For nonprofit organizations, financial stewardship and transparency are essential to fulfilling their mission and maintaining the trust of donors, grantors, and the community. One important aspect of nonprofit accounting is the classification of revenue as either restricted or unrestricted. Understanding the difference between these two types of revenue is critical for effective budgeting, financial reporting, and compliance.

What Is Restricted Revenue?

Restricted revenue refers to funds given to a nonprofit with specific limitations or conditions set by the donor. These restrictions determine how, when, or where the funds can be used. Donors may restrict revenue for:

• A particular program or project (e.g., funding for a youth literacy initiative)
• A specific time period (e.g., funds that must be used in the next fiscal year)
• A designated purpose (e.g., capital campaigns, scholarships, or building renovations)

Restricted funds are further divided into two categories:

• Temporarily Restricted: These funds are restricted for a certain period or purpose but will become unrestricted once the condition is met.
• Permanently Restricted (now referred to as net assets with donor restrictions that are perpetual in nature under the latest accounting standards): These funds are typically endowments where the principal must be maintained indefinitely, and only the income or a portion of it may be used.

For example, a foundation donates $50,000 to a nonprofit with the stipulation that it be used only for environmental education programs. The organization cannot legally use this money for general operations or other programs.

What Is Unrestricted Revenue?

Unrestricted revenue, on the other hand, is funding that the nonprofit can use at its discretion. These funds are not bound by any donor-imposed conditions and can be used to support day-to-day operations, cover administrative expenses, or fund new initiatives.

Unrestricted revenue provides the most flexibility, allowing nonprofit leaders to respond to changing needs and make strategic decisions based on organizational priorities rather than donor mandates.

For example, an individual makes a $100 donation to a nonprofit without designating it for any specific purpose. The organization may use it to pay rent, purchase office supplies, or invest in staff development.

Why the Difference Matters

• Financial Planning: Restricted funds cannot be used to cover general operating expenses unless specified. Nonprofits must ensure they have sufficient unrestricted funds to maintain operations.
• Reporting Requirements: Organizations must accurately track and report restricted versus unrestricted revenue to comply with accounting standards (such as those outlined in FASB ASU 2016-14) and donor expectations.
• Strategic Flexibility: While restricted funds are valuable for targeted programs, a healthy balance of unrestricted revenue allows nonprofits to sustain their core functions and adapt to unexpected challenges.

Key Takeaway

The distinction between restricted and unrestricted revenue lies in how the funds may be used:

For nonprofit leaders, understanding and managing these categories responsibly is not only a legal requirement but a best practice for building sustainability and donor trust.