Restricted Funds: donations tied to a specific purpose

What are restricted funds?

Restricted funds are donations that a donor requires be used only for a specified purpose, a particular program, project, region or type of activity. The organisation accepts the money on the condition that it will be spent as the donor directed, and is bound to honour that restriction.

They contrast with unrestricted funds, which an organisation can allocate wherever it judges the need is greatest. A restricted gift trades some of the organisation's flexibility for the donor's assurance that their money will go exactly where they intend.

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What is the difference from unrestricted funds?

The distinction is about control over spending. Restricted funds carry a donor-imposed condition on their use; unrestricted funds do not. This is not a matter of preference but of obligation: spending restricted money on the wrong purpose breaches the terms on which it was given.

The difference has concrete accounting consequences. Restricted and unrestricted funds are typically tracked and reported separately, because an organisation must be able to show that restricted money was used only as intended, which unrestricted money does not require.

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How are restricted funds different from a pledge?

The two describe different attributes and should not be conflated. Restricted funds concern purpose, what the money may be spent on. A pledge concerns timing, a commitment to give in the future, perhaps in instalments.

Because the attributes are independent, a single gift can be both restricted and pledged: promised over several years and tied to one program. Treating purpose and timing as separate dimensions is what lets an organisation account for a gift accurately on both counts.

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Tracking restricted funds in a platform

A grant management software platform records the restriction attached to each gift and tracks spending against it, so an organisation can demonstrate that restricted money was used only for its stated purpose, keeping the evidence in the audit trail for donors and auditors alike.