Treatment of earmarked funding: booking donor-restricted funding

Treatment of earmarked funding: booking donor-restricted funding

Nonprofits often receive funding that the donor restricts to a specific purpose. Accounting rules require you to track that restriction and show it in your annual accounts, and getting the mechanics right protects both your tax-exempt status and your donors' trust. In this page you will find the principles of earmarked funding that apply everywhere, and the booking mechanics under the Dutch rules (RJ 650), with pointers for other frameworks.

Money Bag Same money, two views

When a donor gives money for a specific purpose, the cash and the restriction live in different places on the balance sheet: the cash sits with all other cash under liquid assets; the restriction shows in equity as a designated fund.
ASSETS                            EQUITY
Liquid assets      €500,000       RESERVES (board-controlled):
  ↑                                 Continuity reserve      €200,000
  ALL cash, restricted              Other reserves          €200,000
  and unrestricted                FUNDS (donor-controlled):
                                    Project A fund         €100,000
Total assets       €500,000       Total equity              €500,000
The €100,000 Project A fund is part of the €500,000 liquid assets: the same money, seen once as cash and once as a restriction.
The naming differs per country (Netherlands: Bestemmingsfonds under RJ 650 §309–310; US GAAP: net assets with donor restrictions; UK charity accounting: restricted funds), the principle is the same.

Thinking Face Reserve or fund: who imposed the restriction?

Title
Dutch term
Who decided
Example
Reserve
Bestemmingsreserve
The board
"We save €50,000 for platform development"
Fund
Bestemmingsfonds
The donor
"This grant is for program A"
A restriction only counts as donor-imposed with written evidence: a grant agreement stating the purpose, a donor letter, or campaign materials with an explicit restriction. Internal assumptions about donor intent are not enough. No written restriction → book it as unrestricted; the board can still designate it, which makes it a reserve, never a fund. (RJ 650 §307–310)

How the bookings flow

The mechanics below follow the Dutch rules (RJ 650). Other frameworks reach the same end result with different journal entries; check the rules that apply to your organization before copying the entries.
Under RJ 650, income is recognised in full in the P&L in the year of receipt. The fund moves via resultaatbestemming (allocation of results) at year-end, never via direct equity entries. (RJ 650 alinea 203)
1. Grant received. A foundation grants €100,000 for program XYZ:
P&L (NL: staat van baten en lasten):
  Income - Donations - Foundations   €100,000  ← recognised in full on receipt
ASSETS:
  Liquid assets                      €100,000  ← cash arrives in the bank
Tag the donation to its program in your bookkeeping on arrival, and record the donor type; the annual accounts require income split by donor type.
2. Program costs. Later, €5,000 of program costs are incurred:
P&L:
  XYZ program costs                    €5,000  ← costs hit the P&L in full
ASSETS:
  Liquid assets                       -€5,000
3. Year-end. The unspent balance moves to the fund via resultaatbestemming:
EQUITY:
  Fund XYZ                            €95,000  ← €100,000 received − €5,000 spent
The program tagging from step 1 is what makes this number easy to compute at year-end.
Multi-year grants follow the same logic. A €300,000 grant for a 2025–2027 program, received in January 2025:
Year
Spending
Cash remaining
Fund at year-end
2025
€100,000
€200,000
€200,000
2026
€100,000
€100,000
€100,000
2027
€100,000
€0
€0
Each year, cash and fund decrease equally.

Notebook Presenting funds in the annual accounts

The notes show a movement schedule for each designated fund. In the Netherlands this is required by RJ 650 §304 and §310; in most other frameworks it is required or good practice:
Note X: Designated Funds (Bestemmingsfondsen)

[Fund name] — Purpose: [description of restriction]

Opening balance January 1            €xxx,xxx
Additions during the year            €xxx,xxx
Releases to income                  (€xxx,xxx)
Closing balance December 31          €xxx,xxx

[Intended use of the remaining balance]

Why the classification matters

  • Tax-exempt status : many jurisdictions test whether a charity holds excessive free reserves. Designated funds are excluded from available reserves (total equity − funds), so misclassifying a fund as a reserve inflates your reserves. In the Netherlands this matters for the ANBI excessive-reserves test.
  • Cash management : the same subtraction on the asset side (liquid assets − donor-restricted) shows what your organization can spend freely.
  • Donor trust : funders see that their earmarked money is tracked and protected.

Warning Common mistakes

Mistake
Why it's wrong
Booking earmarked grants as deferred income (liability)
A designated fund is equity. Only when unspent money must be repaid to the donor is it a liability
Showing restricted cash outside liquid assets
All cash is liquid assets; the restriction lives in equity. Split it out and the balance sheet no longer balances
Putting donor funds under reserves
Reserves are board-controlled, funds are donor-controlled; mixing them breaks the available-reserves calculation