How to Track and Record Restricted Donations
Restricted donations play a vital role in helping nonprofits achieve specific goals, but they also come with additional responsibilities. Mismanaging these funds can lead to compliance issues, loss of donor trust, or even fines. Proper tracking and recording of restricted donations is essential to honoring donor intentions and maintaining financial integrity. Here’s how to do it right.
1. Understand Restricted Donations
Restricted donations are contributions with specific conditions set by the donor.
Types of Restrictions:
Temporarily Restricted: Donations that must be used for a specific purpose or within a certain timeframe (e.g., funding a new program).
Permanently Restricted: Donations that are invested to generate income for the organization, such as endowments.
Pro Tip: Always document donor restrictions in writing, whether it’s through a grant agreement, a donation letter, or an email confirmation.
2. Set Up a System for Fund Accounting
Fund accounting helps you track restricted donations separately from unrestricted funds.
Steps to Implement Fund Accounting:
Use your accounting software to create unique fund codes for each restricted donation.
Create separate accounts or sub-accounts for different programs or restrictions.
Track expenses and revenue for each restricted fund to ensure compliance.
Recommended Tools: QuickBooks Online, Xero, or Sage Intacct.
3. Record Donations Properly
Accurate recording ensures that restricted donations are used and reported correctly.
What to Include When Recording:
Donor name and contact information.
Amount of the donation.
Specific restrictions or intended purpose.
Any relevant timeframes for usage.
Pro Tip: Include notes about restrictions directly in your accounting software for easy reference.
4. Monitor and Track Spending
Every dollar spent from restricted donations should align with the donor’s intent.
Best Practices:
Regularly review expenses charged to restricted funds to ensure they match the purpose.
Use expense tracking software to allocate costs to specific funds.
Generate fund-specific reports to monitor remaining balances.
5. Reconcile Restricted Fund Accounts Monthly
Reconciling restricted funds ensures that your records match your bank statements.
What to Check:
Ensure all donations have been properly allocated to their respective accounts.
Verify that expenses align with donor restrictions.
Identify and correct any discrepancies promptly.
Pro Tip: Schedule reconciliations at the end of each month to stay on track.
6. Prepare for Reporting Requirements
Restricted donations often require specific reporting to donors or grantors.
What to Include in Reports:
How the funds were used, including detailed expense breakdowns.
Progress updates on programs or projects funded by the donation.
Any unused funds and plans for their future use.
Pro Tip: Create standardized report templates to streamline the reporting process.
7. Communicate with Donors
Transparency is key to building trust and maintaining strong relationships with donors.
How to Keep Donors Informed:
Send updates on the progress of programs funded by their donations.
Notify donors promptly if there are challenges meeting restrictions or timelines.
Share success stories to show the impact of their contribution.
Final Thoughts
Tracking and recording restricted donations doesn’t have to be daunting. With a robust system in place and a focus on transparency, your nonprofit can honor donor intentions, ensure compliance, and build long-term trust with supporters.
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