Explain the term “temporary restrictions” in nonprofit accounting.

The term "temporary restrictions" in nonprofit accounting refers specifically to conditions imposed by donors that limit how or when funds can be used. This concept is crucial in nonprofit financial reporting, as it provides transparency about the intended use of the donated resources. These restrictions can dictate that funds are to be used for a specific project, event, time period, or purpose, ensuring that the donor's intentions are honored.

For example, if a donor contributes money specifically for a building project, the nonprofit must recognize that this donation has a temporary restriction until the building is completed. Once the purpose of the donated funds has been fulfilled, those restrictions are released, allowing the organization to use the funds freely as part of their overall revenue.

Understanding temporary restrictions helps stakeholders, including donors, board members, and financial auditors, assess the availability of resources for operational needs and ensure compliance with donor wishes. This crucial element of accounting promotes accountability and trust between nonprofits and their funding sources.