illustration. A grant has $34,000 unspent with four months left. Spending the rest on time takes $8,500 a month. The program is spending $5,000 a month. At that pace, $14,000 would remain unspent when the grant period ends.
Three questions the books answer at any time
Fund accounting is the practice of recording each restricted source in its own fund. With it, the books answer three questions on any day. How much unrestricted money does the organization hold? Which restricted funds does it hold, and for what? Is each restricted grant on pace to be spent as the donor set out, within its period?
Organizations that manage restrictions well also build budgets that keep restricted program spending apart from general costs. Where it fits, they ask funders for general operating support, which arrives unrestricted. Auditors review the releases, and funders read the reports before they give again.
The figures are an illustration. Unrestricted money is $80,000. Restricted funds are $59,000 left on the tutoring grant, $60,000 for the building and $36,000 for next year. The tutoring grant is 34.4% spent after 33.3% of its period.
What this means for a nonprofit
The bank balance mixes restricted and unrestricted money. Only the unrestricted part pays general costs, so cover is measured on that part alone. In the $520,000 example, cover is 1.25 months, against 8.1 months on the full balance. Each restricted fund needs its own balance, its own release entries and a monthly pace check against its period.
Fund accounting in the monthly books
Averan Advisors keeps nonprofit books with each restricted fund tracked on its own and released as it is spent. See bookkeeping and monthly close for that work, and controller support for audit preparation and grant reporting.
The nonprofit finance resources hub covers fund accounting, board reporting, grants and reserves.
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