Restricted vs. Unrestricted Funds: The Missing Pieces That Break Most Nonprofit Books
Nonprofit accounting isn’t hard because it’s “complicated.”
It’s hard because nobody ever teaches founders, directors, or even bookkeepers how your financial puzzle actually works.
The most common and damaging problem?
Confusing restricted and unrestricted funds.
When these two categories get mixed — even a little — your books stop telling the truth.
And once that happens, everything else becomes unreliable:
• grant reporting
• funder requirements
• program spending
• compliance
• 990 preparation
• audit readiness
• donor trust
• organizational transparency
Let’s simplify this once and for all.
What are restricted fn
Restricted funds are dollars with rules.
They must be used for a very specific purpose defined by:
• a grantor,
• a donor,
• or a funding agreement.
Examples:
• “For after-school tutoring only”
• “Must be used by June 30”
• “Restricted to mental health programs”
• “Cannot be used for overhead or admin”
• “Must cover salaries for a specific program”
Restricted dollars are a puzzle within the puzzle.
Every piece has to stay inside its own frame.
What are unrestricted funds?
Unrestricted funds can be used for any purpose that supports the organization.
These cover the real backbone of nonprofit operations:
• admin salaries
• rent
• software
• fundraising
• utilities
• overhead
• general programming
Most nonprofits run into trouble because they expect restricted funds to cover unrestricted needs — but they can’t.
Where nonprofits go wrong
Here are the three mistakes that break 90% of nonprofit books:
1. Treating all revenue like one big pot
Money comes in → it goes to one revenue account → it gets spent.
Simple, but completely wrong.
Without fund tracking, you lose:
• balance visibility
• spending accuracy
• grant compliance
• the ability to prove where money went
2. Coding restricted expenses incorrectly
If an expense belongs to a restricted fund but is coded to general operations, it creates:
• overstated general spending
• understated grant spending
• inaccurate reimbursement reports
• false fund balances
3. No fund balance reconciliation
Every restricted fund needs its own balance — with beginning, changes, and ending amounts.
Most nonprofits never reconcile this.
They rely on the bank balance instead of the fund balance — which is a costly mistake during audits.
How to track funds correctly
Proper fund tracking requires three components working together:
1. Revenue is tagged to its fund
Whether you use Classes, Locations, Tags, or Projects — it must be consistent and clean.
2. Expenses are coded to the correct fund
This includes:
• payroll allocations
• vendor invoices
• credit card charges
• reimbursements
• program-specific costs
3. Monthly fund balance reconciliation
A true fund balance report shows:
• beginning restricted balance
• restricted revenue added
• restricted expenses deducted
• ending balance available
If this doesn’t exist, your books are incomplete.
When fund accounting errors become dangerous
This is where the stakes become real.
Fund issues lead to:
• grant repayment
• audit findings
• donor distrust
• suspended funding
• board-level concerns
• compliance violations
• reputational damage
Most nonprofits don’t realize how serious it is until something goes wrong.
How a Clarity Reset fixes this
A Reset rebuilds the entire structure:
✓ correct COA for fund accounting
✓ clean revenue and expense coding
✓ grant-by-grant spending summaries
✓ fund balance reporting
✓ documentation alignment
✓ reconciliation of historical activity
✓ removal of incorrect entries
✓ accurate restricted/unrestricted separation
Once this structure is rebuilt, your reports become trustworthy — and you finally know where every dollar actually went.
If your nonprofit doesn’t trust its numbers, you’re running blind
But it’s fixable.
Fund accounting isn’t meant to be chaotic.
Once the puzzle is rebuilt, the financial picture becomes clear.
Start your Clarity Reset here.
