What is the Release from Restriction Concept in Nonprofit Accounting?

In nonprofit accounting, the release from restriction concept refers to the process of moving funds from temporarily restricted net assets to unrestricted net assets when donor restrictions are fulfilled or expire. When a nonprofit organization receives donations with donor-imposed restrictions, the organization cannot use those funds for general operating purposes until the restrictions are met. Once the restrictions are fulfilled, the organization can release those funds from the temporarily restricted net assets and move them to the unrestricted net assets, making them available for use in the organization’s operations. This process is often tracked through the use of accounting software and is an important part of managing the financial health of a nonprofit organization.

Example of a Release from Restriction

Let’s say a nonprofit organization receives a donation of $10,000 with a restriction that it must be used for a specific program. The organization records the donation as temporarily restricted net assets because the donor has restricted its use.

Over time, the nonprofit spends $5,000 on the program, leaving $5,000 of the donation still restricted. If the donor then releases the restriction, the nonprofit can now use the remaining $5,000 for any purpose it sees fit.

At this point, the organization records a release from restriction of $5,000, which is then recorded as unrestricted net assets. This release from restriction represents the donor’s release of the restriction on the use of the donation and allows the nonprofit to use the funds for other programs or general operations.

What is the Journal Entry to Move Funds from Restricted to Unrestricted?

The journal entry to move funds from restricted to unrestricted depends on the specific transaction and the organization’s accounting policies. However, here is an example of a journal entry to release temporarily restricted net assets:

Debit: Temporarily Restricted Net Assets – Scholarship Fund $10,000

Credit: Unrestricted Net Assets $10,000

This entry indicates that $10,000 has been released from the temporarily restricted scholarship fund and added to the organization’s unrestricted net assets. It is important to note that this is just an example and that the specific accounts used and amounts will vary depending on the transaction. It is also important to consult with a qualified accountant or financial advisor to ensure that all journal entries comply with accounting standards and regulations.

How Do Restricted and Unrestricted Funds Appear on the Net Assets Section of a Balance Sheet (Statement of Financial Position)?

Unrestricted net assets $150,000
Temporarily restricted net assets $50,000
Permanently restricted net assets $100,000
Total equity (Total Net Assets) $300,000

In this example, the nonprofit has $150,000 in unrestricted net assets, meaning these funds can be used for any purpose by the organization. They also have $50,000 in temporarily restricted net assets, which are funds that have been donated with specific restrictions on their use, but will become unrestricted once those restrictions have been met. Additionally, the nonprofit has $100,000 in permanently restricted net assets, which are funds that have been donated with permanent restrictions on their use, such as endowment funds that must be invested to generate income for a specific purpose in perpetuity.

Together, the unrestricted, temporarily restricted, and permanently restricted net assets make up the total equity of the nonprofit, which in this example is $300,000.

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: https://accountinghowto.com/about/

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