“How much of this can we actually spend?” It’s one of the most common questions I hear from nonprofit directors and volunteer treasurers, and it’s a fair one.
The money in your account isn’t all the same. Some of it came with strings attached: a grant for your youth program, a donation for the new roof, a gift meant for next year. That’s restricted money, and spending it on the wrong thing can hurt your relationship with a funder.
Not long ago, I started working with a nonprofit that was keeping each restricted fund in its own asset account on the balance sheet. I understand why. It feels natural to put the money “somewhere separate.” But all of that money was really sitting in the same bank account, so the books had to keep shuffling amounts between asset accounts that didn’t match anything real. It was hard to reconcile, hard to explain to the board, and almost impossible to see what had actually been spent from each fund.
We moved them to the setup below, and the question “what can we spend?” finally had a clear answer. Here’s how it works.
First, the two buckets
Every dollar your organization receives falls into one of two buckets:
- Without donor restrictions: money you can use for anything that supports your mission, like general donations, membership dues, and most event income.
- With donor restrictions: money the donor said must be used for a specific purpose or time period.
You need to know how much is in each bucket, and in each restricted fund, at any point in the year.
The idea in one line
Your chart of accounts tells you what the money was for. Classes tell you whose money it was.
Restricted money doesn’t need its own bank or asset account. It needs a label.
Step 1: Build your chart of accounts to match Form 990
Your chart of accounts is the list of categories everything gets sorted into. Most nonprofits start with the default list QuickBooks gives a regular business, and it doesn’t fit how nonprofits report.
Instead, I build the chart of accounts to follow the lines on IRS Form 990. Income accounts follow the revenue lines (contributions and grants, program service revenue, special events, investment income). Expense accounts follow the expense lines (salaries, payroll taxes, professional fees, occupancy, travel, insurance, and so on).
At year end, your numbers already line up with the form. Your CPA isn’t re-sorting a year of transactions, which saves time and usually lowers their bill. Even if you only file the short 990-N or 990-EZ today, you’ll be ready when you grow.
Step 2: Use classes for your funds
QuickBooks Online has a feature called classes (available in Plus and Advanced). Since your chart of accounts already handles the 990, your classes can do one job: track your funds.
Set them up like this:
- Without Donor Restrictions
- With Donor Restrictions
- Youth Program Grant 2026
- Roof Fund
- (one sub-class for each restricted gift or grant)
If you only get one or two restricted gifts a year, you can skip the sub-classes and use the two main classes. Add sub-classes when you’re juggling more than a couple.
Step 3: Tag income and spending to the fund
Every time you record income or an expense, tag it with the class of the fund it belongs to.
Say you receive a $10,000 grant for your youth program. Record the deposit with the class “Youth Program Grant 2026.” In March, you spend $2,500 on program supplies. Record that bill with the same class.
Now run a Profit and Loss by Class report. Set the dates to start when the grant began (or “All Dates”), so you see the whole life of each fund. The youth program column shows $10,000 in, $2,500 out, and $7,500 left. General donations and everyday expenses sit in the “Without Donor Restrictions” column, and the Total column shows the whole organization. That’s your answer to “what can we spend?”, and it’s also most of your grant report.
Use classes on income and expenses only. QuickBooks Online can’t split the balance sheet accurately by class, so trying to track funds there leads to messy “Not specified” columns.
Step 4: Keep your net assets right with one entry each quarter
The P&L by Class tracks each fund for you, but your balance sheet needs one more step. Nonprofit accounting rules ask you to show net assets (the nonprofit version of equity) with and without donor restrictions separately. QuickBooks doesn’t do that on its own. It rolls all of your profit, restricted grants included, into one account called Retained Earnings, so by default everything looks unrestricted.
Here’s the fix:
- Rename Retained Earnings to Net Assets Without Donor Restrictions.
- Create an equity account called Net Assets With Donor Restrictions.
- Once a quarter, check the P&L by Class for how much is left in all your restricted funds, and move that amount into “With Donor Restrictions.”
In the youth program example, $7,500 is still restricted at the end of Q1, so the entry is:
| Account | Debit | Credit |
|---|---|---|
| Net Assets Without Donor Restrictions | $7,500 | |
| Net Assets With Donor Restrictions | $7,500 |
Memo: Q1 restricted balance: Youth Program Grant 2026, $7,500
After that, each quarter you only record the change:
- If the restricted total went up (new restricted money came in), move the increase from Without to With.
- If it went down (you spent restricted money on what the donor asked), move the decrease from With back to Without. This is what accountants call “releasing” the restriction.
So if you spend another $2,500 in Q2 and the youth program has $5,000 left, the Q2 entry moves $2,500 from With back to Without.
No class is needed on these entries. The memo tells you which funds are included. At any point, “Net Assets With Donor Restrictions” on your balance sheet should equal what’s left in your restricted funds. If your CPA prepares your year-end statements, ask how they’d like this handled. Some prefer to make the entry themselves.
A note for larger nonprofits
Once you file the full Form 990, the IRS also wants your expenses split into three columns: Program Services, Management & General, and Fundraising. Your chart of accounts covers the lines, but not those columns.
If you need that split every month, flip the setup: use classes for those three functions, and use QuickBooks’ Projects feature to track each grant. It’s a bigger setup, but you get both your 990 columns and a report for every grant. If your CPA handles the split at year end, the fund-class setup above still works well.
Why it’s worth doing
With this in place, you can answer “what can we spend?” any day of the year, not just at year end. Grant reports come straight out of QuickBooks, because every fund has its own column with its own income and expenses. Your CPA gets books that already match the 990, with a balance sheet that shows restricted money correctly. And your board sees restricted and unrestricted money side by side at every meeting, so the conversation can be about the mission instead of the numbers.
The setup takes some care the first time. After that, it’s tagging transactions as you go and one short entry each quarter.
Want help setting this up?
If your books don’t look like this yet, that’s okay. Most of the nonprofits I work with started with a standard business setup, or something homemade like the asset accounts above, and we fixed it together. I can rebuild your chart of accounts, set up your fund classes, and show your treasurer how to do the quarterly entry, or handle it for you.
[Book a free 30-minute consultation] and let’s take a look at where your books stand.
This article is general information, not tax or legal advice. Every organization is a little different, so check with your CPA about your specific situation.
