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Restricted Funds accounting

Forum|Forum|8 months ago
October 14, 2025
3 replies
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I've been trying to find the best way to track restricted funds for my nonprofit and expenses that are incurred against them.

1. I tried using Equity accounts. The problem I ran into is that when we have an expense--say a PayPal fee--I have to choose between having it appear as a decrease in the equity account OR as a PayPal expense along with other non-restricted PayPal expenses--but not both. This means either the equity account or the expense tracking is wrong.

2. So I tried using Classes instead of equity accounts. This seemed to solve the problem above but a new one arose: suppose I create a Sales Receipt for a donation made via PayPal. The receipt has two lines, one for the gross amount of the donation and one with a negative value for the PayPal expense. I assign the relevant restricted fund class to both, categorize the gross donation as a donation (along with unrestricted ones) and the PayPal fee as a PayPal fee (along with other "unrestricted" PayPal fees). In this case, the PayPal fee shows up in my Class report for that fund as a positive, not a negative number, increasing the fund's value rather than decreasing it. This is even worse.

3. Because each of our few restricted funds has multiple donors, I can't see how to use Projects as a solution.

So what is the best way to track revenues AND expenses for restricted accounts?

QuickBooks Online Advanced

Best answer by Hannah54

You’re running into a very common challenge for nonprofits , tracking restricted funds accurately while still maintaining proper expense categorization. The key is to set up your system so that you can monitor restricted fund balances without distorting your P&L or expense accounts.

Here’s the best approach:

1. Use Classes for Fund Tracking (Correctly)

You were on the right track with Classes. Each restricted fund should be assigned its own Class (e.g., “Restricted – Youth Program Fund,” “Restricted – Building Fund”).

Assign this Class to all income and expenses related to that fund.

Your unrestricted activities get a Class like “Unrestricted.”

This allows you to run a Profit & Loss by Class report, which shows the inflows and outflows per fund — exactly what you need for donor or board reporting.

2. Record Donations and Fees Separately

Avoid using negative lines on the Sales Receipt for PayPal fees — that’s what causes the positive value issue. Instead:

Record the gross donation in your donation income account with the appropriate Class (e.g., “Restricted – Building Fund”).

Then record the PayPal fee separately as a Bank Expense (or a Check/Expense transaction), categorized to your PayPal Fees expense account and assigned the same restricted Class.

This way:

Your donation income is correctly recorded in full.

Your PayPal fees are properly tracked as expenses.

Both appear correctly under the restricted fund in your Class report, with the fee showing as a deduction (negative).

3. Optional: Track Fund Balances

If you want to see each restricted fund’s balance (like a mini balance sheet per fund), you can run a Balance Sheet by Class report (available in QuickBooks Online Advanced or QuickBooks Desktop).
If you don’t have that feature, you can simulate it by creating a spreadsheet to reconcile beginning balances + inflows – outflows per fund.

4. Avoid Equity Accounts for Tracking

Equity accounts don’t work well for restricted funds because they don’t flow through the P&L. You lose visibility into how the funds are being used and can’t easily report income/expenses by restriction.

Summary

✅ Use Classes for each restricted fund
✅ Record income and related expenses separately (never as negative lines)
✅ Run P&L by Class to track inflows and outflows per fund
✅ Use Balance Sheet by Class (if available) to see fund balances

If you’d like, feel free to message me — I’m a professional bookkeeper and QuickBooks freelancer based in the UK, and I can help you set up your chart of accounts and class tracking properly so restricted fund reports are accurate and audit-ready.

H

Hannah54Answer

You’re running into a very common challenge for nonprofits , tracking restricted funds accurately while still maintaining proper expense categorization. The key is to set up your system so that you can monitor restricted fund balances without distorting your P&L or expense accounts.

Here’s the best approach:

1. Use Classes for Fund Tracking (Correctly)

You were on the right track with Classes. Each restricted fund should be assigned its own Class (e.g., “Restricted – Youth Program Fund,” “Restricted – Building Fund”).

Assign this Class to all income and expenses related to that fund.

Your unrestricted activities get a Class like “Unrestricted.”

This allows you to run a Profit & Loss by Class report, which shows the inflows and outflows per fund — exactly what you need for donor or board reporting.

2. Record Donations and Fees Separately

Avoid using negative lines on the Sales Receipt for PayPal fees — that’s what causes the positive value issue. Instead:

Record the gross donation in your donation income account with the appropriate Class (e.g., “Restricted – Building Fund”).

Then record the PayPal fee separately as a Bank Expense (or a Check/Expense transaction), categorized to your PayPal Fees expense account and assigned the same restricted Class.

This way:

Your donation income is correctly recorded in full.

Your PayPal fees are properly tracked as expenses.

Both appear correctly under the restricted fund in your Class report, with the fee showing as a deduction (negative).

3. Optional: Track Fund Balances

If you want to see each restricted fund’s balance (like a mini balance sheet per fund), you can run a Balance Sheet by Class report (available in QuickBooks Online Advanced or QuickBooks Desktop).
If you don’t have that feature, you can simulate it by creating a spreadsheet to reconcile beginning balances + inflows – outflows per fund.

4. Avoid Equity Accounts for Tracking

Equity accounts don’t work well for restricted funds because they don’t flow through the P&L. You lose visibility into how the funds are being used and can’t easily report income/expenses by restriction.

Summary

✅ Use Classes for each restricted fund
✅ Record income and related expenses separately (never as negative lines)
✅ Run P&L by Class to track inflows and outflows per fund
✅ Use Balance Sheet by Class (if available) to see fund balances

If you’d like, feel free to message me — I’m a professional bookkeeper and QuickBooks freelancer based in the UK, and I can help you set up your chart of accounts and class tracking properly so restricted fund reports are accurate and audit-ready.

N

Nonprofit Treasurer 27Author

Thank you so much, Hannah, for your detailed explanation. That all makes sense to me, I'm going to try it out and let you know how it make out with it. Will take a few days...

Cheers,

Stanley

I

i-am-the-cosmos

The best and most scalable approach for nonprofits in QuickBooks Online is to use Classes for Fund Restrictions + Sub-Classes for Programs if needed, while maintaining proper income and expense categorization.

Asha Kanta Sharma

P

Peter_B

Everyone i5 making it way more complicated than it needs to be.

Simply make a restricted bank account as a sub account. Transfer portions there or send it straight there in the register (change where deposit went in the bank register edit).

Boom, you’re done. It’s reconciled monthly as part of your closing routine.
Do the same for Board Designated Funds.

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