How to Account for Restricted Revenues

The term "restricted revenue" often is used in the nonprofit accounting world. Revenues are usually restricted for two reasons: donors want to fund a specific program, or donors want the money to be used after a certain time, such as an anniversary date. Restricted funds are accounted in a special way, getting different treatment from regular donations.

Follow donors' wishes and get their instructions in writing. An organization cannot ignore donors' specific requests about how their funds are to be used, or it risks lawsuits and scandals. The "Statement of Financial Standards No. 116 Accounting for Contributions Received and Contributions Made," indicates that only donors can restrict funds -- not management or Board of Directors. If a donor wants to give funds to a certain program, management cannot override this decision.

Credit a "Temporarily Restricted Revenue" account when you receive restricted funds -- not a regular revenue account. Restricted funds are booked separately from general donations because they must be used for certain expenses only or after a specific date. The debit side of this transaction is applied towards cash, assuming the donation was made in the form of cash or a check.

Release revenues when constraints are met -- when certain program expenses have occurred or when a date has passed. The journal entry is to debit a "Release of Restriction -- Temporarily Restricted" account and credit "Release of Restriction -- Unrestricted" account. Note that the revenue account is not touched when revenues are released -- release accounts are used instead.

Close the accounts into the correct "Net Asset," at least at year-end. The revenue and release accounts generally close into two net assets: unrestricted and temporarily restricted. Accounts identified as temporarily restricted are closed in the temporarily restricted net assets; the rest are usually closed in the unrestricted net assets. Closing accounts properly is required to maintain the net assets balances correct.

Report the accounts properly on financial statements by following the "Statement of Financial Standards No. 117 Financial Statements of Not-for-Profit Organizations." Unrestricted, restricted revenues and releases are presented in different areas of financial statements. When looking at a "Statement of Position," for example, you will see restricted revenues under the temporarily restricted net assets' column; unrestricted revenue is shown under the unrestricted net assets' column.

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About the Author

Sheila Shanker is a certified public accountant based in California. She writes online courses for professionals seeking CPE hours and has also published the book "Guide to Non-profits: From the Trenches." Her articles have been published in national magazines such as the "Journal of Accountancy," "Architecture Business and Economics" and "Veterinary Economics." Shanker holds a Master of Business Administration.