You’re running into a very common challenge for nonprofits , tracking restricted funds accurately while still maintaining proper expense categorization. The key is to set up your system so that you can monitor restricted fund balances without distorting your P&L or expense accounts.
Here’s the best approach:
1. Use Classes for Fund Tracking (Correctly)
You were on the right track with Classes. Each restricted fund should be assigned its own Class (e.g., “Restricted – Youth Program Fund,” “Restricted – Building Fund”).
Assign this Class to all income and expenses related to that fund.
Your unrestricted activities get a Class like “Unrestricted.”
This allows you to run a Profit & Loss by Class report, which shows the inflows and outflows per fund — exactly what you need for donor or board reporting.
2. Record Donations and Fees Separately
Avoid using negative lines on the Sales Receipt for PayPal fees — that’s what causes the positive value issue. Instead:
Record the gross donation in your donation income account with the appropriate Class (e.g., “Restricted – Building Fund”).
Then record the PayPal fee separately as a Bank Expense (or a Check/Expense transaction), categorized to your PayPal Fees expense account and assigned the same restricted Class.
This way:
Your donation income is correctly recorded in full.
Your PayPal fees are properly tracked as expenses.
Both appear correctly under the restricted fund in your Class report, with the fee showing as a deduction (negative).
3. Optional: Track Fund Balances
If you want to see each restricted fund’s balance (like a mini balance sheet per fund), you can run a Balance Sheet by Class report (available in QuickBooks Online Advanced or QuickBooks Desktop).
If you don’t have that feature, you can simulate it by creating a spreadsheet to reconcile beginning balances + inflows – outflows per fund.
4. Avoid Equity Accounts for Tracking
Equity accounts don’t work well for restricted funds because they don’t flow through the P&L. You lose visibility into how the funds are being used and can’t easily report income/expenses by restriction.
Summary
Use Classes for each restricted fund
Record income and related expenses separately (never as negative lines)
Run P&L by Class to track inflows and outflows per fund
Use Balance Sheet by Class (if available) to see fund balances
If you’d like, feel free to message me — I’m a professional bookkeeper and QuickBooks freelancer based in the UK, and I can help you set up your chart of accounts and class tracking properly so restricted fund reports are accurate and audit-ready.
