NFPs - Types of Monetary Donations
Not-for-profit organizations (NFP) are largely supported by donations, contributions, and grants from the public and/or government. When a donor gives a NFP money, there are different ways this money can be recorded and used based on the wishes of the donor.
The most common type of donation is an unrestricted donation. An unrestricted donation occurs when a donor gives money to the NFP and would like the NFP to use the money for any purpose related to the organization's mission. The NFP would record this as an unrestricted donation and is able to use this money for operating expenses. An example of this type of donation occurs if an individual gives money to a Humane Society for their general fundraising event. This money can used by the Humane Society for any purpose they see fit, whether it be for paying employees, paying rent, or buying dog food, as long as it's an expense that supports the organization's mission.
When the donor restricts the donation's use, this donation will fall into one of two categories, temporarily restricted donation or permanently restricted donation. Temporarily restricted donations are donations that are restricted for a specific project/program or restricted by time. An example of this type of donation is if a donor gives $100,000 to a school and says that they would like it to be used to assist with tuition for the next five years. When this donation is initially received, the entire $100,000 is recorded as a temporarily restricted donation. In the five years that follow, the school would take $20,000 out of temporarily restricted net assets and release it into unrestricted net assets. This money may also need to be set aside in a separate bank account in some cases, it depends on the desires of the donor.
The other type of restricted donation, permanently restricted, is a monetary donation where the principal is invested and only the income it earns is used by the NFP. The NFP receives the money and invests it into an endowment fund. An endowment fund is an investment fund set up by the NFP that is usually overseen by money managers who invest in stocks and bonds. The NFP is then allowed to use the investment income that comes from the endowment fund for either general operating expenses or a specific project that the donor requested. Since just the investment income is allowed to be used, endowment funds usually grow into millions of dollars.
Allowing donations to be restricted for specific purposes is comforting to some donors who want to make sure their money is being used the way they intended. Other donors are comfortable with letting the NFP decide the best way to use their donation. Either way, the NFP's mission is the winner. If you have any questions on donations or for more information on how we can help your non-profit organization, give us a call.