Restricted Funds—Accounting and Auditing Problems
by FRANCIS W. ASCHER Principal, New York Office
Presented before The New York State Society of Certified Public Accountants, New York City — November 1962
THE TERM restricted funds, as applicable to non-profit organizations, comprises all funds not available for current general operating purposes of the institution. It is my intention not to attempt a discussion
of all such funds, which could include endowment funds, plant funds, agency funds, to mention but a few. Instead, I shall discuss current restricted funds, that is, operating funds restricted by an outside agency or person as to use. This class of fund frequently
is created by gift, grant, or bequest. In addition, income from restricted endowments and income from current restricted funds' investments also gives rise to such funds.
Because restrictions have been placed on the use of these funds, careful consideration must be given to the accounting records necessary
to assure the use of the funds for the intended purposes. As contrasted with the receipt of unrestricted funds, which constitute income when received, the receipt of current restricted funds does not become income to the institution until such time as the funds are expended. Receipt of current restricted funds has no effect on net income, since income can be recognized only to the extent of expenses. When an institution accepts current restricted funds it must acknowledge its accountability through the creation of a separate liability or fund account for each such fund. It is desirable to include in the names of the individual accounts some description of the nature of the restricted purpose. Correspondence of the donors, copies of grants, etc., which give the particulars of the restrictions, should be maintained and kept current in the accounting department.
METHODS OF RECORDING CHARGES
Institutions generally have followed two methods of recording charges to current restricted funds. Under one method, transfers are made from the current restricted fund to a general fund income account.
The amount transferred would be equal to amounts charged to operating expenses that could have been charged to the fund. Under this method, the responsibility of establishing the extent to which a