Accounting
Nonprofit Accounting
Nonprofit Management
Restricted Funds Accounting for Nonprofits: Recording Restrictions and Releases
Last updated: October 7, 2026 · Independent guide · We do not sell rankings or coverage.
Restricted funds accounting means recording a donor-restricted gift in net assets with donor restrictions when you receive it, then moving the amount to net assets without donor restrictions once the donor’s purpose or time condition is met. That move is the release from restriction, and under ASC 958 it is reported as a reclassification between the two net asset classes, not as new revenue. Because US nonprofits that follow GAAP now report only two net asset classes, your ledger has to track each restriction in more detail than the statements show.
If you are also choosing a system, our nonprofit accounting software guide compares the main vendors on price and fit.
The release rule and the journal entries
A donor restriction expires when the stipulated time has passed, when the purpose has been fulfilled, or when both have happened if the gift carries both conditions (ASC 958, as summarized by PwC Viewpoint, no date shown). At that point you reduce net assets with donor restrictions and increase net assets without donor restrictions by the same amount. The expense that met the purpose is always recorded in net assets without donor restrictions.
| Account | Debit | Credit | Note |
|---|---|---|---|
| Cash or contributions receivable | Gift amount | Entry 1: gift received. Pledges at present value, net of allowance. | |
| Contributions, with donor restrictions | Gift amount | Revenue in the restricted class. | |
| Program expense | Qualifying spend | Entry 2: expense, always without donor restrictions. | |
| Cash or accounts payable | Qualifying spend | Payment or accrual. | |
| Net assets released from restrictions, with donor restrictions | Amount released | Entry 3: release. Reduces the restricted class. | |
| Net assets released from restrictions, without donor restrictions | Amount released | Increases the unrestricted class. Nets to zero in total. |
The trigger differs by restriction: qualifying spending for a purpose restriction, the start of each installment’s period for a pledge, and the placed-in-service date for a capital gift. Endowment corpus never releases.
Worked example: one year of restricted activity
Illustration only. These figures are constructed for this example, and the pledge is shown before discounting and allowance for simplicity. A community health nonprofit starts the year with no restricted balances.
Step 1. Record a $300,000 grant restricted to diabetes education. Debit cash $300,000 and credit contributions, with donor restrictions $300,000.
Step 2. Spend $210,000 on the program and release it. Debit program expense $210,000 and credit cash $210,000, coding the expense to the grant. Then debit net assets released from restrictions (with donor restrictions) $210,000 and credit net assets released from restrictions (without donor restrictions) $210,000.
Step 3. Record a $90,000 unconditional pledge with no stated purpose, payable $30,000 a year for three years. Debit contributions receivable $90,000 and credit contributions, with donor restrictions $90,000. The pledge is restricted because future installments carry an implied time restriction. When the first year’s period arrives, release $30,000 with the same pair of release entries.
Step 4. Record a $500,000 gift for clinic vans. Debit cash $500,000 and credit contributions, with donor restrictions $500,000. In May, $180,000 of vans are bought and placed in service. Debit vehicles $180,000 and credit cash $180,000, then release $180,000.
Step 5. Record a board vote setting aside $200,000 of reserves for a future building. No entry crosses net asset classes. The $200,000 stays in net assets without donor restrictions and is disclosed as board-designated.
| Restriction | Received | Released | Closing balance |
|---|---|---|---|
| Diabetes education (purpose) | $300,000 | $210,000 | $90,000 |
| Pledge (time) | $90,000 | $30,000 | $60,000 |
| Clinic vans (capital) | $500,000 | $180,000 | $320,000 |
| Total with donor restrictions | $890,000 | $420,000 | $470,000 |
This table is the roll-forward your auditor will ask for. If the van gift had been released only as the vans depreciate, at no more than $36,000 a year over five years, the restricted balance would be overstated by at least $144,000, which is a common audit adjustment.
The standard behind it: ASC 958 net asset classes
The FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, on August 18, 2016 (Deloitte, September 12, 2016). It amended ASC 958 to replace the unrestricted, temporarily restricted and permanently restricted classes with net assets without donor restrictions and net assets with donor restrictions, effective for fiscal years beginning after December 15, 2017 (The CPA Journal, April 25, 2018).
Several rules in ASC 958 decide when a release happens:
- Purpose restrictions. When both restricted and unrestricted resources are available for an expense, the restriction is fulfilled to the extent of the expense (PwC Viewpoint). You release restricted money first.
- Implied time restrictions. Unconditional promises payable in future periods generally carry an implied time restriction under ASC 958-605-45-5, so each installment stays restricted until its period arrives (PwC Viewpoint).
- Long-lived assets. Restrictions on gifts of long-lived assets, or cash to buy them, expire when the assets are placed in service, unless the donor sets a different time restriction. PwC points to ASC 958-205-45-12 for this rule, and ASU 2016-14 removed the option to release over the asset’s useful life (Wiss, updated July 29, 2019).
- Same-period policy. If a restriction is met in the same period the contribution is recognized, you may report the gift directly in net assets without donor restrictions, provided you apply the policy consistently and disclose it (ASC 958-605-45-4 via PwC Viewpoint; BDO, July 26, 2018).
- Perpetual restrictions. Endowment corpus never releases. Earnings are typically restricted until your board appropriates them under your state’s endowment law (FORVIS, no date shown). Underwater endowment funds are reported in net assets with donor restrictions (Belfint, Lyons & Shuman, no date shown).
Conditional grants sit outside this process. Under ASU 2018-08, a contribution is conditional when the agreement has both a barrier to overcome and a right of return or release (BDO, July 26, 2018). It is not revenue until the barrier is met, so it never enters restricted net assets early. Cost-reimbursement awards often fall here, which matters when you prepare your schedule of expenditures of federal awards.
Common mistakes
- Releasing once a year. Monthly statements then overstate restricted net assets and show the board a deficit in the unrestricted column that does not exist.
- Coding expenses to a program but not a funding source. Without the grant code, you cannot show which restriction an expense met.
- Treating board designations as donor restrictions. Board-designated amounts stay in net assets without donor restrictions.
- Keeping no roll-forward by restriction. Auditors want the opening balance, new gifts, releases and closing balance for each restriction.
How to report releases
On the statement of activities, releases appear as a reclassification: a decrease in net assets with donor restrictions and an equal increase in net assets without donor restrictions (PwC Viewpoint). Propel Nonprofits recommends separate restricted and unrestricted columns, so your board does not see a misleading surplus in the year a large grant is booked (Propel Nonprofits, no date shown).
In the notes, ASU 2016-14 requires you to disclose the composition of net assets with donor restrictions and how the restrictions affect the use of resources, along with board designations, liquidity and expenses by nature and function (Deloitte, September 12, 2016). On Form 990, Part X, lines 27 and 28 follow the same two-class split (IRS, 2025 Form 990 instructions).
How ERP and accounting systems automate releases
The design that makes releases automatable is the same in every system: one set of revenue and net asset accounts, a required dimension for restriction class and a second dimension for funding source. CLA, a CPA firm that implements Sage Intacct, describes using the Class dimension this way and requiring it on every account (CLA, February 19, 2025).
Sage Intacct. Sage documents a purpose-based release that sweeps qualified expenses within a set timeframe and creates a matching release entry with a snapshot of the calculation. The entry goes through journal approvals, where reviewers can accept or decline it but not edit it, and the feature is available only to companies created with the Nonprofit QuickStart (Sage Intacct Help, modified October 1, 2026). CLA notes that time releases still use recurring journal entries and that some settings lock after the first run (CLA, April 14, 2025).
NetSuite. The SuiteSuccess Social Impact edition adds program, grant, region and time-restriction segments, a Release from Restriction transaction and a release report. RSM, a NetSuite partner, notes that the report must be customized if you release on class or department, and that a release posted as an ordinary journal entry will not update it (RSM, July 21, 2023). Our Sage Intacct vs NetSuite for nonprofits comparison covers fit and cost.
Aplos. Aplos, now part of the Velora suite, says it “automatically manages transfers between restricted and unrestricted funds” (Aplos, June 16, 2025). Its help center describes a fund transfer tool that does not touch income or expense, and a manual journal entry when the transfer must show on the income statement (Aplos Support Center, October 28, 2025).
QuickBooks Online. QuickBooks Online is not a fund accounting system. Class tracking, the usual stand-in for funds, is only in the Plus and Advanced plans (Intuit, no date shown, checked October 7, 2026), and releases are posted as manual journal entries. Our list of QuickBooks alternatives for nonprofits covers the signs it is time to move.
How we researched this
We reviewed ASU 2016-14 and ASU 2018-08 and the related ASC 958 paragraphs through summaries by Deloitte, BDO, PwC and The CPA Journal, because the FASB’s own text was not accessible during research. We read vendor and partner documentation for Sage Intacct, NetSuite, Aplos and Intuit and checked them on October 7, 2026.
Related guides
- Statement of Activities: Nonprofit Template and How-To
- Church Fund Accounting Software: Requirements and Options
- Capital Campaign Software: Gift Charts, Pledges, Progress
Frequently asked questions
What is the journal entry for a release from restriction?
Debit net assets released from restrictions in the with-donor-restrictions class and credit the same line in the without-donor-restrictions class, for the qualifying expense or expired period. The two sides net to zero in total. The expense itself is recorded separately as unrestricted.
Are temporarily and permanently restricted still used?
Not on GAAP statements. ASU 2016-14 replaced both with net assets with donor restrictions. You still disclose how much is perpetual versus purpose or time restricted.
When do you release a restricted gift for a building or equipment?
When the asset is placed in service, unless the donor sets a different time restriction. Releasing over the asset’s useful life is no longer allowed.
Is a multi-year pledge restricted if the donor gave no purpose?
Generally yes. A promise payable in future periods implies a time restriction, so each installment stays restricted until its period. Check the agreement, because a donor can make a gift available immediately.
Do you need a release entry if the grant is spent in the same year?
Not if you elect the same-period policy. You may then report the gift directly in net assets without donor restrictions, as long as you apply the policy consistently and disclose it.
Sources
Vendor and partner sources are marked because those firms sell or implement the software they describe.
- Deloitte, Heads Up on ASU 2016-14, September 12, 2016. dart.deloitte.com
- The CPA Journal, Using the new reporting requirements for not-for-profit entities, April 25, 2018. cpajournal.com
- PwC Viewpoint, Donor-imposed restrictions (ASC 958-605-45-4, 958-605-45-5, 958-205-45-12), no date shown, checked October 7, 2026. viewpoint.pwc.com
- Wiss, Net asset presentation, updated July 29, 2019. wiss.com
- Belfint, Lyons & Shuman, ASU 2016-14 net asset classes, no date shown. belfint.com
- BDO, ASU 2018-08 summary, July 26, 2018. bdo.com
- FORVIS, Endowment accounting webinar, no date shown. forvismazars.us
- Propel Nonprofits, Managing restricted funds, no date shown. propelnonprofits.org
- IRS, 2025 Instructions for Form 990. irs.gov
- CLA, Sage Intacct restricted net assets Part 1, February 19, 2025 (partner). claconnect.com
- CLA, Sage Intacct restriction release Part 2, April 14, 2025 (partner). claconnect.com
- Sage Intacct Help, Purpose-based restriction release, modified October 1, 2026 (vendor). intacct.com
- RSM, NetSuite releasing funds from restriction, July 21, 2023 (partner). rsmus.com
- Aplos, Release from restriction, June 16, 2025 (vendor). aplos.com
- Aplos Support Center, Fund transfers, October 28, 2025 (vendor). help.aplos.com
- Intuit, QuickBooks Online pricing, checked October 7, 2026 (vendor). quickbooks.intuit.com
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
