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If a nonprofit buys a $60,000 van expected to last ten years, GAAP doesn’t let it book the entire $60,000 as an expense the month of purchase. Instead, the cost is spread out — commonly $6,000 a year using straight-line depreciation — so each year’s financial statements reflect the portion of the asset’s value actually consumed that year.

Depreciation applies to vehicles, equipment, furniture, and buildings, but not to land, which doesn’t wear out. It’s a non-cash expense: no money leaves the bank account when depreciation is recorded, which is why cash flow statements add it back when reconciling net income to cash generated.

For nonprofits with facilities or vehicle fleets, depreciation can be a meaningful line item on the statement of activities — and it’s one reason “break-even” on a cash basis can still show a deficit once depreciation is properly recorded on an accrual basis.

A donor restriction might limit a gift to a specific program (“for the youth mentoring program only”), a specific time period (“for use starting next fiscal year”), or make it permanent, as with an endowment where only investment earnings — never the principal — can be spent.

Restrictions come from the donor’s own words, typically in a gift letter, grant agreement, or pledge form — not from how the nonprofit chooses to use unrestricted money internally (that’s a board designation, a different concept entirely). Under GAAP, every dollar received either has a donor restriction or doesn’t; there’s no in-between.

Tracking donor restrictions accurately protects the organization two ways: it keeps the nonprofit out of legal jeopardy for spending restricted money on the wrong purpose, and it gives the finance team the documentation needed to release restrictions properly once the donor’s conditions have been met.