A Restricted Fund is a type of financial resource set aside by a nonprofit organization for a specific purpose as designated by the donor or governing body. These funds can only be used for particular programs, projects, or operational expenses, as stipulated in the donation agreement. Restricted funds can include endowments, grants, or donations from individuals, corporations, or foundations, and they are essential for ensuring that donors’ intentions are honored. Nonprofits are often required to report separately on how restricted funds are spent, maintaining transparency and accountability. The proper management of restricted funds is critical for compliance with financial regulations and to uphold trust with donors. Mismanagement of these funds can lead to a lack of donor confidence, potential financial penalties, or even loss of nonprofit status.
In reality, restricted funds are legally binding and must be carefully managed to ensure compliance with the specific use designated by the donor, meaning they require diligent accounting and reporting practices.
Restricted funds can only be used for specific purposes set by the donor, whereas unrestricted funds can be used at the organization’s discretion for any expense.
No, restricted funds must be utilized strictly for the purpose indicated by the donor. Using them for general operating costs would violate the terms of the donation.
Nonprofits track and report on restricted funds separately from unrestricted funds, ensuring that each dollar is used according to the donor’s intent and strictly for the specified purpose.