3 Types of Charitable Contributions and How to Identify ThemPosted on December 20th, 2017
Restricted donation or general support? Here are the three categories to consider when classifying your donations:
Unrestricted donations are contributions that do not have any donor-imposed requirements. These are commonly known as general contributions or operating support. You can spend these funds however you like.
Temporarily restricted contributions are donations with a directive from your donor that instructs you how to use the donation. Restrictions are usually time- or use-based. When you accept a restricted donation, you agree to spend the funds in line with your donor’s wishes.
- An example of a time-based restriction is when you receive a donation at the end of one fiscal year that is specifically for use in the next year.
- An example of a use-based restriction is when a donor gives you money to support a specific program activity, in which case you cannot use it to fund administrative or fundraising expenses.
Permanently restricted contributions are gifts that usually go to fund an endowment. These are funds that your organization will hold in perpetuity, using the principal to generate revenues to support your organization’s operations.
Why does donation classification matter so much?
Donations and grants are major sources of revenue for many nonprofits, so it is vitally important to properly identify and record contributions when they are received by your organization. Your finance committee or board of directors need to know the proper breakdown of income by revenue stream so they can make informed decisions about your nonprofit. Properly classifying contributions when they come in can also save your organization from unintentionally misappropriating funds (and being sued by angry donors).
To learn more about how to account for contributions, check out our other posts in the Nonprofit Contributions series.