The short answer
Non-profit accounting turns on donor intent. Funds with donor restrictions cannot be treated as general reserves. In Business Central, GrantFlow 365 records the restriction on each grant, holds receipts as deferred, recognises them as conditions are met, and returns unspent restricted money at closeout.
Unlike a commercial company, where revenue increases general equity, a non-profit's revenue is bound by what donors say it can be used for. Mixing restricted funds with general reserves is more than poor practice. It can breach duty to donors and damage trust.
This guide explains the distinction under non-profit reporting standards, such as IFRS and US GAAP (FASB ASC 958), and how GrantFlow 365 supports it.
We cover restricted vs unrestricted fund accounting, non profit net asset tracking and how FASB ASC 958 applies in Business Central.
Net asset categories
Under modern standards, net assets are classed by the presence or absence of donor restrictions.
Without donor restrictions
Unrestricted funds.
- General operating revenue and unrestricted donations
- Board-designated funds: internal reserves set aside for a purpose, still unrestricted
With donor restrictions
Restricted funds.
- Purpose-restricted: earmarked for a programme or activity
- Time-restricted: for use in future periods
- Perpetual or endowment: principal kept intact
The accounting event: release from restriction
Suppose a donor gives $500,000 for a clean water project.
- ReceiveThe gift is recorded as net assets with donor restrictions.
- SpendQualified costs are incurred, such as equipment and field engineers.
- ExpenseEach cost is recorded in the ledger.
- ReleaseAn equal amount moves from restricted to unrestricted net assets to show the donor's terms were met.
In older systems, finance calculates and posts the release by hand each month. With many active grants, manual calculation leads to errors, late statements and balance sheet mismatches.
How GrantFlow 365 supports restricted funds
Restriction recorded on the grant
Each award carries a restriction type.
- Unrestricted, restricted, conditional, exchange and contribution treatments
- Posting setup that maps grants to the right ledger accounts
Deferred, then recognised
Receipts are held until conditions allow.
- Donor receipts are recorded against the grant
- Revenue recognition moves amounts from deferred to recognised when the rules allow, with approval
Unspent restricted money
Returned or reported at closeout.
- Closeout calculates any refund due to the donor and requires it to be posted before the grant is closed
- Indirect cost recovery is treated as unrestricted
- A closed grant is blocked for new transactions
Financial statements
Non-profit reporting rests on three statements. Business Central produces them from its financial reports, and we configure them with you to your accounting framework.
Statement of Activities
Revenue by restriction class, releases from restriction, expenses and the change in net assets.
Statement of Financial Position
Net assets with and without donor restrictions, with restricted cash identified.
Statement of Functional Expenses
Expenses analysed across programme services and supporting services such as management and fundraising.
How a release is presented, how board-designated reserves are tracked and how the statements are laid out depend on your standard (IFRS or US GAAP) and your auditors. We settle these in design and confirm what GrantFlow 365 provides today and what is configured for you.
What changes for finance leaders
Lower fiduciary risk
Restrictions are recorded on the grant, so restricted money is harder to misapply.
Audit-ready lineage
Auditors can follow a release from the grant ledger back to its source entries.
Less manual journalling
Recognition follows approved rules instead of month-end spreadsheets.
To see restricted fund accounting on your own grants, book a GrantFlow 365 demo or read the GrantFlow 365 product page.
Keep reading
Fund accounting in Business Central
Dimensions instead of a bloated chart of accounts. Read the guide
Donor compliance and reporting
Budget control, cost rules and donor packs. Read the guide
The grant lifecycle
From opportunity to closeout in one record. Read the guide
Frequently asked questions
What is the difference between restricted and unrestricted funds?
Restricted funds carry a donor-imposed purpose or time condition. Unrestricted funds can be used for general purposes. Standards such as IFRS and FASB ASC 958 require them to be reported separately.
How does GrantFlow 365 handle restricted funds?
Each grant records its restriction type. Receipts are recorded against the grant, revenue recognition moves amounts from deferred to recognised as conditions are met, and closeout returns unspent restricted money.
Does Business Central produce non-profit financial statements?
Business Central produces financial reports that we configure to your standard, including the statements of activities, financial position and functional expenses.