What it means
A donor may give money specifically for school meals, medical equipment or a building project, and the recipient must understand the actual terms before accepting the gift. A restricted donation can support valuable work, but it may not pay for general rent or salaries unless those costs fit the restriction.
The conditions should be documented in a grant letter, appeal wording or gift agreement, since a vague note such as "for children" can be hard to apply. Clarify eligible costs, dates, reporting, treatment of unspent balances and whether the donor may approve changes.
A donation can also have conditions under which the recipient must return it, and those should be distinguished from a simple purpose restriction. Finance should record restricted funds separately enough to show receipts, spending and the remaining balance, with the exact accounting presentation depending on the organisation's reporting framework and jurisdiction.
Do not assume that a bank account labelled "project" by itself proves the money was spent properly, because transactions need supporting evidence and a link to the donor terms. Managers should budget the full project, as a donor may fund equipment but not delivery, maintenance or staff training.
If the charity accepts a restricted gift without funding the other costs, it can create a cash strain despite receiving money, so a sensible acceptance review asks whether the organisation can meet the purpose and reporting duty. If circumstances change, do not silently redirect the balance.
Contact the donor or follow the lawful process for changing the restriction, with appropriate professional advice where needed, and remember that a project ending early does not turn the unused amount into general income automatically. For managers, the useful distinction is donor intent versus internal preference.
An internal budget allocation can usually be changed by the organisation's authorised decision-makers, whereas a donor-imposed restriction carries an obligation that needs separate respect and evidence.
In practice
Real-world examples.
Example
A donor gives $100,000 solely for school meals. The charity tracks meal purchases and related eligible delivery costs under the agreement rather than using the gift for unrelated office rent.
Example
A supporter gives a general gift and the trustees later choose to allocate it to meals. That internal choice does not, by itself, make the original gift donor-restricted.
Example
A grant for a training programme ends with an unspent balance. The organisation checks the agreement and obtains any needed approval before using or returning it.
Formula
Calculation
Restricted fund balance = opening restricted balance + restricted gifts received - eligible spending - amounts returned or otherwise released under valid terms.
Worked example. A charity starts with $20,000 restricted to a food programme, receives another $100,000 for the same purpose and spends $75,000 on eligible activity. Closing restricted balance = $20,000 + $100,000 - $75,000 = $45,000.
That is a tracking balance, not automatically available cash for other programmes. Confirm the terms and accounting treatment.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Harbour Meals, an invented charity. It received a fictional $200,000 gift for new kitchen equipment. The operations manager ordered ovens for $160,000 and planned to use the remainder to cover general fundraising salaries. The finance lead reviewed the donor letter and found that it covered equipment, installation and training, but not the general salaries. Harbour prepared a project budget, spent $25,000 on eligible installation and training and kept the remaining $15,000 marked for the restricted purpose.
It then asked the donor whether a related equipment-maintenance cost could be included, rather than moving money without approval. Its reports showed the gift, eligible spending and remaining balance separately. The donation was generous, but it did not remove Harbour's need to fund general operations. The charity used a clearer acceptance checklist for later gifts so programmes did not start with hidden unfunded costs.
Watch out
Common mistakes.
- Treating a donor-restricted balance as spare general cash. The giver's terms control the purpose and may require reporting or return.
- Confusing a board's internal earmark with a donor's restriction. They arise from different decisions and may have different accounting treatment.
- Accepting a gift for one cost without checking the unfunded costs needed to complete the project. A restricted grant can still create a cash gap.
Questions
People also ask.
Can a charity ever change a restriction?
It may be possible with donor consent or a lawful process, depending on the terms and jurisdiction. Do not change the use silently; obtain appropriate advice.
Must the funds be in a separate bank account?
Not necessarily. The organisation must track and use the funds properly under its obligations. A separate account can help but does not replace transaction-level records.
What happens if the project ends with money left?
Follow the gift agreement and applicable law. The balance may need donor approval for a different use or be returned; it does not automatically become unrestricted.
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