Every dollar your nonprofit receives comes with a story. Some dollars can go anywhere your mission needs them. Others come with strings attached. Knowing the difference, and tracking it correctly, is one of the most important parts of nonprofit accounting. Get it wrong, and you risk audit findings, repaying a grant, or losing a funder’s trust.
What Are Restricted Funds?
Restricted funds are contributions a donor or grantor has limited to a specific purpose, time period, or both. A foundation grant for a youth literacy program, a gift for a new roof, or a pledge meant for next year’s operations are all examples.
Under current nonprofit accounting standards (FASB ASU 2016-14), these appear on your financial statements as net assets with donor restrictions. The key point: only the donor can place a restriction. Your board cannot.
What Are Unrestricted Funds?
Unrestricted funds, reported as net assets without donor restrictions, can be used for any purpose that supports your mission. This includes general donations, event revenue, membership dues, and program fees.
Board-designated funds, such as an operating reserve your board sets aside, still count as unrestricted. The board can change its mind; a donor’s restriction cannot be undone without the donor’s permission.
Why Tracking Grant Money Matters
Grant funders expect proof that their money was spent exactly as promised. Federal grants subject to the Uniform Guidance carry especially strict documentation and reporting rules. Even private foundations often ask for detailed budget-to-actual reports.
Poor tracking can lead to:
- Spending restricted dollars on general operations by mistake
- Missed or inaccurate grant reports
- Audit findings that worry your board and future funders
- Being asked to return unspent or misused grant money
- An unclear picture of how much cash is actually available to spend
A healthy bank balance can hide how much is already promised to specific programs.
How Nonprofits Should Track Grant Money
Set up your chart of accounts for restrictions. Use classes, funds, or project codes in your accounting software so every grant has its own income and expense trail. This makes it easy to pull a report for any single funder.
Record grants when they are awarded, not just when cash arrives. Unconditional grants are generally recognized as revenue when committed. Conditional grants, those with barriers the organization must meet, are recognized once conditions are met.
Release restrictions as you spend. When you spend money that meets a grant’s purpose, record a “release from restriction” that moves those dollars into unrestricted net assets. This keeps your statements accurate month to month.
Allocate shared costs fairly. Rent, salaries, and utilities often support several programs. Use a consistent, documented method, such as time tracking or square footage, to assign these costs to grants.
Review budget-to-actual reports monthly. Don’t wait until the final report is due. Monthly reviews catch overspending, underspending, and coding errors while there is still time to fix them.
Keep documentation organized. Store grant agreements, invoices, timesheets, and approvals together. Auditors and funders will ask for them.
Simplify Grant Tracking With Expert Help
Tracking restricted and unrestricted funds takes time and nonprofit-specific know-how. Many small and mid-sized organizations don’t have the staff to do it well, and that’s where outsourced accounting helps.
Specialized Accounting Services helps nonprofits across Allegan, Kalamazoo, Grand Rapids, and greater West Michigan keep grant money organized, reports accurate, and audits stress-free. Led by Chris Slater, a former auditor, CEO, and CFO, our team offers bookkeeping, financial reporting, and fractional CFO services built for mission-driven organizations.
Ready to gain clarity and confidence in your grant tracking? Call us at 269.270.7755 or book a consultation today. Let’s make sure every dollar supports your mission exactly as intended.