Fund Accounting 101 Definition, Use, and More

fund accounting

Nonprofits and governments need to understand fund accounting basics in order to ensure transparency, accountability, and responsibility in their financial management. It also helps them report their finances to the IRS, honor any restrictions placed on their assets, and ensure they have the funds necessary to continue operating. This is essential for for making sure funds are managed properly and used for the right reasons. Organizations that receive revenue through public and private sources of funding use the system of fund accountancy rather than traditional business methods of accounting. Fund accounting refers to the management and allocation of revenue an organization acquires through donations, tax payments, grants and other public and private sources.

fund accounting

To learn more about mutual fund accounting and hedge fund accounting click here. Most will say that fund accounting is harder to use, but it really is just a different way of thinking. It’s no different than a for profit system where you need to know the credit and debit to code the transaction right. Think of the fund as a category that encapsulates the transaction which keeps that transaction from affecting any other category (fund). A GIGO example is, if they enter a transaction for an expense and code it to the Youth fund instead of the General fund, then the reports for both funds would be incorrect. The Youth fund report would show less money than it should in the checkbook.

NAV accounting calculation

In some cases, a board will transfer funds into a special fund, or subcategory, for a specific purpose. For example, a Fixed Assets Fund Accounting for In-Kind Donations to Nonprofits tracks buildings, furniture and fixtures and equipment. In this case, the board can separate these assets from the unrestricted fund.

If you look at your property tax bill, you’ll see that your tax is applied to various government programs. All of those programs must be accounted for separately to ensure that your tax dollars are used properly. Most nonprofit  organizations have at least one professional accountant who is in charge of the management and reporting across all of the funds held by that organization. They are responsible for maintaining regulatory compliance and ensuring donor stewardship.


Government receive most of their funds from taxpayers and therefore require to be completely transparent about how the funds are allocated and spent. The goal is not to maximize profits like in basic accounting but use the funds in the most productive ways to provide specific services or support causes. Fund accounting helps governments organize their resources for easy management and tight control, all while staying compliant with laws and regulations. While fund accounting is primarily designed for nonprofit organizations, government entities, and educational institutions, for-profit businesses can also utilize this method for specific purposes.

While we touched on organizations that need fund accounting, it’s beneficial to have a brief rundown of the types of funds that have unique accounting needs. Examples of the types of entities that may use fund accounting are artistic foundations, charities, churches, colleges and universities, governments, hospitals, nursing homes, and orphanages. Funds are intended to restrict the uses to which certain cash flows can be used. By taking this approach, an organization has better control over the uses to which cash inflows are used.

Recording revenues

And finally when purchasing the piano, were the piano fund monies used instead of another fund? Once the obligation is fulfilled, then the church should take appropriate steps to take care of any left over monies, in accordance to church bylaws and other FASB regulations. However, if they ran a report for the entire organization which includes the General and Youth fund, it would show the checking account to be right. Treasurers prepare the accounting reports for the church board, and at times answers the church board’s questions. Liabilities, revenues, expenses, and asset accounts can all have various fund allocations for any transaction that hits them.

fund accounting

For eg, they may compare the performance of several funds and prepare reports based on the gathered data to be used by the management. Fund accounting can include researching the effect of certain actions on fund values. Fund accounting is a way for nonprofits to stay in control of their finances and make sure they’re living up to the public’s expectations when it comes to handling money. If you have multiple funds, you can have the total for all the funds recorded to a single bank account on your Chart of Accounts, but have multiple sub-accounts to track individual funds. Let’s say you manage a nonprofit that helps stray animals, and your operations are pretty straightforward at the moment. You receive money from donations, and you spend a little to keep the lights on.

Fund accounting vs. regular accounting

Temporarily restricted funds are those funds that were received from the donor with certain restrictions that will be satisfied in the future. It is responsible for keeping a record of such funds and ensure that they are only being used once the restriction has been lifted. Private equity should accommodate privately held companies since private equity funds are not traded publicly. Private equity fund accounting must be adjusted to clearly outline the financial situation and operation of the private equity fund. Private equity accounting is complex and unlike other investment vehicles.

In fact, accounting principles mimic real life processes of how money comes in and out of your pockets. In this section we are gonna go over the five main areas of accounting, normal balances, and accounts in the chart of accounts. If all the money went into one pot without a fund annotation — how will the church assure the donors, that their money went for the new building project and not some thing else? Using a fund based accounting system is the only way you can show them a financial statement for the Building fund and what its expenses and revenues were, separate from everything else.

Adopt Consistent Reporting Standards

Essentially, this is designed to ensure organizations have remained accountable to those who ask to restrict funding. This is a useful method of accounting when all of the funds an organization earns are recycled and reinvested back into the organization itself rather than collected as a profit. Fund accounting is a system of accounting used to track the amount of money allocated to various operations at an organization. It’s a system designed to ensure funds are used productively and for the benefit of the organization as a whole.

  • It helps the government keep track of all the funds received from donors and expenditures.
  • It helps the church board filter out the noise from other mission areas in the reports.
  • The NAV is the assets of the fund minus the liabilities of the fund.
  • Where regular accounting tracks money in and money out and is meant for for-profit companies, fund accounting is more specific.
  • The normal balance is the expectation that an account, depending on its classification (ie asset, liabilities, etc.) within the chart of accounts, will have a credit or debit balance.
  • Nonprofits and governments need to understand fund accounting basics in order to ensure transparency, accountability, and responsibility in their financial management.

Deja una respuesta

Tu dirección de correo electrónico no será publicada. Los campos obligatorios están marcados con *