QuickBooks and Temporarily Restricted Net Assets


Wendell H. writes, “How do I track temporarily-restricted and [permanently] restricted funds with QuickBooks? Are they to be considered “Equity” and if so, how are they setup?”

QuickBooks started as accounting software for the construction industry and has expanded widely since then. For nearly a decade or so, it has marketed a Nonprofit version of Premier, leading consumers to think that the software will be a perfect choice for nonprofits. But while it has many features that are useful, QuickBooks’ basic for-profit structure has not been modified in any way to make tracking of temporarily and permanently restricted activity and fund balances as easy as it should be.

One of the changes Intuit made in the NFP version was to replace ‘equity’ in the balance sheet accounts with ‘net assets’. If you have a version of QB that has an ‘equity’ section, you probably have one that’s meant for a commercial enterprise. But never fear, you can adapt it for use with your nonprofit and will face pretty much the same challenges as users of the NFP version will.

Let’s take a moment to review nonprofit financial reporting. The balance sheet is technically called the Statement of Financial Position and it has three sections: Assets, Liabilities and Net Assets. That last section is divided into Unrestricted, Temporarily Restricted, and Permanently Restricted Net Assets. Permanently Restricted Net Assets are endowments and most small nonprofits and many larger ones don’t have them.

The income statement is technically called the Statement of Activities and has up to four columns: Unrestricted, Temporarily Restricted, Permanently Restricted and Total. Each of these columns reports income, expense and net income (also described as change in net assets).

Accounting software that’s designed for nonprofits can produce reports in the prescribed columnar format because it can close income and expense to each level of restriction separately. And that’s one of the problems with QuickBooks: it closes all income and expense to the same account, whether the income was restricted by donors or not.

The challenge for accountants, then, is to somehow keep restricted activity separate from unrestricted activity using the few means available in QuickBooks: account numbers, classes, and customer:job. If you can do this, then you have the information you need to separate restricted activity with a journal entry once you’ve closed a month. And that’s the other problem with QuickBooks: I wish it had a better way to track grant activity so reports by grant could be produced more easily.

Returning to Wendell’s question, the first thing to do is to set up accounts in the equity section of the chart of accounts so you have all the ones you need. Rename the Retained Earnings account that comes with the software to Unrestricted Net Assets. .QB will post the annual net income to this account as it closes each fiscal year. Next, add an account called Temporarily Restricted Net Assets. This account will have no activity in it except what you put there by journal entry.

The next thing to do is to settle on a way to keep track of TR grants and donations as well as expenses by TR category (these are usually grants) that will allow you to easily determine the amount of money that has been released from restriction each month. Your choices are to either set up an unrestricted class and a TR class for each funding source; use classes for program areas only and set up a customer for each funder and a job for each grant; or use account numbers to distinguish between them.

I’ve tried both of the first two approaches and I’ve also tried combining them. The third option is not one I’d recommmend, though I’m not a QB expert and I don’t like exporting to Excel to prepare reports. If any one has used this approach successfully, please write and let us know how you made it work.

Let’s say you pick the first approach. You will add a section to your Class List called Temporarily Restricted, and it will have a subclass for each funding source you want to track. This will produce an Income Statement by Class with a section of classes for TR activity to the right of the classes for your programs. You’ll also need a new account in the income section of the chart of accounts called Transers from TR – let’s say it’s #4900.

Each time a grant is awarded, you’ll set up a new class as a subclass of the program area the grant supports and another one as a subclass of TR activity for the same program. Grant income will be posted to the TR class. As you record monthly expenses (salary and wages, benefits, travel, etc.), you’ll post each one to the unrestricted class for that grant. At the end of the month, after reconciling your balance sheet accounts, you’ll allocate indirect costs to the unrestricted classes. Once you’ve done that, print a report for the unrestricted class. There should be no income yet, and the net loss you see will represent the amount of TR that has been released. To record this, post a journal entry to account #4900 with the debit posted to the TR class and the credit to the unrestricted class for that grant. Print the income statement for the unrestricted class again. This time, net income should be $0.

The final challenge is the Net Assets section of the balance sheet. It’s a challenge because you cannot split the Net Year-to-Date Income account into unrestricted and TR.Your choices are to leave the accounts as they are or to update the TR Net Assets section with a journal entry. I usually choose to update it for my clients because managers and finance committees always want to know how much temporarily restricted money they have left, and leaving last year’s balance on the balance sheet month after month doesn’t seem like the best solution. To make this update, take the total of all the transfers you made that month and DR unrestricted net assets and CR TR net assets. Now the balanced in TR net assets is correct, and the sum of year-to-date net income and Unrestricted Net Assets is the month-end total of unrestricted net assets.

Thanks for your question Wendell! I’d love to hear from readers who’ve wrestled with this difficulty and found solutions you can share.

Nancy Church

About Nancy Church

A CPA in Portland, Oregon with over 20 years experience in auditing, accounting and consulting for nonprofit organizations, Nancy Church is the director and primary driving force behind NFP Accounting Help. A mother of three children, Nancy enjoys music, dancing, working on her old house, hiking, and thinking about how NFPs can create a more effective and efficient accounting process.

  • PJ

    I am working with a few NFPs that have never recorded their assets or funds as equity or net assets. I have set up the equity accounts and posted the JEs as follows:

    For Reserve fund opening balance:
    Acct 3590 (Prior Yr Surplus or RE) DR $300K
    Acct 3330 (Reserve Fund Equity – Sub of TR) CR $300K

    (To show Term Deposits as TR)

    For Reserve fund contribuitions:
    Acct 6900 (Trfrs to Reserve – Other Exp) $50K
    Acct 3330 Reserve Fund Equity – Sub of TR) CR $50K

    And bank transfers of course

    A couple things concern me about this… Is it correct to post to Prior Yr or RE to show the equity they have had but not shown? Do I need to do a YE JE to reverse the Other Exp of their contributions (they budget for this ‘expenditure’) but it is not really an expense. So can I CR the Other Exp and DR ___ (I’m not sure)?

    Another situation is where they are setting aside funds for future major purchases. Accumulated funds were previously only recorded as a different bank account.

    I have set these other funds up as an equity as well as a liability as follows:

    Acct 3590 (Prior Year (now deficit) DR 100K
    Acct 2120 (Reserve Funds Payable) CR $50K
    Acct 3320 (Reserved Funds – Future Purchases) CR $50K

    When they make the purchase I will:

    Acct 1490 (Asset) DR $50K
    Acct 1020 (Bank) CR $50K
    Acct 2120 (Reserve Funds Payable) DR $50K
    Acct 3320 (Reserved Funds – Future Purchases) DR $50K

    Acct 3??? (Do I make an Equity item for this Asset?) CR $50K
    Acct ???? (I need another account to CR? – Help!)

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