What is the difference between temporarily restricted and permanently restricted donations?
The difference comes down to whether the donor’s restriction can eventually be fulfilled or whether it’s meant to last forever.
A temporarily restricted donation has conditions attached that will be met at some point. The donor gives money for a specific purpose (like buying playground equipment or funding a summer reading program) or for use during a specific time period (like “for operations in 2025”). Once the nonprofit spends the money on that stated purpose or the time period arrives, the restriction is considered released. The funds move from restricted to unrestricted on your financial statements. Common examples include grants for specific programs, capital campaign gifts earmarked for a building project, and donations restricted to a particular fiscal year.
A permanently restricted donation is one where the donor intends for the principal to remain intact indefinitely. The nonprofit can invest the money and use the investment earnings, but the original gift amount can never be spent. Endowments are the most common example. A donor gives $100,000 with instructions that the principal stays invested and only the returns can fund scholarships. That $100,000 remains on your books as permanently restricted forever.
The accounting standards changed this terminology in 2018. Under ASU 2016-14, nonprofits no longer use three categories (unrestricted, temporarily restricted, permanently restricted). Instead, net assets are reported in two categories: “with donor restrictions” and “without donor restrictions.” The “with donor restrictions” bucket combines what used to be temporarily and permanently restricted. Your financial statements should still disclose the nature and timing of restrictions in the notes, but the face of the statement uses the simplified two-category approach.
From a bookkeeping standpoint, you still need to track each restricted gift individually even though the statement presentation is simpler. You need to know what the restriction is, when or how it can be released, and whether it’s time-bound or perpetual. When you spend money on a purpose that matches a temporarily restricted gift, you record a reclassification (a “release from restriction”) that moves those dollars into the without-donor-restrictions column. For permanently restricted funds, you only release the investment income, never the principal.
Getting this wrong creates real problems. Spending permanently restricted funds violates donor intent and can have legal consequences. Failing to release temporarily restricted funds when the conditions are met understates your unrestricted net assets and makes your financial position look worse than it actually is. Both scenarios affect donor confidence and complicate audits or grant reporting.
If your nonprofit receives restricted donations regularly, your chart of accounts needs to support tracking by restriction type and by individual donor or grant. This is true whether you’re a Phoenix-based charity or a foundation anywhere in the Valley. It’s not something you can easily reconstruct after the fact, so getting the tracking right from the start saves significant time during year-end reporting. Much like healthcare practice bookkeeping services require specialized knowledge of insurance reimbursements and billing cycles, nonprofit bookkeeping demands careful attention to fund accounting and donor restrictions. The underlying principle is the same: you need someone who understands how money flows through your specific type of organization.
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