Which fund balance category is typically constrained by external sources such as grants or donors?

• A. Nonspendable
• B. Committed
• C. Restricted
• D. Assigned

Answer: (C)

When thinking about fund balance categories, external constraints come from outside the government, like grants or donor-imposed restrictions. This is why restricted funds are the category tied to external sources such as grants or donors. Donors and grantors specify how the money must be used, so those constraints remain with the fund and limit its use accordingly. Other categories reflect internal decisions: committed funds are constrained by formal actions of the governing body, and assigned funds are designated by management for specific purposes but not by external mandates. Nonspendable funds are not available for spending because they are in forms that cannot be spent (like inventories or prepaid amounts). So the externally imposed constraint characteristic points to restricted funds.