Glossary
Fund Accounting

Restricted Fund

By: Alec Hollingsworth
Updated:  
June 2, 2025

DEFINITION:

A restricted fund is money given to a nonprofit for a specific purpose, which must be used only as directed by the donor.
A restricted fund is a segment of a nonprofit organization's finances that is earmarked for a specific purpose, project, or program as designated by donors or grantors. These funds must be used in accordance with the donor's instructions and cannot be reallocated for general operations or other uses without explicit permission. Restrictions can be temporary, such as funds that must be spent within a certain timeframe, or permanent, such as endowments where only the investment income can be used. Restricted funds are tracked separately from unrestricted funds in nonprofit accounting to ensure compliance with donor-imposed limitations and transparency in financial reporting.

Key Takeaways

  • Restricted funds are designated for specific purposes by donors.
  • Nonprofits must track and report restricted fund use separately.
  • Failure to comply can jeopardize donor trust and legal standing.

Why It Matters

Properly tracking restricted funds ensures compliance with donor wishes and legal requirements.

Real World Example

A community foundation receives a $50,000 donation from a local business, with the stipulation that the funds be used solely to build a new playground in the neighborhood. The nonprofit sets up a restricted fund in their accounting system to record all income and expenses related to the playground project. As the project progresses, they use this fund to pay for construction, equipment, and signage. When reporting back to the donor and preparing financial statements, the organization can easily show that the donation was used exactly as intended, fulfilling both donor expectations and legal obligations.

How Aplos Helps

Aplos allows nonprofits to easily set up and track restricted funds within their accounting system. With dedicated fund tracking, organizations can generate reports showing how restricted donations are received, allocated, and spent, ensuring transparency and accountability that meets donor and regulatory expectations.
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Frequently Asked Questions

What is a restricted fund in nonprofit accounting?

A restricted fund is money donated to a nonprofit with the requirement that it is only used for a specific purpose, as defined by the donor or grantor.

How do nonprofits track restricted funds?

Nonprofits use fund accounting software like Aplos to set up separate funds, ensuring income and expenses for each restriction are tracked and reported accurately.

What happens if a restricted fund is used incorrectly?

Using restricted funds outside of donor intentions can result in loss of donor trust, legal penalties, and potential loss of future funding.

Related Terms

Recurring Donation
Matching Gift
ACH Deposit
Fund Balance
Board‑Designated Fund
Tithes

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