When someone gives to your church, they're not just offering financial support, they're placing trust in your ability to steward that gift well. That’s why it’s so important for church leaders to understand the distinction between restricted and unrestricted funds and to handle each with clarity, accuracy, and care.
Yet for many churches, especially growing or newly planted ministries, fund classification is an area of confusion, and one that can lead to unintentional missteps.
Here’s what you need to know:
What Are Restricted Funds?
Restricted funds are donations that are designated by the donor for a specific purpose. These gifts come with strings attached; not in a negative way, but in a directional way.
Examples include:
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A $5,000 donation specifically for your building campaign
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A love offering meant to support a missionary
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A memorial gift to be used for youth programs
These funds must be used as designated. Using restricted gifts for general expenses or other ministries, even if the cause seems worthy, can violate donor intent and possibly result in legal or ethical issues.
What Are Unrestricted Funds?
Unrestricted funds are donations that can be used at the church’s discretion to meet any financial need. They fund your day-to-day operations from rent and utilities to salaries, curriculum, and outreach events.
Because these funds aren’t bound by designation, they give leadership the flexibility to respond to evolving ministry needs and operational demands.
Examples include:
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Weekly tithes and offerings without any written designation
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General gifts to “where needed most”
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Non-designated online giving
Why It Matters
Failing to properly classify and track funds can create more than just accounting headaches. It can result in:
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Loss of donor trust
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Audit complications
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Noncompliance with IRS and FASB nonprofit guidelines
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Reputational damage, especially if misused funds come to light
Even unintentional misuse of restricted gifts can erode credibility and limit future giving.
Best Practices for Stewarding Both Types of Funds
1. Use a Chart of Accounts that Separates Fund Types
Set up clear tracking within your accounting software (e.g., QuickBooks, Sage, etc.) that distinguishes restricted from unrestricted activity.
2. Keep Documentation for All Designations
Always record donor instructions in writing, especially for large or long-term gifts.
3. Track Fund Balances Separately
Maintain a running balance of each restricted fund to ensure that funds are spent as intended and not comingled with general income.
4. Communicate Clearly with Donors
Regularly report how designated funds were used, and thank donors with updates showing the ministry impact of their gift.
How Anchor Hill Accounting Can Help
At Anchor Hill Accounting, we specialize in helping churches establish and maintain faithful, transparent fund accounting. Whether you're starting from scratch or refining your system, we can help you:
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Set up or restructure your chart of accounts
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Track restricted gifts cleanly and efficiently
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Create donor-ready reports that inspire confidence
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Prepare for audits or board reviews with clarity and ease
We walk alongside you, not just to meet financial standards, but to honor the generosity of those who give to your mission.