Temporarily Restricted vs Permanently Restricted

Within restricted funds, there's an important distinction that affects how and when you can spend the money. Under the older accounting standards (which many nonprofit professionals still reference), restricted funds are categorized as either temporarily restricted or permanently restricted.

Temporarily restricted funds have conditions that will eventually be fulfilled. The restriction might be time-based ("use this money in fiscal year 2027") or purpose-based ("use this for your literacy program"). Once the condition is met — the time arrives or you spend the money on the designated purpose — the funds are "released from restriction" and effectively become unrestricted. This release shows up on your Statement of Activities as "net assets released from restrictions."

Permanently restricted funds are different — the donor has stipulated that the principal (the original gift amount) must be maintained forever. Only the investment earnings generated by that principal can be spent, and even then, often only for a purpose the donor specified. The most common example is an endowment. If a donor gives your nonprofit $1 million as a permanently restricted endowment for scholarships, you invest that $1 million and use the annual returns (say, 4-5%) to fund scholarships. The $1 million itself can never be spent.

Note: Under current accounting standards (ASU 2016-14), the terminology changed to "with donor restrictions" and "without donor restrictions," but the concepts remain the same.

Understanding this distinction is essential for accurate financial reporting and cash management. If you report $2 million in net assets but $1.5 million is permanently restricted endowment principal, your board needs to know that money is untouchable. Financial statements that don't clearly show this breakdown can give a dangerously misleading picture of your financial health.

For temporarily restricted funds, tracking when restrictions are released is critical for proper accounting. Recognizing revenue at the right time (when restrictions are met, not when the money arrives) ensures your financial statements accurately reflect your financial position.