A question came through my in-box a while ago and made me realize that I should clarify some terms that I think we hear a lot in nonprofits.  Here is the main part of the email:

When a member joins our nonprofit they are required to provide a membership fee which is refundable in full if they move out of the neighborhood. Because these fees are refundable (i.e., deposits), would they be considered restricted funds?

The short answer is no, and for several reasons. #1 – the monies received were probably not contributions with any donor restrictions on them so would not be restricted funds. #2 – These sound like deposits that they have to hold onto and not spend so they can give them back if need be. That would not be considered income so could not be restricted.

Restricted is a word we hear quite a bit in nonprofits when it comes to money. So is unrestricted, conditional, temporarily restricted among others, and with the above email in mind I thought I would define a few terms.

Restricted — as in restricted income, restricted donations, restricted revenue. The world of nonprofit accounting is made a touch more complex because donors can tell us exactly what they would like us to do with the money they give us. They can restrict the use of the funds for specific purposes. “I like your organization and I want to give you money to operate this program.” That is a restricted donation. Your nonprofit is given money for a purpose that is narrower is scope than your organizations overall purpose. You can ask for restricted donations, “Please help our organization by giving money to support this program.” The donor imposes any restrictions on the funds they give you. If they don’t the donation would be considered unrestricted. Earned revenue is unrestricted. Most government money is unrestricted – they are not giving you any money, they are hiring you to perform a service and will only pay you if you perform the service.

Conditional — not the same as restricted. Conditions are imposed by donors on funds they want to give you. Matching funds are a common example; you’ll get $20,000 if you raise $10,000. Even if you already have the $20,000 sitting in the bank it is not yours (it is in fact a liability — money you owe someone else) until you raise the other $10,000 and satisfy the conditions of the grant.

I’ll do some more terms in later posts but if you have any questions about the above items or have other question, use this form or leave them in the comments section below.

Thanks,

Alan