Donor-restricted endowment vs unrestricted endowment.

Donor-restricted endowment vs unrestricted endowment.

• A. Donor-restricted endowment has donor-imposed restrictions on corpus or income; unrestricted endowment has no donor-imposed restrictions.
• B. Donor-restricted endowment has no restrictions; unrestricted endowment is restricted on corpus.
• C. Donor-restricted endowment is always funded by government grants; unrestricted endowment is funded by taxes.
• D. Donor-restricted endowment cannot generate income; unrestricted endowment can.

Answer: (A)

Endowment funds in nonprofit accounting are defined by whether the donor places restrictions on how the money can be used. A donor-restricted endowment has restrictions imposed by the donor on either the principal (corpus) or on the income generated from it. Those restrictions reflect the donor’s intent and usually mean the principal must be preserved and only earnings (or funds allowed by the restriction) can be spent, often under a spending policy. An unrestricted endowment has no donor-imposed restrictions, so the organization’s board can use both the principal and the income as needed for its missions. The correct idea is that donor-restricted endowments carry donor-imposed restrictions on corpus or income, while unrestricted endowments do not. The other statements mix up who imposes restrictions, or misstate the ability to generate income, or link endowment types to government grants or taxes, which isn’t how endowments are classified.

Endowment funds in nonprofit accounting are defined by whether the donor places restrictions on how the money can be used. A donor-restricted endowment has restrictions imposed by the donor on either the principal (corpus) or on the income generated from it. Those restrictions reflect the donor’s intent and usually mean the principal must be preserved and only earnings (or funds allowed by the restriction) can be spent, often under a spending policy. An unrestricted endowment has no donor-imposed restrictions, so the organization’s board can use both the principal and the income as needed for its missions. The correct idea is that donor-restricted endowments carry donor-imposed restrictions on corpus or income, while unrestricted endowments do not. The other statements mix up who imposes restrictions, or misstate the ability to generate income, or link endowment types to government grants or taxes, which isn’t how endowments are classified.