Unrestricted fund balance is critical in accounting for government and nonprofit organizations.
It represents the portion of a fund balance that is not subject to any legal or contractual restrictions on its use, making it an important measure of an organization’s financial flexibility.
In this article, we will define unrestricted fund balance, describe the five types of fund balances, and explain how organizations account for unrestricted fund balance.
An unrestricted fund balance is the portion of a fund balance available for general use, without legal or contractual restrictions. This means that the resources can support the organization’s operations or meet its obligations as they come due.
Unrestricted fund balance is essential to an organization’s financial position, as it reflects the resources available to support ongoing operations and meet future obligations.
Types of Fund Balances
Five types of fund balances are commonly used in accounting for government and nonprofit organizations.
- Non-spendable fund balance: resources that cannot be spent, such as inventory or prepaid expenses.
- Restricted fund balance: resources subject to legal or contractual restrictions on their use, such as grants or donations that are earmarked for a specific purpose.
- Committed fund balance: resources committed to a specific purpose by a government’s highest level of decision-making authority, such as a city council or board of directors.
- Assigned fund balance: resources designated for a specific purpose by a lower level of authority within the organization, such as a department manager or program director.
- Unrestricted fund balance: resources available for general use and not subject to any legal or contractual restrictions.
How to Account for Unrestricted Fund Balance?
To account for unrestricted fund balance, the organization should record it as a separate line item on its balance sheet or statement of net position.
This allows stakeholders to see how much of the organization’s resources are available for general use.
By disclosing the unrestricted fund balance separately, the organization can communicate its financial flexibility and ability to meet its obligations to stakeholders.
Monitoring Unrestricted Fund Balance
Organizations must monitor their unrestricted fund balance to ensure that it is sufficient to support their operations and meet their obligations.
If the unrestricted fund balance is too low, the organization may need to increase revenue, reduce expenses, or restructure its operations to improve its financial position.
Conversely, if the unrestricted fund balance is too high, the organization may consider investing the excess resources to earn a return on investment.
What is the unrestricted fund balance for a nonprofit?
Unrestricted fund balance for nonprofit organizations refers to the portion of net assets not subject to donor-imposed restrictions.
In simpler terms, it is the amount of money the organization has available for any purpose without any limitations or conditions attached.
This type of fund balance is often used to cover operating expenses, make investments, or build reserves for future needs. It can also be used to fund new programs or initiatives that are not covered by other sources of revenue.
Nonprofit organizations must maintain a healthy unrestricted fund balance, as it provides a cushion for unforeseen expenses and allows the organization to respond to new opportunities or challenges.
A healthy fund balance also provides financial stability and sustainability, which can help the organization weather economic downturns or other disruptions.
However, maintaining an excessively high unrestricted fund balance can also be problematic. It may suggest that the organization needs to invest more in its mission or that it needs to be using its resources efficiently.
It can also signal to donors or funders that the organization needs a clear plan for using its resources effectively.
Nonprofit organizations must maintain a healthy unrestricted fund balance and use their resources to advance their mission effectively.
This requires careful financial planning, budgeting, reporting, and ongoing monitoring and evaluation of the organization’s financial performance.
What is the difference between restricted and unrestricted funds?
Restricted and unrestricted funds refer to the different types of money non-profit organizations receive and how they can use them.
Restricted funds are funds that come with specific conditions or restrictions attached to them by the donor or funder. These restrictions may dictate how the funds are to be used when they can be used, and for what purpose. For example, a donor may specify that their donation can only be used to fund a specific program or project.
These funds can only be used for the specific purpose that they were donated for, and the organization must keep detailed records of how they are used to ensure compliance with the donor’s wishes.
Unrestricted funds, on the other hand, are funds that do not come with any conditions or restrictions attached to them.
The organization can use these funds for any purpose as long as they are consistent with the organization’s mission and objectives.
Unrestricted funds provide flexibility and can be used to cover operating expenses, invest in new programs or initiatives, or build reserves for future needs.
The difference between restricted and unrestricted funds is significant because it impacts how the organization can use the funds and how they must be accounted for.
Restricted funds must be accounted for separately and cannot be commingled with unrestricted funds.
In addition, any use of restricted funds must be carefully documented to ensure compliance with donor restrictions. On the other hand, unrestricted funds can be used more flexibly, but the organization must still ensure that they are used responsibly and transparently.
Non-profit organizations must carefully manage their restricted and unrestricted funds to ensure that they use their resources effectively and in line with their mission and objectives.
This requires strong financial planning, budgeting, reporting, and ongoing monitoring and evaluation of the organization’s financial performance.