A restricted fund is a reserve of money that can only be used for specific purposes. Restricted funds provide reassurance to donors that their contributions are used in a manner they have chosen. When a donor gives money to a nonprofit organization or charitable company they must specify whether the gift is unrestricted and can be used for any purpose the organization sees fit. If the funds are temporarily restricted, they must be used for a specific purpose. With permanently restricted funds, the donation acts as principal on which interest can be earned (and only the interest is to be spent).

• Restricted funds comprises:
  • Restricted income funds
  • Endowment funds
• Restricted funds are funds subject to specific trusts which may be declared by the donor(s) or with their authority (e.g. in a public appeal) or created through legal process, but still within the wider objects of the charity.
• In restricted funds analysis, the restricted funds may be restricted income funds, which are expendable at the discretion of the governing board members in furtherance of some particular aspect(s) of the objects of the charity; or they may be capital (i.e. endowment) funds, where the assets are required to be invested, or retained for actual use, rather than expended
• In case of restricted funds analysis, the expenditure may be charged to a restricted fund only if funds have been received or there is a genuine anticipation of receipts that can properly be credited to the fund in order to meet the expenditure.
• Income generated from assets held in a restricted fund (e.g. interest) will be legally subject to the same restriction as the original fund unless either:
• The restricted fund is an endowment fund, the income of which is expendable at the discretion of the governing board members.

• The terms of the original restriction specifically say otherwise (for example, the expressed wishes of a donor or the terms of an appeal); or

Restricted funds has been categorized into two

• Temporarily Restricted
• Donors sometimes impose time-limited restrictions.
• Time-restricted means that the donation can be used for a particular purpose for a specified period or it must support a specific program or campaign.

When the time is up, or the project is done, the funds become unrestricted or stopped.

• Permanently Restricted
• Permanently restricted funds never expire. Usually, this means that the charity invests the gift and then uses the interest and investment returns in perpetuity.

Whatever type of restricted fund is set up, the nonprofit or charitable organization must keep track of it and report it appropriately in its financial statements