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A Brief Introduction on Managing Restricted Funds

The non-profit organizations follow a unique accounting standard that requires the organization to contributed income in one of the three categories that are the unrestricted, the temporarily restricted as well as the permanently restricted funds. This classification is based on the donor based restrictions that might be there or might not be there. These restricted funds as well as grants are important as well as desirable although they place a serious challenge in their management. It is important to note that the restrictions on the funds can only be placed legally. The shape as well as the form of the restrictions is defined in the “gift instrument.” The gift instrument could be in the form of the award letters from the foundations or could be in the form of the letter from the individual donor.

The Three Categories of the Funds can be defined as:

  1. The Permanently Restricted Funds: These kind of restricted funds are constrained by the donor for a designated purpose or for an unlimited time period. The main idea behind these kinds of funds is to retain the principle amount and allow the non-profit organization to utilize the interest and the investment returns.
     
  1. The Temporarily Restricted Funds: The restriction on these funds can be fulfilled in either of the ways- by the expiration of the prescribed time period, or by performing the desired activities.
     
  1. The Unrestricted: These kinds of funds are free from any restriction and can be used for general purposes. The example of these kinds of funds is the donations that are made by the individuals to the organization.
Once when the contribution made to the organization has been classified as restricted, the accounting as well as the record keeping of the funds attains prime importance. It has to be noted that the restrictions are imposed by the donor when they make the gift or the grant. Secondly, the income is recorded in the accounts when the unconditional commitment for the funds is received rather than the year when the expenses occur. Such restrictions make the preparation of the financial records for the non-profit organizations all the more complex and difficult.