Restricted Funds
Donations or grants that must be used for a specific purpose as defined by the donor or grantor.
Definition
Restricted funds are financial resources given to a nonprofit with donor-imposed limitations on how they may be spent. Restrictions can be temporary (time-limited or purpose-specific) or permanent (endowments where only earnings are spent). Proper tracking of restricted funds is a core fiduciary obligation.
Why It Matters
Misusing restricted funds can result in legal action, loss of tax-exempt status, and reputational damage. AP must ensure that expenditures from restricted funds comply with donor intent.
Examples
Purpose restriction
A $100,000 donation restricted to "youth programs" can only fund expenses directly related to youth programming.
Time restriction
A pledge of $50,000 per year for 3 years. Each year's amount becomes available for use only in its designated year.
How Nexus AP Helps
Nexus AP enforces fund restrictions by flagging invoices coded to restricted funds that do not match the fund's allowed expense categories.
Start Free TrialFrequently Asked Questions
What is the difference between temporarily and permanently restricted funds?
Temporarily restricted funds have conditions that will be met (time or purpose). Permanently restricted funds (endowments) preserve the principal indefinitely; only earnings are spent.
Can restricted funds be used for overhead?
Only if the restriction specifically allows it. Most purpose-restricted gifts cannot fund general overhead unless the donor agreement permits it.
Category
nonprofitRelated Terms
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