For many non-profit organizations, the contributions received directly from donors are the funds that help keep the lights on and support the day-to-day operations. However, many of these contributions have donor restrictions. Just like during year-end reporting, it is important that organizations properly track all funds received and use those funds in accordance with any specified restrictions.
Restricted contributions are funds received for a specific purpose designated by the donor. They could be temporary or permanent in nature. Legally, donors have the right to attach restrictions on the funds they contribute and can require those funds to be used for a specific purpose. If an organization fails to honor the restrictions specified by the donor, the organization could be subject to legal action and could also face penalties from the IRS, including potential loss of their exempt status.
To avoid potential penalties and legal action, it is important for organizations to have policies and practices in place for tracking donor restricted funds. Here are four practices that could be used to ensure donor restricted funds are being properly tracked and utilized by an organization.
Separate general ledger accounts
Recording restricted funds to a separate general ledger account allows transactions related to the specified purpose of those funds to be captured separately and will assist in tracking to make sure those funds are used in accordance with the restrictions.
Separate bank accounts
Specifically for permanently restricted funds or restricted funds with large or multiple transactions, having separate bank accounts for these funds helps the organization to capture those transactions in the correct classes more efficiently and will assist in making the year-end closing process run smoothly.
Monthly review and reconciliation
An organization that receives restricted funds should be tracking the use of and reconciling these funds monthly. This process will allow the records to be up to date throughout the entire year and will confirm funds are being used in accordance with their restrictions. The reconciliation should also be reviewed and shared with the board of directors to report on the usage of the funds.
Annual review of spending policies
Specifically for permanently restricted funds in endowments, the spending policy for those funds should be reviewed on an annual basis. The spending policy of an endowment will note the amounts that are to be distributed on an annual basis for spending purposes. An annual review of the spending policy ensures the organization is correctly adhering to the guidelines and is distributing the correct amount during the year.
Organizations should strive to make sure they are honoring the restrictions designated by their donors for restricted funds received. Any of the above practices has the potential to assist in this matter and improve the overall process for recording these funds.
Please contact us if you have questions about the information outlined above, our seasoned and experienced nonprofit professionals are here to help. You can also learn more about our Nonprofit services by visiting our website.
About the Author
Erin joined McKonly & Asbury in 2017 and is currently a Manager with the firm. She is a member of the firm’s Audit & Assurance Segment, primarily working with clients in the healthcare, nonprofit, and affordable housing industrie… Read more