Explanation of option. { C {

When accepted, donations are classified as unrestricted, temporarily restricted and permanently restricted. These assets are broken down on a nonprofit organization's Statement of Financial Position, which is equivalent to a balance sheet. Generally, the majority of donations to nonprofit organizations are unrestricted, which allows the organization to freely utilize the money as they see fit. Temporarily restricted assets come with strings attached — that is, they must be earmarked for certain purposes, but only until expiration of the term stipulated by a donor.
The third type, permanently restricted assets, are usually related to a particularly large donation, the donor of which a majority of the time will specify the purpose of the money. The amount will be meaningful and intended to fund designated areas in perpetuity (i.e., "permanently"). A common type of permanently restricted asset is real estate. For example, an individual or organization may donate a large chunk of real estate to a nonprofit entity, such as a public university, with the restriction that the property only be used to house scientific research labs in perpetuity. The property can never be resold by the university for a capital gain.

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Classification of Endowment Net Assets

Endowment funds are created to provide a perpetual source of income for a nonprofit organization. The principal amount of an endowment fund is invested, and the earnings generated are used to support the organization's programs and activities. The net assets of an endowment fund are classified into three categories:

1. Temporarily Restricted Net Assets
Temporarily restricted net assets are funds that have been donated to the organization with restrictions on their use. These restrictions may be time-bound, purpose-bound, or both. The purpose of the restriction is to ensure that the funds are used for a specific program or project. Once the restriction is lifted, the funds become unrestricted and can be used for any purpose.

2. Unrestricted Net Assets
Unrestricted net assets are funds that have no restrictions on their use. These funds can be used for any purpose deemed necessary by the organization. Unrestricted net assets are the most flexible type of funds and provide the organization with the most autonomy.

3. Permanently Restricted Net Assets
Permanently restricted net assets are funds that have been donated to the organization with the restriction that the principal amount cannot be spent. Only the earnings generated from the principal can be used to support the organization's programs and activities. The purpose of the restriction is to ensure the long-term sustainability of the organization.

Conclusion
The principal portion of an endowment is classified as permanently restricted net assets because it cannot be spent. The earnings generated from the principal can be temporarily restricted or unrestricted, depending on the donor's wishes. The classification of endowment net assets is important for financial reporting and compliance purposes.