About Revenue

As noted in Basic Financial Concepts, in order to spend money, you must first have money to spend. Revenue is the word we use to talk about money that the organization receives.

Whatever the source of the revenue, it comes in two basic forms: restricted and unrestricted.

A note on terminology:
I'm using terms restricted and unrestricted to describe practical limitations on the use of funds. These terms also have strict technical meanings for accountants. Accountants are interested in how and when revenue is recognized in the organization's financial accounts, and so they have a specialized way of recognizing revenue. Please remember that I am not using these words to mean precisely what accountants mean when they use them. I'm simply describing the basic, practical limitations on the use of funds as they are experienced by the typical NGO.

Mainly, revenue is recognized as restricted or unrestricted based on the donor's instructions at the time the gift is made.

Restricted Revenue
The most typical form of restricted gifts is a grant (or cooperative agreement) intended to fund a specific activity of the organization. It is a hallmark of restricted gifts that the recipient may not use the gift for purposes not approved by the donor (funder). Grants are usually made in response to a proposal that was submitted by the recipient organization to the donor, and the donor usually conveys its specific restrictions on the size of the gift and how it may be spent via the terms and conditions of an award agreement — a form of binding contract between the donor and the recipient organization. (See also Basic Facts about Funding Agreements.)

Furthermore, nearly all federal grants and many non-federal grants are made strictly for the reimbursement of allowable costs. So, not only is the use of the funds restricted, but the total amount of the gift is restricted as well — to reimbursement of actual costs incurred.

Unrestricted Revenue
Sometimes, donors will give money to a recipient with "no strings attached." When this happens, the revenue is recognized as unrestricted. This means that the recipient may use the funds (its unrestricted reserves) in any legal way that it chooses. Such gifts are often referred to by the donor as general support donations.

While restricted gifts most often result from proposals, unrestricted gifts most often result from fundraising campaigns, also sometimes called appeals for general support.

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