Non-Profit Accounting: Types of Funds

Permanently restricted, temporarily restricted, and unrestricted assets are terms used in non-profit accounting to categorize funds and equity used by the non-profit to provide its goods and services to the general public. Each of these has different implications as to what the assets can be used for in an organization.

Permanently restricted assets are exactly what they sound like, restricted. They are restricted from use by the organization. For example, an organization will get a donation of cash. This cash comes with a restriction that the initial donation cannot be used by the organization, but it can be invested and the interest earned can be used for normal organizational operations. In this case, the principle can never be touched by the organization to spend operationally, but any earnings from the principle such as interest or dividends can be used. The principle would still be displayed on the organizations statement of position even though it can’t be used, but it must be denoted as a permanently restricted asset so anyone looking at the organizations financials knows that cash is not a usable source of operational funds.

While permanently restricted assets can never be used by a non-profit organization, temporarily restricted assets can only be used in certain situations or for certain programs. For example, an organization may start a fundraising campaign to raise capital for a construction project. Any donations they get for that campaign are temporarily restricted until they are used for construction costs. These funds cannot be used to fund programs or other projects that the organization may have. In this case these funds are restricted for specific use by the organization and are considered temporarily restricted. Instead of an organization going out and raising funds for a specific project, the other way to have temporarily restricted assets is for a donor to support the organization by donating cash or other assets specifically for one program or project. A single organization may run several programs that support different people or areas of a community. A donor may decide that they want to support one specific program with their money. They can then donate with the stipulation that it must be used for a specific program. This would be temporarily restricted until the organization has a need to use it for that program. These assets are also displayed separately from other assets as they cannot be used for any operational need. They have a specific purpose and restrictions for spending.

Unrestricted assets are the last type of asset that a non-profit organization can have. All unrestricted assets are just that, unrestricted. The organization can use these assets for whichever program or project within the organization. Any general donation can be used for any operational need of an organization. The organization itself can choose where to deploy these assets to further their cause. In that way, these assets are like those of any for-profit organization.

All three of these types of assets are displayed separately on the statement of position of a non-profit organization. There are very different purposes for permanently restricted, temporarily restricted, and unrestricted assets in an organization, but all three are used to further the mission of that organization. It is very important to keep these assets separated. Failure to correctly account for these assets can have legal implications and the non-profit can lose credibility in the community.

Written by:
Ashley Peth
TGG Accounting

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