How to Funds Move from Restricted to Unrestricted in Nonprofits

The accounting treatment of unrestricted funds as conditions for release are met involves recognizing and reclassifying these funds from temporarily restricted net assets to unrestricted net assets in a nonprofit organization’s financial statements. This process occurs when the restrictions placed on a contribution or grant are fulfilled or the conditions for release are satisfied. Here’s an explanation of how this accounting treatment works:

  1. Initial Receipt and Classification:
    • When a nonprofit receives a contribution or grant, the funds are initially recorded and classified as temporarily restricted net assets on the balance sheet. This classification indicates that the funds are subject to specific restrictions or conditions.
  2. Conditions for Release:
    • Unrestricted funds typically become subject to restrictions due to donor-imposed conditions, such as a specified time frame or purpose. When these conditions are met, the funds are eligible to be reclassified as unrestricted.
  3. Evaluation and Approval:
    • Before reclassifying the funds, the nonprofit must evaluate and ensure that all conditions for release have been met. This process may involve reviewing documentation, verifying compliance, and obtaining appropriate approvals.
  4. Reclassification to Unrestricted:
    • Once the conditions for release are confirmed, the nonprofit updates its financial records to reclassify the funds from temporarily restricted net assets to unrestricted net assets.
  5. Financial Statement Reporting:
    • The reclassification is reflected in the nonprofit’s financial statements. The statement of activities (income statement) and the statement of financial position (balance sheet) are adjusted to show the change in net asset classification.
  6. Statement of Activities:
    • In the statement of activities, the release of restrictions is reported as an increase in unrestricted revenue. This reflects the addition of funds that are now available for general use.
  7. Statement of Financial Position:
    • On the balance sheet, the reclassification is shown by decreasing the temporarily restricted net assets and increasing the unrestricted net assets by the same amount. This adjustment reflects the change in the organization’s financial position.
  8. Disclosure and Transparency:
    • Nonprofits should provide clear and transparent disclosures in the notes to the financial statements, explaining the nature of the conditions for release, the specific funds affected, and the impact of the reclassification on the organization’s financial position.
  9. Internal Controls and Documentation:
    • Maintaining strong internal controls and proper documentation is essential throughout this process to ensure accuracy, compliance, and accountability.
  10. Impact on Reporting:
    • Reclassifying funds from temporarily restricted to unrestricted can impact financial ratios, such as liquidity and program efficiency, as well as overall financial stability.

It’s important for nonprofits to carefully track and document the fulfillment of conditions for release to ensure accurate and compliant accounting treatment. Properly managing the reclassification process helps nonprofits maintain transparency, demonstrate their responsible stewardship of funds, and provide clear financial reporting to stakeholders.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit:

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