The balance that is not yours to spend
Your organisation has 400,000 dollars in the bank and a board asking why you are worried about payroll. The answer is that 310,000 of it is restricted: a foundation grant for a specific programme, a capital campaign fund, and donations given for a named purpose. Spending any of it on general operations is, at best, a serious compliance problem.
Commercial accounting has no concept for this. Fund accounting exists precisely to answer the question a nonprofit balance sheet must answer: how much of this money are we actually free to use?
The two categories that matter
Under current standards, net assets split into two classes: those without donor restrictions and those with. Within the restricted class, it is worth tracking two further distinctions internally.
- Purpose restrictions limit what the money may be spent on. A grant for youth programming cannot fund the heating bill, even if the building houses that programme.
- Time restrictions limit when it may be spent. A pledge for next fiscal year is revenue now but cannot be spent now.
- Board designations look like restrictions but are not. A board-designated reserve is unrestricted money the board has chosen to set aside, and the board can undesignate it. Reporting it as restricted overstates your constraints.
Where organisations get it wrong
Recognising grant revenue on the wrong date
A conditional grant, one with a measurable barrier and a right of return, is not revenue until the condition is met. An unconditional multi-year pledge is revenue in full when promised, with the future portion restricted by time. Getting these backwards distorts the current year badly in either direction.
Not releasing restrictions when spending happens
When restricted money is spent on its purpose, the amount must move from restricted to unrestricted through a release entry. Organisations that skip this show restricted balances that never decline, while unrestricted funds appear to be covering everything.
Allocating overhead inconsistently
Functional expense reporting requires splitting costs across programme, management and fundraising. The allocation method must be reasonable, documented and applied consistently. Shifting the basis between years to improve the programme ratio is visible to anyone comparing filings.
What the board actually needs to see
A statement of financial position alone is not enough. Boards make better decisions with a short schedule showing, for each restricted fund, the opening balance, additions, releases and closing balance, alongside a clear figure for unrestricted operating cash and how many months of expenses it covers.
That last number is the one that prevents the most damaging conversations, because it separates total cash from available cash.
Audit and filing readiness
Organisations above certain thresholds face audit requirements, and those spending significant federal money face additional scrutiny. Auditors test whether restrictions were tracked and honoured throughout the year, which cannot be reconstructed afterwards from a general ledger that never distinguished them. The structure has to be in place as transactions happen.
TallyWise provides this as part of our nonprofit accounting services. Book a call to talk through your situation.
