Preparing for an Audit: Classifying Revenue
t is important to classify revenue correctly in your chart of accounts. Doing so ensures that you will be prepared for the investigative process of an audit. Revenue can be defined as income received from donations and earned from program service fees.
When it comes to nonprofit organizations, donated revenue, in the form of contributions, pledges, and gifts are classified in one of three categories. The main categorization tool used to define them is the existence or absence of donor imposed restrictions.
This is revenue that has no impositions from the donor. They are available funds that you may use toward any purpose. For this reason, you are permitted to use them toward the expense of operating your organization.
2. Temporarily Restricted Revenue
This revenue is restricted for one reason or another, on a short term basis. It will one day become unrestricted and it can be classified as one, or both of the following types:
- Purpose: The money must be spent as the donor specifies, such as a particular program/class (i.e. cancer research; youth education; capital campaign).
- Time: The contribution is restricted until a fixed period passes. Examples of this would include pledges or bequests. For example, the gift of a CD that states it must be held until maturity. After maturity, the CD can be spent as the organization wishes.
This contribution is characterized by a restriction that can never be removed. For example, an endowment fund with a principal must be retained; however its income can be used by your nonprofit in accordance with donor stipulations.
Keep in mind that these restrictions do not apply to funds designated by your internal board, these are considered UNRESTRICTED. An example of this would be your governing board designating a sum of money for a specific project or program. Although the use of these funds is restricted to a certain area, when you report them financially they do not fall under the restricted category.
For funds to be considered “restricted”, the restriction must be designated by an external source, such as by the grantor/donor.