Not for profit organizations, such as charities, churches, and universities, follow generally accepted accounting principles (GAAP) in how they record and report revenue activities. Basically, non-profits generally earn revenue through contributions or exchange transactions. Contributions are donations or other forms of value freely given to a non-profit entity without a reciprocal exchange of value.
Contributions can include cash gifts, property gifts, investment gifts, reductions in the liabilities of the organization, and certain kinds of volunteered services. Exchange transactions are more business-like transactions where a non-profit receives cash or property for performing a service or selling a good. We will go into detail about what donated services are considered to be contribution revenue and how exchange transactions differ from contributions in a later posting.
According to generally accepted accounting principles articulated by the Financial Accounting Standards Board (FASB), contributions are generally classified into three types and must be so classified in the accounting records and reported on the financial reports of the non-profit entity. Contributions are classified as being unrestricted, temporarily restricted, or permanently restricted.
Unrestricted contributions are contributions received where the donor does not place any restriction on the timing or purpose on the use of the contributed funds. These are classified under unrestricted net assets on the balance sheet and may be used for any purpose allowed by the non-profit's by-laws.
Temporarily restricted contributions are contributions received with either a time-based restriction, a specified use restriction, or a combination of the two. An example of a time-based restriction is a donor that gives money to a charity in 2018 with a stated restriction that that money is not to be used until 2019. An example of a specified use restriction is a person who donates money to a church specifies that the donation is to be used for the youth group. An example of both a time-based and specified use restriction would be someone that donates to the American Red Cross who stipulates that their donation (given in 2018) is intended to be used in 2019 for a disaster relief operation.
Permanently restricted contributions are contributions made that are never meant to be spent by the organization. They are typically given in the form of an investment where the principle cannot be touched but the interest or dividends can be used by the organization. The donor can further stipulate whether or not the interest gained from the investment is unrestricted or temporarily restricted in some manner. Universities commonly have permanently restricted funds that gain interest for their use. Permanently restricted funds are also known as endowments.
Keeping track of restricted contributions and upholding the fiduciary duty to only use contributions in their intended use can be a difficult task for a non-profit. A strong dedication to financial accounting is a solid answer that can help a non-profit fulfill their mission and being fiscally responsible to their donors.