Key Takeaways
- Under GAAP and ASC 958 (Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 958), churches must classify all net assets as either with donor restrictions or without donor restrictions, and the distinction carries legal weight.
- Misusing donor-restricted funds exposes church leadership to lawsuits, IRS penalties, and potential loss of tax-exempt status.
- The language in a donation solicitation determines fund classification. How a church asks for gifts is an accounting decision, not just a fundraising one.
- Board-designated funds are not legally restricted, which is a distinction many church finance committees misunderstand.
- Strong fund tracking requires separate fund codes, documented release entries, and consistent board reporting.
When a donor writes a check specifically for your building campaign, that money is no longer yours to allocate freely, regardless of what the general fund needs.
Understanding the difference between restricted vs. unrestricted funds is a consequential accounting decision for your church, and it’s easy to get it wrong.
What Are Church Restricted Funds?
Under Generally Accepted Accounting Principles (GAAP), nonprofits must classify net assets as either with donor restrictions or without donor restrictions.
Church restricted funds fall into the first category. They represent contributions where the donor has explicitly tied the gift to a specific purpose, program, or time period.
Restrictions originate in two ways.
- The first is a solicited campaign. Here, your church launches a capital drive for a new fellowship hall, donors give in response, and those funds are restricted to that project by the act of acceptance.
- The second is an unsolicited designation, where a donor decides on their own to earmark a gift for a specific purpose. If the church accepts that designation, the gift becomes restricted. The church always has the option to decline a restricted gift before accepting it.
Once restricted, that restriction is permanent. You can’t redirect the funds to other purposes. Improper use of restricted funds can result in severe penalties or even loss of tax-exempt status.
The path to redirecting restricted funds, when truly necessary, runs through the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which every state except Pennsylvania has adopted. Under UPMIFA, restricted funds may only be redirected if it is deemed unlawful, impracticable, impossible to achieve, or wasteful to fulfill the donor’s restriction, and proving one of these criteria can be challenging.
What Are Church Unrestricted Funds?
Church unrestricted funds are net assets without donor restrictions.
General Sunday offerings, tithes, event revenue, and most program fees fall into this category. These funds give leadership the operational flexibility to respond to needs as they arise, such as covering payroll, maintenance, staffing, and ministry expenses that don’t fit neatly into a designated campaign.
The most important distinction here is one that many church finance committees misunderstand: board-designated funds are not legally restricted. When a board votes to set aside $75,000 as an operating reserve or facilities fund, those dollars remain legally unrestricted.
A nonprofit is free to set aside a portion of general operating revenue for any number of reasons and may even create policies to make it difficult for those funds to be used for any other purpose, but those funds are not truly restricted in the legal sense.
Restricting the use of funds is not the same as restricted funds.
This matters for audit purposes, for board reporting, and for how funds appear on your statement of financial position. Mislabeling board-designated dollars as restricted overstates the constraints on your assets and distorts the picture your leadership sees when making financial decisions.
Restricted vs. Unrestricted Funds: A Side-by-Side View
The chart below summarizes the key differences church administrators and finance committee members need to understand.
| Dimension | Restricted Funds | Unrestricted Funds |
| Source | Donor-designated gifts, solicited campaigns | General offerings, tithes, program fees |
| Legal binding | Donor intent is legally enforceable | No, board-designated funds remain flexible |
| GAAP classification | Net assets with donor restrictions (ASC 958) | Net assets without donor restrictions (ASC 958) |
| Accounting treatment | Tracked separately; released only when restriction is met | Available for any organizational use |
| Financial statement reporting | Reported separately on statement of financial position | Reported separately on statement of financial position |
| Redirection process | Requires donor consent or court approval under UPMIFA | Board authority sufficient |
| Form 990 implications | Disclosed; restrictions must be described | Reported as general net assets |
The table reflects the two-category classification system that ASU 2016-14 (Accounting Standards Update (ASU) 2016-14, issued by FASB in 2016) introduced, replacing the previous three-class system of unrestricted, temporarily restricted, and permanently restricted net assets to make it easier for readers of financial statements to understand donor-imposed limitations. Churches operating under older frameworks or legacy software should verify their chart of accounts reflects current GAAP language.
How You Ask for Donations Changes Everything About Fund Classification
For church administrators, the language of a solicitation is both a communications decision and an accounting one. The way your church asks for a donation determines whether those funds become restricted vs. unrestricted funds under nonprofit accounting standards, and that classification follows the gift permanently.
Consider three scenarios that play out in Ohio churches regularly:
- A general Sunday offering with no stated purpose is unrestricted.
- A capital campaign that asks donors to support a specific building project creates restricted funds upon acceptance.
- An unsolicited check from a longtime member with “youth ministry only” written on the memo line is also restricted the moment your finance office deposits it without returning it to the donor.
To avoid misusing donor funds, consider including a disclaimer in campaign materials that the church reserves the right to redirect funds in specified circumstances. Doing so limits unintended restrictions from unsolicited designations.
Or if a donor designates a gift that doesn’t align with a current need, contact the donor before depositing the check and ask if the restriction can be lifted. Most donors are trying to help the organization and would be amenable to your request.
Tips To Accurately Track Church Accounting Restricted Funds
Accurate fund classification means nothing without a system to enforce it. Church accounting restricted funds require structural controls that make misuse easier to prevent or detect and produce clean records for your auditor and your board.
Fund accounting differs from standard bookkeeping in a foundational way. Rather than tracking a single pool of cash with departmental cost codes, fund accounting assigns each restricted gift its own fund, with its own balance, its own allowable expenditures, and its own release entry when the restriction is fulfilled.
At minimum, your tracking system should include:
- A unique fund code for each active restriction
- Documented journal entries when restrictions are released
- A quarterly fund status report for your finance committee
- A reconciliation of restricted fund balances to your annual audit
Why Care About Accurate Restricted Fund Tracking?
All of the controls above will help you significantly come audit season for your church.
Form 990 reporting also depends on accurate fund classification. Net assets with and without donor restrictions are reported separately, and auditors review the footnotes for consistency between restriction descriptions and actual expenditure patterns. Misclassification here creates both compliance risk and reputational exposure with major donors reviewing your public filings.
Rea’s not-for-profit advisors work directly with Ohio churches on fund accounting structure, audit preparation, and internal controls. This is the operational infrastructure that makes sound fund management sustainable over time.
Protect Donor Trust Through Accurate Fund Accounting
Sound fund management is stewardship made visible.
When your church tracks restricted vs. unrestricted funds correctly, you demonstrate to your congregation, and to every current and prospective donor, that designated gifts land exactly where they were intended.
Doing so creates trust that shows up in annual giving, capital campaign outcomes, and the willingness of major donors to make planned gifts.
Rea’s not-for-profit team brings deep experience with church accounting restricted funds, GAAP-compliant financial reporting, and the internal control structures that protect your leadership from personal liability.
Contact Rea’s not-for-profit team to talk through your church’s fund accounting structure and where you might be carrying risk you haven’t mapped.
About the Author
Sophia Sedensky is an Audit Supervisor at Rea, where she works with not-for-profit organizations, including Ohio churches and faith-based ministries, on fund accounting structure, audit preparation, and financial reporting. With nearly six years at Rea and a background in public accounting, Sophia brings a practical, relationship-oriented approach to the compliance and stewardship questions that church finance committees face.
To connect with Sophia or learn more about Rea’s not-for-profit services, contact our team directly.
