What is the difference between restricted and unrestricted funds?

What is the difference between restricted and unrestricted funds?

• A. Restricted funds are always used for capital projects.
• B. Unrestricted funds are donor restricted.
• C. Both funds are restricted by donor terms.
• D. Unrestricted funds may be used for any purpose; restricted funds are limited by donor stipulations or grant terms.

Answer: (D)

The key idea is how donor constraints shape how funds can be used. Unrestricted funds may be used for any purpose the organization chooses, within its policies and legal requirements. Restricted funds, on the other hand, come with donor stipulations or grant terms that limit use to specific programs, activities, or time periods. The organization must honor those restrictions; only when they are met (or with donor permission to reallocate) can the funds be used for other purposes. That contrast is exactly what the statement conveys: unrestricted funds are available for any approved purpose, while restricted funds are limited by donor terms.

The key idea is how donor constraints shape how funds can be used. Unrestricted funds may be used for any purpose the organization chooses, within its policies and legal requirements. Restricted funds, on the other hand, come with donor stipulations or grant terms that limit use to specific programs, activities, or time periods. The organization must honor those restrictions; only when they are met (or with donor permission to reallocate) can the funds be used for other purposes. That contrast is exactly what the statement conveys: unrestricted funds are available for any approved purpose, while restricted funds are limited by donor terms.