How Should Restricted Donations Be Tracked in QuickBooks?

Restricted donations should be tracked in QuickBooks using three coordinated tools: dedicated income and equity accounts in the chart of accounts, Classes to separate restricted activity by program, and Projects to track individual grants from receipt through release. I have set up this system for several nonprofits, and the combination keeps donor funds compliant, audit-ready, and clearly separated from unrestricted money.

If your nonprofit accepts donor-restricted gifts or grant-funded programs, you need more than a single donation account. This guide walks through the exact QuickBooks configuration I use, the journal entries that bookkeepers miss, and the reports auditors expect to see. Whether you run QuickBooks Online or Desktop, the principles and most steps apply to both versions.

What Restricted Donations Are and Why They Need Special Tracking

A restricted donation is a charitable gift that comes with a donor-imposed condition on how the funds can be used. A donor may say “for our scholarship fund,” “for capital construction only,” or “to be spent within 18 months on youth programs.” Until your nonprofit meets that condition, the money legally belongs to that purpose, not to your general operating budget.

Under U.S. GAAP, nonprofits must classify net assets into three buckets on the financial statements: net assets without donor restrictions, net assets with donor restrictions (temporary), and net assets with donor restrictions (permanent). QuickBooks does not enforce this classification automatically, which is why the configuration work below matters.

Donor Restrictions vs. Board Designations

Restrictions come in two flavors. Donor restrictions are imposed by the giver and cannot be changed by your board. Board-designated funds are unrestricted dollars that your board has internally earmarked, and these are tracked differently. Confusing the two is one of the most common audit findings I see, so I always separate them at the chart-of-accounts level.

Temporarily vs. Permanently Restricted

Temporarily restricted means the restriction will eventually be satisfied (for example, a one-year program grant). Permanently restricted means the principal must stay intact forever, like an endowment. QuickBooks treats both the same way during tracking, but you will report them separately on the Statement of Activities.

Setting Up Your QuickBooks Chart of Accounts for Restricted Funds

The chart of accounts is the foundation of restricted donation tracking. If your accounts are wrong, every report downstream will be wrong. I recommend a layered structure that separates the type of money, the source, and the restriction status.

Income Accounts for Restricted Revenue

Create a dedicated income account for each major restriction category rather than one generic “Restricted Donations” account. For a typical community nonprofit, I set up accounts like these:

• 4000 Contributions Without Donor Restrictions
• 4100 Temporarily Restricted Contributions – Programs
• 4110 Temporarily Restricted Contributions – Scholarships
• 4120 Temporarily Restricted Contributions – Capital Campaign
• 4200 Government Grants
• 4300 Foundation Grants
• 4500 Released from Restriction (a contra-revenue reclassification account)

The “Released from Restriction” line is the trick most articles skip. When a restriction is satisfied, you do not delete the original income. Instead, you move the amount from the restricted income account into this release account, then move it again into unrestricted net assets. This keeps your restricted income reports accurate for the life of the donation.

Equity Accounts for Net Asset Classification

QuickBooks has a built-in Net Assets section in the chart of accounts equity area. I expand it to include three sub-accounts:

• 3100 Net Assets Without Donor Restrictions
• 3200 Net Assets With Donor Restrictions – Temporary
• 3300 Net Assets With Donor Restrictions – Permanent

Every restricted donation eventually posts to one of these equity accounts, which is where the funds “live” on the balance sheet until they are spent or released.

Using Classes to Distinguish Restricted vs Unrestricted Activity

Classes in QuickBooks are dimension labels you attach to transactions. For a nonprofit, the most valuable Class is the program or fund that money is tied to. I always create one Class per restricted program, plus one “General Operating” Class for unrestricted activity.

Step-by-Step Class Setup

From the QuickBooks Online gear menu, choose “All Lists” then “Classes.” Click “New” and name the class after the program or grant (for example, “Youth Mentoring FY26” or “Smith Family Endowment”). Set it as active. Repeat for each restricted program and one catch-all for unrestricted activity.

Every transaction – donations, payroll, bills, credit card charges – gets a Class. When you later run a Profit & Loss by Class report, restricted dollars stay in their lane and unrestricted dollars stay in theirs. This single habit prevents the most common error: spending restricted money on general operations.

The 100 Active Class Limit and Workarounds

QuickBooks Online caps you at 100 active Classes. For nonprofits with many simultaneous grants, this fills up fast. Several real users on the QuickBooks Community and Reddit report hitting this wall. Two reliable workarounds exist.

First, deactivate Classes for closed-out programs at year-end rather than leaving them active forever. QuickBooks keeps the historical data intact but frees up slots.

Second, and this is the move I prefer for organizations with 50 or more active grants: use Projects instead of Classes for individual grant tracking, and reserve Classes for higher-level program categories. We will cover that next.

Tracking Grants and Donations with QuickBooks Projects

Projects in QuickBooks Online let you bundle every transaction tied to a specific grant or initiative into one reportable container. For multi-year or high-volume grant funders, Projects scale better than Classes.

When Projects Beat Classes

Use Projects when a single grant has its own budget, its own reporting deadline, and its own allowable expenses. A $250,000 federal grant with sub-award reporting is a perfect Project. A general “scholarship fund” that pools many small donations is better as a Class.

Setting Up a Project

Go to “Projects” in the left navigation, then “New project.” Name it after the grant (for example, “DOE STEM Grant 2025-2027”). Assign a Project Manager if you want accountability. Then start tagging transactions.

When you record the initial grant receipt, create an invoice or sales receipt, choose the donor in the Customer field, and assign the Project. The donor acts as the customer because grant payments often come in installments tied to invoices. This is the technique our team picked up from Atchley CPAs and it works cleanly across multi-year grants.

For multi-year restrictions, set the Project end date to the grant period end. QuickBooks will keep the project visible for reporting until you close it, even after funds are fully spent.

Classes and Projects Together

You can tag a single transaction with both a Class and a Project. I use this dual-tag method for every restricted grant: the Class tells me the program area, the Project tells me the specific grant award. Reports can be sliced either way without losing the other context.

Recording Journal Entries for Restricted Funds

The journal entry is where most bookkeepers stumble. Below are the three entries I run most often. I keep these templates memorized in QuickBooks so I can post them in under a minute.

Entry 1: Receiving a Restricted Donation

When a $10,000 restricted gift arrives in your checking account:

• Debit: Bank Account (1000) – $10,000
• Credit: Temporarily Restricted Contributions – Programs (4100) – $10,000
• Class: Youth Mentoring FY26
• Project: (leave blank if pooled, or assign to a specific donor Project)

At the same time, move the amount into the equity section so it shows up correctly on the balance sheet:

• Debit: Net Assets Without Donor Restrictions (3100) – $10,000
• Credit: Net Assets With Donor Restrictions – Temporary (3200) – $10,000

Entry 2: Spending the Restricted Funds

When you pay a $2,500 program bill against the restricted gift above:

• Debit: Program Expense (5000) – $2,500
• Credit: Bank Account (1000) – $2,500
• Class: Youth Mentoring FY26

The expense correctly reduces the restricted fund balance because it carries the same Class as the original donation.

Entry 3: Releasing the Restriction

Once the donor’s purpose has been satisfied, reclassify the remaining restricted net assets as unrestricted. For $7,500 of remaining program funds released at year-end:

• Debit: Net Assets With Donor Restrictions – Temporary (3200) – $7,500
• Credit: Released from Restriction (4500) – $7,500

Then immediately reverse through unrestricted net assets:

• Debit: Released from Restriction (4500) – $7,500
• Credit: Net Assets Without Donor Restrictions (3100) – $7,500
• Class: Youth Mentoring FY26

This three-leg release keeps your Statement of Activities clean and shows both the release event and the resulting unrestricted classification.

Reporting on Restricted Fund Balances

Reports are where auditors and boards verify your work. The two reports that matter most are the Balance Sheet and the Statement of Activities. QuickBooks can produce both with the right filtering.

Balance Sheet Presentation

Run the standard Balance Sheet report. Verify that your “Net Assets With Donor Restrictions” equity line equals the sum of all unspent restricted cash and receivables. If it does not, a release entry was missed or expenses were tagged with the wrong Class.

For grantors, drill into a single Project’s profitability report. It should show the grant income, the expenses incurred, and the remaining balance – all within seconds.

Statement of Activities

The Statement of Activities is not a default QuickBooks report, but you can build it from a customized Profit & Loss by Class. Run the report, group by Class, then save the customization as “Statement of Activities.” The temporary restriction releases show up as a positive line, balancing the restricted income against the released amounts.

Classes vs Projects: Which Should Your Nonprofit Use?

For smaller nonprofits with fewer than 20 active grants, Classes alone are usually enough. For larger organizations juggling 50+ grants across multiple funders, Projects scale better and avoid the 100-class ceiling. Many organizations run both: Classes for program area, Projects for individual grant awards.

Organization Size	Recommended Tool	Why
Under 20 grants	Classes only	Simpler reporting, no extra setup
20 to 50 grants	Classes plus a few Projects	Reserve Projects for the largest funders
50+ grants	Projects primary, Classes secondary	Avoids the 100-class limit and matches grantor reporting

Common Mistakes and Year-End Reconciliation

After running this setup for several audits, I have seen the same handful of errors trip people up. Watch for these.

Mixing Class tags. If a payroll entry leaves the Class field blank, it defaults to “unrestricted” and quietly reduces the wrong fund. Make “Class required” a rule in your bookkeeping workflow.

Forgetting to release. Restrictions expire, but the reclassification entry does not happen automatically. Schedule a quarterly reminder to review each Project and release any fully spent or expired restrictions.

For year-end reconciliation, run three reports side by side: Balance Sheet by Class, Profit & Loss by Class, and Project Profitability for every active Project. The numbers should reconcile exactly. If they do not, a Class is missing on a transaction. Fix it before issuing the financial statements.

Frequently Asked Questions

Key Takeaways for Tracking Restricted Donations in QuickBooks

Restricted donation tracking in QuickBooks comes down to three habits: dedicated income and equity accounts in your chart of accounts, a Class on every transaction, and a Project for each major grant. Add the three core journal entries for receipt, spending, and release, and you will pass an audit with clean statements and satisfied donors.

Start with one restricted fund today. Configure the account, set up the Class, create the Project, and post one journal entry. Once the workflow clicks for a single grant, you can replicate it across every restricted program your nonprofit operates.