A restricted fund is a reserve of money that can only be used for specific purposes. Restricted funds provide reassurance to donors that their contributions are used in a manner they have chosen. When a donor gives money to a nonprofit organization or charitable company they must specify whether the gift is unrestricted and can be used for any purpose the organization sees fit. If the funds are temporarily restricted, they must be used for a specific purpose. With permanently restricted funds, the donation acts as principal on which interest can be earned (and only the interest is to be spent).
Restricted funds has been categorized into two
Whatever type of restricted fund is set up, the nonprofit or charitable organization must keep track of it and report it appropriately in its financial statements