The distinction comes down to donor intent. Unrestricted donations can be used for anything your organization needs. Restricted donations come with strings attached. The donor specified how the money must be used, and you’re legally obligated to honor that.

Tracking requires a system that separates these funds in your books without needing separate bank accounts. Most nonprofits use classes or funds in their accounting software to accomplish this.

In QuickBooks Online, set up a class for each restriction type. When a donation comes in marked for a specific program or purpose, assign that class to the transaction. When you spend money from that restricted fund, apply the same class. This lets you run reports showing exactly how much restricted money remains and how much has been spent against each restriction.

Some nonprofits prefer using separate accounts in their chart of accounts instead. One revenue account for restricted gifts, another for unrestricted. This works but gets complicated when you have many different restrictions. Classes are usually cleaner for most organizations.

Document donor intent at the time of the gift. If someone writes “for the building fund” on their check, save that check image. If the restriction comes from a grant agreement, keep that document linked to the transaction. When you’re audited or preparing financial statements, you’ll need to prove what restrictions existed and that you honored them.

The key moment is when the restriction gets fulfilled. Say a donor gave $5,000 specifically for your summer youth program. You track that as temporarily restricted. As you spend money on the program and meet the restriction, you “release” those funds. In accounting terms, this means reclassifying from temporarily restricted net assets to unrestricted net assets. Your software handles this through a journal entry.

Time restrictions work similarly. A multi-year pledge is temporarily restricted until each year’s portion becomes available. A gift designated “for use in 2025” stays restricted until that year arrives.

Watch for the difference between internal designations and donor restrictions. If your board decides to set aside money for a future project, that’s internally designated but not actually restricted. Only donor-imposed limitations create true restrictions with legal and accounting implications. The tracking and reporting requirements differ significantly.

Running restriction reports monthly helps you catch problems early. You don’t want to accidentally spend restricted funds on general operations and then scramble to replace them. A bookkeeping service familiar with nonprofit accounting can set up your tracking system correctly from the start and produce the reports your board and auditors need to see.