Say a donor gives $5,000 for a roof renovation. Or a campaign raises money designated for a water project overseas. That money is restricted: it can only be spent on the purpose it was given for. Tracking such funds separately is one of a treasurer's most important jobs, and a common pitfall.
What are restricted funds?
Restricted money is money the giver has attached a purpose to. In the financial statement, this shows up as a donor-restricted fund (the donor set the purpose) or a board-designated fund (the board set aside money for a purpose itself). The difference is who sets the purpose, but in both cases the rule is the same: this money isn't freely available.
Why you keep it strictly separate
There are three good reasons to never lump restricted money in with your unrestricted funds:
- Trust. Donors want to see that their gift went to the purpose they were promised. A separate accounting is your proof.
- Obligation. Spending restricted money on something else can create legal and tax problems, especially for 501(c)(3) organizations.
- Clarity. You want to know at any moment how much is left in a given fund, without having to do the math.
An unrestricted bank balance tells you little if part of it has already been promised to a project. Only once you subtract the restricted portion do you know what you can actually spend freely.
How to keep it organized
You don't need to open a separate bank account per project (though you can). What matters more is that in your books, every transaction is linked to the right project or fund. That way you build a balance per purpose: what came in, what was spent, and what's still outstanding. At year end, your reporting per fund falls right out of that.
Common mistakes
- Recording restricted income as a regular gift, without linking it to a project;
- Paying a project's costs out of the general fund and forgetting to reconcile it;
- Not being able to show, at year end, how much remains per purpose;
- Not closing out a fund once it's complete, leaving old balances lying around.
How Tutelium helps
In Tutelium, you link transactions to a cost center or project, so every restricted fund keeps its own balance. You see at a glance how much has come in and been spent per purpose, and how much is still available. Your reporting per fund is always ready, no more separate spreadsheets.
Keep reading
Factor restricted funds into your planning too: read building a realistic budget. Are you a 501(c)(3)? Then this matters for your public disclosure rules.
