Three Kinds of Donations in Your Church: Unrestricted, Designated, and Restricted

Every donation that comes into your church or ministry is one of three kinds: unrestricted, designated, or restricted. Each kind has its own rules for how those donations can be used.

Many of the legal and relational problems churches face involve how they handle funds. When a donor learns that a gift was used in a way they did not expect, it can damage the trust between that donor and the church.

Paul cared about this as well. When he collected the gift for the church in Jerusalem, he handled it carefully so that no one could question how it was used. He wrote:

"For we aim at what is honorable not only in the Lord's sight but also in the sight of man." 2 Corinthians 8:21 (ESV)

That is still a good standard for churches and ministries today. This article explains what each kind of donation is, who decides how it is used, and how to handle a few common situations.

Unrestricted Donations

Unrestricted donations make up your general fund, and most of your regular giving goes here. Because the donor gave it without limits, your leaders decide how it is used through the budget.

These donations pay staff, cover facility costs, and fund ministry, and they are the most flexible donations you have. For that reason, it is important to keep them separate from the other two kinds. If restricted gifts are recorded with them, your general fund can appear to have more available to spend than it actually does.

Designated Donations

Designated donations are unrestricted donations that your elders or board have set aside for a specific purpose, such as a roof reserve, an emergency fund, or a future staff position.

What makes these donations designated is who made the decision. The donor gave without limits, and your leaders chose to set the donations aside. Because your leaders created the designation, they can also change it, and that change should be made by a vote recorded in the minutes.

A designated fund helps your leaders plan ahead by setting donations aside for future needs. It should still be handled carefully, because your congregation may know about the fund and expect the donations to be there.

Restricted Donations

Restricted donations are gifts given for a specific purpose that your church or ministry asked people to support, such as the youth mission trip, a building campaign, or the benevolence fund.

With a restricted gift, the donor's terms decide how the donation is used, and your leaders cannot remove the restriction by a vote. If the purpose changes or cannot be carried out, you need to contact the donor or follow the terms under which the gift was given.

When a Donor Asks to Direct a Gift

A donor cannot decide on their own that a gift must go to a purpose the church never asked for. If someone offers a gift for something you have not asked for donations toward, your leaders need to decide whether that purpose fits your mission and vision. You can accept the gift or decline it. If you accept it with the donor's terms, you are then bound to honor those terms, so make the decision before the donation is deposited.

The best practice is to be clear with donors up front. Let them know where the real needs are, and do not allow a donor to set the direction or vision of your ministry. Be wise about what you ask people to give toward, and only ask for donations toward purposes that line up with your organization's mission.

A simple way to remember the difference. The donor decides how restricted funds are used, and your leaders decide how designated funds are used. Be sure you know which is which before you spend those donations.

What This Looks Like on Your Financial Statements

If your church or ministry has an audit or reviewed statements, you will see these grouped in two ways: net assets with donor restrictions and net assets without donor restrictions. Restricted funds go in the first group. Unrestricted and designated funds both go in the second, because leaders can undo a designation.

Three Common Situations

Here is how these principles apply to three situations churches often face.

A Cancelled Trip

A family gave $10,000 for the youth mission trip, and the trip is cancelled. Because this gift is restricted, the first step is to call the family and ask whether they would like it held for next year's trip or moved to another student need. If your gift language covers this situation, follow it, and still let the family know.

A Roof Reserve

Your elders set aside $40,000 for the roof, and the church is short on cash for payroll. Because these donations are designated, the elders can release them by a vote recorded in the minutes, along with a plan to rebuild the reserve. This is what a reserve is meant for, and the decision should be shared clearly and put in writing.

An Old Building Fund

There is $8,000 in a building fund from a campaign six years ago. What you can do with it depends on what donors were told during the campaign. If the campaign said the donations were for the building, keep them for building use, which may include a repair. If no one remembers what was said, communicate with your congregation before you redirect the donations, and talk with your CPA.

Moving Donations Between Funds

Sometimes donations need to move from one fund to another, which is called an internal transfer. This is different from moving cash between bank accounts. Moving cash from checking to savings does not change any fund balance, but moving $20,000 from the general fund into the roof reserve does.

Good reasons to transfer:

• Releasing a restriction once its purpose has been met. For example, if the trip was paid from general funds, you can release the restricted dollars to cover those costs.
• Moving a year-end surplus into reserves, as your policy allows.
• Funding a reserve your elders or board approved.

Reasons for caution:

• Borrowing from a restricted fund to cover operations. If a church ever does this, it needs elder approval, a written repayment plan, and a repayment date, but most churches should avoid it altogether.
• Moving donations to make a report look better.
• Any transfer no one approved in writing.

Keep a Transfer Log

Fund transfers should always be documented so they are never a surprise to leadership. A simple log records the date, what moved, why it moved, and who approved it. Here are two sample entries:

• December 31: $20,000 from the general fund to the roof reserve (designated). Why: year-end surplus, per reserve policy. Approved by the elders in December.
• June 30: $6,500 from the missions trip fund (restricted) to the general fund. Why: trip costs paid, so the restriction was released. Approved by the finance team in June.

Show Your Funds to Your Board Every Month

Your board should see restricted and designated fund balances in every monthly report. A single line is enough:

Sample fund line. Missions $18,400 · Building $62,000 · Benevolence $7,250 · Roof reserve (designated) $40,000

These balances show your board how much of your cash is set aside for specific purposes. If you have $210,000 in the bank but $127,650 of it belongs to specific funds, your board needs to know that the donations available for general use are much less than the bank balance suggests.

A Place to Start This Week

A good first step is to list every fund your church or ministry holds. Next to each one, write its type, its current balance, and who has the authority to change it. If you find a fund that no one is sure about, begin with that one.

Tracking restricted and designated funds and reporting them clearly each month is part of what our church bookkeeping team does for churches and Christian nonprofits every day. If you would like help organizing your funds or setting them up in your books, reach out to our team. We would be glad to help.

This post was adapted from a recent session of our Executive Leader Cohort.