Grants are an essential source of funding for many nonprofits. They allow organizations to launch new programs, expand services, and reach more people in their communities. But grants often come with donor-imposed restrictions, and understanding how those restrictions affect financial reporting can be confusing.
A common assumption is that once grant money is deposited into the bank account, it is available to be spent as needed. In reality, restricted funds must be tracked and reported differently from unrestricted contributions. Without a clear structure in place, financial statements can quickly become difficult to interpret, and leadership may not have an accurate picture of which resources are actually available for operations.
This article walks through how donor-restricted grants move through nonprofit financial statements and how organizations using QuickBooks Online can track those funds as restrictions are satisfied.
1. Why Restricted Grants Get Small Nonprofits Into Trouble
Restricted grants aren’t complicated — but they do need to be handled correctly.
In small nonprofits, all funds usually land in one bank account. From a cash standpoint, everything looks available. If the balance feels healthy, leadership relaxes. If it’s tight, everyone feels pressure.
But the bank balance doesn’t tell you what is actually available.
When a donor restricts a gift — whether for a specific purpose or for a future time period — that restriction matters. Under nonprofit accounting standards (ASC 958), donor intent determines how that revenue is reported and when it becomes available for general use.
And this is where things quietly drift.
I’ve seen organizations:
- Build budgets assuming restricted funds are flexible
- Make spending decisions based on cash instead of availability
- Present financial statements that technically balance — but don’t reflect reality
The issue usually isn’t bad intent. It’s structure.
Restricted funding requires intentional tracking. Without it, leadership may believe they have more flexibility than they do. Over time, that gap between perception and reality creates reporting confusion, board frustration, and unnecessary financial stress.
Before you can track restricted grants properly, you first have to understand how they show up on your financial statements. And that starts with net asset classifications.
2. Net Asset Classifications — The Practical Version
If restricted grants determine availability, net assets show the impact.
Under current nonprofit accounting standards (ASC 958), net assets are presented in two categories:
- Net assets without donor restrictions
- Net assets with donor restrictions
That distinction is driven entirely by donor intent.
Net assets without donor restrictions
These are resources the organization can use for general operations. This includes unrestricted donations, earned income, membership dues, and funds the board has internally set aside.
Board-designated funds fall into this category. Even if the board votes to reserve money for a future project or operating cushion, those funds remain unrestricted for financial reporting purposes. Because the limitation is internal — not donor-imposed — it stays in “without donor restrictions.”
Net assets with donor restrictions
These are resources that carry donor-imposed limitations. Restrictions generally fall into two categories:
- Purpose restrictions — funds must be used for a specific activity or initiative.
- Time restrictions — funds cannot be used until a future period or until a specified time requirement is met.
Endowments with donor-imposed requirements also fall into this category. If a donor requires the principal to be maintained, that restriction keeps the funds in “with donor restrictions.”
Until the restriction is satisfied, those resources remain in net assets with donor restrictions — even if the cash has already been received and deposited.
This structure answers where restricted funds sit on the financial statements. The next question is just as important: when does a restricted grant actually become revenue?
3. When Does a Restricted Grant Become Revenue?
Net asset classification answers where restricted funds are reported. The next question is just as important: when should a grant be recognized as revenue in the first place?
Under nonprofit accounting standards, the answer depends on whether the contribution is conditional or unconditional.
Most restricted grants that small nonprofits receive are unconditional contributions with donor restrictions. For example, if a foundation awards your organization $75,000 to support a specific after-school program, that revenue is recognized when the award is made or the funds are received — even though the money must be used for that defined purpose. It is recorded as revenue with donor restrictions and remains there until the purpose restriction is satisfied.
A conditional contribution is different. If the grant agreement includes a measurable barrier that must be overcome — such as serving a required number of participants, incurring qualifying expenses, or meeting performance benchmarks — and the donor retains the right to withhold or require repayment if those conditions are not met, the revenue is not recognized until the barrier is substantially met.
Until that point, any cash received is recorded as a liability, not revenue.
This distinction is important because restricted does not automatically mean delayed revenue recognition. A grant can be restricted and still recognized immediately — as long as it is unconditional.
Understanding whether a grant is conditional or simply restricted ensures that revenue is recorded correctly before it ever affects net assets.
Once revenue is recognized properly, the next step is making sure it moves correctly through the financial statements — especially when restrictions are satisfied.
4. How Restricted Funds Move Through the Financial Statements
Before looking at the flow of restricted funds, organizations using QuickBooks Online usually need to create a few accounts to track this activity properly. Because QBO was designed primarily for for-profit businesses, it does not automatically include the structure nonprofits need to report restricted funding.
In practice, organizations typically create accounts such as:
Revenue accounts
- Contributions – Without Donor Restrictions
- Contributions – With Donor Restrictions
- Net Assets Released from Restrictions
Equity account
- Net Assets – With Donor Restrictions
These accounts allow the organization to separate restricted contributions from unrestricted activity and record releases when donor restrictions are satisfied.
With that structure in place, the movement of restricted funds becomes easier to understand.
Let’s go back to the $75,000 after-school grant.
Assume the grant is unconditional, but the donor requires that the funds be used to support a specific program.
When the grant is received, the organization records the contribution as revenue with donor restrictions. Even though the cash has been deposited in the bank, those funds are not yet available for general operations. They represent resources that must still be used according to the donor’s instructions.
Now the program begins operating.
As the organization incurs expenses related to the after-school program — payroll, supplies, and program materials — those expenses begin to satisfy the donor’s restriction. When that happens, the organization records a release from restriction.
For organizations using QuickBooks Online, this release is typically recorded with a journal entry, often monthly or quarterly after reviewing program expenses.
The entry generally looks like this:
Debit
Net Assets – With Donor Restrictions
Credit
Net Assets Released from Restrictions
This entry reduces the restricted net asset balance and reflects that a portion of previously restricted funding has now been used as intended.
Using our example, if the organization spends $20,000 on the after-school program, that amount is released from restriction. Conceptually, the remaining restricted balance would be:
$75,000 original restricted grant − $20,000 used for the program = $55,000 still restricted
That $55,000 represents the portion of the grant that must still be used according to the donor’s instructions.
For organizations using QuickBooks Online, the Net Assets – With Donor Restrictions account may show a negative balance during the year. This happens because restricted contributions initially increase Net Income rather than equity. When a release from restriction is recorded, the entry reduces the restricted net asset account before that revenue has been closed into equity.
As a result, the overall change on the Statement of Activities will be appear unchanged. The release increases unrestricted activity while the related expenses decrease it, effectively offsetting one another. The negative balance in the Net Assets – With Donor Restrictions account is therefore temporary and reflects the timing of how QuickBooks handles closing entries rather than an error in the accounting.
At year-end, organizations typically record a reclassification entry that moves the restricted portion of the year’s activity into the Net Assets – With Donor Restrictions account so the balance sheet reflects the remaining restricted funds.
Using our example, the entry might look like this:
Debit
Retained Earnings (or Net Income after closing) — 75,000
Credit
Net Assets – With Donor Restrictions — 75,000
Because $20,000 was already released during the year, the balance in Net Assets – With Donor Restrictions would then reflect the remaining $55,000 that is still restricted.
Understanding how restricted funds move through the financial statements is important, but the real impact shows up in how leadership interprets and uses the organization’s financial information.
5. Why This Matters for Leadership and Decision-Making
Tracking restricted grants correctly is not just an accounting exercise. It directly affects how leadership understands the organization’s financial position.
When restricted funding is not tracked properly, the bank balance can create a false sense of financial flexibility. Cash may be available, but portions of it may still be committed to specific programs or future periods. Without clear tracking, leadership and boards may unintentionally make spending decisions based on funds that are not actually available for general use.
Properly recording restricted contributions and releases helps ensure that the financial statements reflect the organization’s true financial picture. It clarifies how much funding is still restricted, how much has already been used for its intended purpose, and how much is available for general operations.
It also improves communication with donors and funders. Many grants require reporting on how funds were used, and having a clear structure in the accounting system makes those reports easier to produce and easier to support if questions arise later.
Finally, this structure provides better visibility for long-term planning. When leadership can clearly see the remaining balance of restricted funding, they can make more informed decisions about staffing, program expansion, and future fundraising needs.
Restricted grants are a vital source of support for many nonprofits. When they are tracked properly, they not only satisfy donor requirements but also provide leadership with clearer insight into the organization’s financial health.
Final Thoughts
Restricted grants are an important source of funding for many nonprofits, but they also introduce responsibilities that go beyond simply depositing the check. Tracking how those funds are recognized, used, and released helps ensure that financial statements accurately reflect the organization’s resources and obligations.
When the structure is set up correctly, leadership can see more clearly which funds are still restricted and which resources are truly available to support operations. That clarity not only supports better decision-making but also strengthens accountability to donors and funders.