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Definition. Restricted funds are monies set aside for a particular purpose as a result of designated giving. They are permanently restricted to that purpose and cannot be used for other expenses of the nonprofit. By contrast, unrestricted funds may be used for any legal purpose appropriate to the organization.
Restricted funds are those where the charity has to spend the funds in line with a particular purpose or project, usually specified by the donor or a fundraising campaign for a specific project or activity.
What are restricted funds? Restricted funds are any donations made and earmarked for a specific purpose by the donor. Donors have the legal right to restrict the donations they contribute to organizations (typically nonprofits) and require that their gifts be used only for very limited and specific purposes.
When the time or purpose restriction has been met, a journal entry is made to transfer funds from the With Donor Restrictions column to the Without Donor Restrictions column using the release from restrictions line item.
There are three types of donor restrictions, which are described below: unrestricted, temporarily restricted and permanently restricted. Once this is understood, a proper system for tracking restrictions is a necessity.
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Restricted assets are cash or other valuable item set aside for a specific purpose. A restricted asset can be collateral for a loan. An example of a restricted asset in a municipality would be revenue bond proceeds.
A restricted fund is any cash balance that has been earmarked for specific or limited use. Often associated with funds held by donations to nonprofit organizations or endowments, restricted funds ensure that donors alone can direct the usage of those assets.
Include your restricted funds under revenue, and specify them as permanently or temporarily restricted. Then, tally everything up by subtracting your liabilities from your gross assets to arrive at your net assets.

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