Nonprofit Bookkeeping: Restricted Funds and Donation Deposits

Nonprofit bookkeeping differs from business bookkeeping in one big way: some of the money in your bank account isn't free to spend on anything you like. Donor-restricted gifts must be tracked separately from unrestricted money, every donation deposit should trace back to individual donors, and the board needs to see both. Here's a practical setup for a small organization with a volunteer or part-time treasurer.

"We have $42,000 in the bank. Can we hire someone?"

Priya is the volunteer treasurer for a community food pantry in Tucson. At the Sep 2026 board meeting, a board member pointed at the bank balance and asked whether the pantry could finally hire a part-time coordinator.

Priya had to explain that the answer was "not really." Of the $42,000:

• $18,000 came from a local foundation grant restricted to buying a walk-in freezer
• $6,500 was raised in a spring appeal specifically for the summer kids' meal program, and $2,100 of that was still unspent
• That left about $21,900 actually available for general operations, which covered roughly four months of rent, utilities and supplies

The bank balance was accurate. It just didn't answer the question. That's why nonprofits track funds, not only accounts.

Restricted vs unrestricted: the plain-English version

Under US nonprofit accounting standards, net assets fall into two classes:

• Without donor restrictions. Money the board can use for any purpose within the mission. General donations, most event income, unrestricted grants.
• With donor restrictions. Money the donor said must be used for a specific purpose, or in a specific time period. The freezer grant. The kids' meal appeal. A gift "for next year's programs."

Some restrictions are permanent, like an endowment where only the investment income can be spent. Most small organizations don't have those, but if you do, get professional help.

A board can also set money aside on its own ("board-designated" funds, like an emergency reserve). That's still without donor restrictions, because the board can change its mind. Donors' restrictions are the ones you're bound to honor.

When restricted money gets "released"

Restricted money doesn't stay restricted forever. When you spend it on its intended purpose, the restriction is satisfied and the amount is released.

Here's how the pantry's freezer grant moves through the books:

The release is an accounting entry, not a bank transaction. The money already left the bank when you paid for the freezer. The release just tells your reports that the restriction has been met.

Small nonprofits often track this with a simple fund or class on each transaction, plus a spreadsheet summarizing each restricted gift: amount received, amount spent, balance remaining. That spreadsheet is the thing your board actually reads.

Donation deposits: where reconciliation gets tricky

Nonprofit deposits come in messy shapes, and every one needs to trace back to donors.

Online giving platforms

Online donation tools usually deposit a batch of gifts minus processing fees. If 40 people gave $2,860 through your donation page in a week and the platform kept $98.40 in fees, your bank gets $2,761.60.

Record it the same way any business would record a processor payout:

1. Record each donation (or the batch total) as contribution revenue at the full amount, $2,860
2. Record $98.40 as a fee expense
3. Match the $2,761.60 net to the bank deposit

Your donor records should show the full $2,860, since that's what donors gave. Recording only the net quietly undercounts every gift.

Checks and cash at events

Event nights produce a pile of checks and cash in an envelope. A simple control helps a lot:

• Two people count together and both sign a count sheet
• List each check by donor name and amount
• Deposit the whole amount, intact, within a day or two
• Match the deposit total to the count sheet

That count sheet is also how you'll know whether the $250 check from the Garcias was for general use or for the kids' meal program.

In-kind gifts

Donated food, supplies or professional services are real contributions, but they never hit the bank. Record them separately at fair value if your organization tracks them, and don't let them confuse your bank reconciliation. Valuing in-kind gifts has its own rules; it's a good question for your accountant.

A monthly close routine for a small nonprofit

Most small organizations run on volunteer time. Keep the routine short and repeatable.

• [ ] Download bank and card statements for the month
• [ ] Record online giving payouts gross of fees
• [ ] Match each event or mail deposit to a count sheet
• [ ] Tag every donation as restricted (with purpose) or unrestricted
• [ ] Tag every expense to a program, admin or fundraising, and to a restricted fund where it applies
• [ ] Record releases for restricted money spent on its purpose
• [ ] Reconcile the bank and any credit card to the statement
• [ ] Update the restricted funds summary: received, spent, remaining
• [ ] Prepare a one-page report for the board: cash, restricted balances, available funds

That last line matters most. Board members aren't accountants. Show them "Cash in bank: $42,000. Restricted: $20,100. Available: $21,900." and you've answered the question they really want answered.

Program, admin and fundraising: tag it now

Funders and donors increasingly ask how much of each dollar goes to programs. You can't answer that at year-end if nobody tagged expenses during the year. Agree on three buckets (program, management and general, fundraising), tag expenses as you categorize them, and split shared costs like rent using a reasonable, consistent method. Your accountant can refine the allocation later. Starting from tagged data is far easier than reconstructing it.

Mistakes we see often

• Spending restricted money on general costs because it was sitting in the same account. Track it, even if you don't open a separate bank account.
• Recording online gifts at net. Your donor thank-you letters and your books then disagree.
• No count sheet for event cash. Then nobody can prove what came in.
• Mixing a volunteer's personal reimbursement with donations. Reimbursements are expenses, paid out against receipts.
• Reconciling once a year. By then nobody remembers what the odd $75 deposit was.

Clean books also make your annual reporting and any audit or review far easier; your accountant or CPA handles the filings.

How HelloBooks helps

HelloBooks isn't a donor-management system, and it won't manage fund accounting for you automatically. It gives a small nonprofit a straightforward set of books: you can connect most US banks and credit cards for a live feed, or import a CSV statement where a connection isn't available. Categorize deposits and expenses, use descriptive accounts and memos for restricted gifts and program tags, and get a P&L, Balance Sheet and Cash Flow statement you can bring to the board.

Free costs $0 with no credit card and no expiry, includes two users (handy for a treasurer and a board member) and one live bank feed, with up to 200 transactions a year. That suits a very small group, and a busier organization will outgrow it. Starter ($14.99/month) adds AI auto-categorization, three bank connections and up to five users; check the pricing page for each plan's limits. Your volunteer bookkeeper or outside accountant can be invited into the same books. More on our nonprofit page and bank reconciliation software.

FAQs

What's the difference between restricted and board-designated funds?

Donor-restricted funds carry conditions set by the donor that you must honor. Board-designated funds are set aside by the board's own choice and can be changed by the board, so they remain without donor restrictions.

Do restricted donations need a separate bank account?

Usually not. What matters is tracking them in your books. Some organizations use a separate account for large restricted gifts to reduce the risk of spending them by accident.

Should online donations be recorded at the gross or net amount?

Gross. Record the full donation as revenue and the platform's fee as an expense. The net matches the bank deposit.

What does "releasing" a restriction mean?

When you spend restricted money on its intended purpose, the restriction is satisfied. You record a release that moves the amount from "with donor restrictions" to "without donor restrictions."

How often should a small nonprofit reconcile?

Monthly, before the board meeting. It keeps the numbers you present current and accurate.

Your donors trusted you with their gift. Clean books are how you show it.

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