Fund Accounting for Non-Profits: Restricted vs. Unrestricted, Explained

The single biggest difference between non-profit books and business books is this: in a business, profit is yours. In a non-profit, a lot of the money comes with strings. A grant is given for a program. A donation is designated for the roof. That money is restricted — and spending it on something else, or just losing track of it, is how organizations lose a funder’s trust (and sometimes the funding). Fund accounting is how you keep it straight.

Restricted vs. unrestricted

• Unrestricted funds — general operating money you can use for any purpose that furthers your mission.
• Restricted funds — money a funder or donor has earmarked for a specific program, project or period. It has to be used that way and reported separately.
• Endowment funds — contributions meant to be held, with only the investment income (or a portion) available to spend.

Keeping these apart — by fund, not in one pot — is what lets you answer the two questions every board and grantor asks: did the restricted money get used for its purpose, and how much unrestricted money do we actually have?

The ASNPO choice: deferral vs. restricted fund method

Canadian non-profits follow the accounting standards for not-for-profit organizations (ASNPO, Part III of the CPA Canada Handbook), which give you two methods to recognize restricted contributions. You pick one:

• Deferral method. A restricted contribution for a future period’s expenses is deferred — recorded as a liability — and recognized as revenue in the period you incur the related expense. Unspent restricted money sits on the balance sheet, not in revenue. It’s often simpler and is common for smaller organizations with few restricted gifts.
• Restricted fund method. A specialized form of fund accounting: you report a general fund, at least one restricted fund, and an endowment fund, and restricted contributions go straight into the matching restricted fund as revenue. If a restricted contribution has no matching fund, it falls back to the general fund under the deferral method.

Choosing well matters: the restricted fund method shows fund balances clearly but adds complexity; the deferral method is lighter but reports everything in one set of statements. The right choice depends on how many restricted streams you run and what your funders want to see.

What good fund accounting gives your board

• Grant reporting that reconciles. Each grant’s spending ties back to your books, so funder reports aren’t a year-end reconstruction.
• A real view of free cash. Separating restricted from unrestricted stops the classic mistake of thinking you have money you’ve actually committed.
• Clean year-end. Fund-level numbers flow straight into your T3010 or financial statements.

We set this up in QuickBooks using classes or locations so each fund reports on its own, and we match the method to your organization. See non-profit bookkeeping or talk to us. General information, not advice for your organization’s financial statements.

Frequently asked questions

Sources

• CPA Canada Handbook – ASNPO Section 4410, Contributions – revenue recognition (deferral and restricted fund methods)
• BDO Canada – ASNPO update and contributions guidance
• CPABC – Fund accounting, restricted fund method and deferral method
• CRA – Books and records (registered charities)

Keep reading

• Registered Charity vs. Non-Profit (NPO) in Québec: Which One Are You, and What Must You File?
• The Non-Profit Treasurer’s Guide: What the Board Needs From You
• The T3010 Charity Return: Deadline, What It Reports, and How to Avoid Revocation
• Month-End Close Checklist for Small Businesses (2026)