donorrestricted

Donor-restricted refers to funds or assets that carry conditions set by the donor on how they may be used or when they may be spent. In nonprofit accounting, donor restrictions can be temporary (time-limited or purpose-limited) or permanent (endowments). These restrictions are defined in gift agreements, grant terms, or donor intent statements and influence how the organization records and uses the contributions.

When donations are received with restrictions, they are initially recorded as net assets with donor restrictions. If a donor allows use for any purpose, the funds are considered unrestricted. The organization must use restricted funds only for the specified purpose or within the specified time frame. If the restrictions are fulfilled or the time requirement passes, the assets are released and reclassified to net assets without donor restrictions.

Endowment gifts often involve permanent restrictions on the principal, which must be maintained in perpetuity. The income generated by endowments may be restricted to particular programs or purposes, or it may be available for general use depending on the donor’s terms and governing policy.

Accounting and reporting standards typically distinguish net assets with donor restrictions from net assets without donor restrictions. In annual financial statements, this separation helps reflect the availability of resources and compliance with donor intent. Board-designated or internally unrestricted funds are not considered donor-restricted, even if management has plans to use them in a specific way, unless the restrictions originate from a donor agreement.

Understanding donor-restricted funds is essential for accurate financial reporting, budgeting, compliance, and donor relations in nonprofit organizations.