The Joseph Room with Nathaniel Aikens, Sr.

Treating Restricted Gifts Like General Funds

Hello.  My name is Nathaniel Aikens, and I have more than 30 years of working with large and small churches and non-profits.  In that time, I have noticed some behaviors that, if you are aware of them and take corrective steps, could increase the effectiveness of your financial stewardship.

When someone gives to the building fund, the mission trip, or a memorial, that money is restricted — legally and ethically, it can only be used for the stated purpose. A frequent mistake is dropping every dollar into one checking account and one “income” line, then spending it on whatever the church needs this month.Even with pure motives, this is a serious problem. Spending restricted gifts on operations is a breach of donor intent, and if the church later can’t fund the designated project, it may owe that money back. Restricted funds cause more quiet trouble than almost any other area of church finance, largely because the rules are more nuanced than they first appear. It’s worth slowing down on a few of them.

Donor-Restricted is Not the Same as Board-DesignatedThis is one of the single biggest points of confusion in church accounting. A donor restriction is a legal obligation created when the giver specifies a purpose — only the donor can impose it, and the church can’t unilaterally remove it. A board-designated fund is money leadership sets aside internally, like a reserve or a “future building fund” the board created on its own. That money is still technically unrestricted, because the board that designated it can un-designate it at any time.

Churches get this backward in both directions: they treat board-designated savings as untouchable, and — more dangerously — treat donor-restricted gifts as if the board can redirect them. The rule of thumb: if a donor set the purpose, you’re bound by it; if the board set it, you’re not.

Your Own Appeals Can Create Restrictions

You can bind your own hands without a donor saying a word. If the church runs a campaign “for the new roof,” every gift to that campaign is restricted to the roof — even from someone who simply dropped cash in the plate during the push. The solicitation itself creates the restriction. Be intentional about how you ask, because how you ask determines what you’re allowed to do with the money.

The Leftover-Money problem

Say you raise $50,000 for a van that ends up costing $40,000. That extra $10,000 is still restricted — you can’t just sweep it into general operations. Your options are to go back to donors for permission, or, far better, to state up front in the appeal that any excess will go to general ministry. That single sentence in your fundraising language prevents a real headache later. The same logic applies when a designated project is cancelled or a fund becomes obsolete.

The Co-Mingling Myth

Many churches believe restricted funds require separate bank accounts. They don’t. You can legally hold restricted and unrestricted money in one account if your books track them separately. Separate accounts can add clarity, but the real requirement is accurate recordkeeping, not physical separation. What you must never do is let the accounting lose sight of how much of the balance is already spoken for.

“Borrowing” From Restricted FundsThe most common failure is dipping into the building or missions fund to cover a payroll or utility shortfall, intending to pay it back. Even with the best intentions, this spends money on a purpose the donor didn’t authorize, and it’s rarely disclosed to the board. If cash flow ever forces the question, that’s a governance conversation to have openly — not a quiet transfer.

Know How Money “Releases”In proper fund accounting, restricted gifts don’t stay restricted forever. When you spend them on their intended purpose, they’re “released from restriction” and reclassified as unrestricted in your reports. A good monthly report shows, for each fund, the beginning balance, new gifts received, amounts released (spent on purpose), and the ending restricted balance. If your reporting can’t answer “how much restricted money do we hold right now, and for what?” at any moment, that’s the gap to close.One terminology note: current nonprofit accounting standards use “net assets with donor restrictions” and “net assets without donor restrictions.” The older labels — “temporarily restricted,” “permanently restricted,” and “unrestricted” — are what most people still say in conversation, so you’ll hear both.

The Fix: Use fund accounting, which tracks money by purpose (general, building, missions, benevolence) rather than treating the bank balance as one pool. Most church accounting software supports this. Beyond the software, put two safeguards in place. First, adopt a short designated-gifts policy stating that the church may decline restrictions it can’t fulfill and spelling out how excess or obsolete funds are handled. Second, include excess-language in every appeal, so leftover money has a pre-approved home. Those two habits prevent most restricted-fund messes before they start.

Nathaniel Aikens Sr., is the CEO of The Joseph Company Consulting, Inc. If you have questions, feel free to contact him here.