Understanding Fund Accounting

Summary: A financial management system for non-profit entities, meticulously tracking and reporting funds with distinct purposes or restrictions.

Fund accounting is a system employed by non-profit entities to manage and report the financial activity of cash or grants. These funds, usually contributed by individuals, grant
agencies, governments, and other organisations often come with specific restrictions or limitations on how they should be spent.

 

Decoding Fund Accounting

Financial reporting requirements for Non-Profit Organizations (NPOs) and government entities can be quite different from those used by profit-driven businesses. Instead of focusing on profit, their primary goal is to track and report the various uses of the funds they receive.

NPOs typically receive two types of funds: unrestricted grants that can be spent as needed, and restricted funds that come with particular criteria for their usage. Fund accounting helps to segregate and monitor these funding streams, enabling a clear differentiation and thorough tracking of funds subject to specific donor terms.

 

Goals of Fund Accounting

The primary aim of fund accounting is to provide explicit accountability for both general and specific-purpose funds, enabling precise tracing of amounts. It helps keep track of expenditures and confirms whether they align with the conditions set out by the donor.

Besides, fund accounting is used to assess an entity’s financial health and deliver accurate financial information for reporting purposes. It also provides a rationale for expenditures made against a particular grant, for instance, those related to capital projects.

 

Working on Fund Accounting

Non-profit and government entities often use fund accounting. This system records resources obtained with a specific purpose in mind. There are two main types of funds: restricted, to be used for a designated cause, and unrestricted, which can be used freely as required.

The terminology used in non-profit finances might differ from that of profit-oriented companies. For instance, Non-Profit Organizations prepare payment and receipt accounts, revenue and expenses accounts, and balance sheets.

 

An Example of Fund Accounting

Consider a school operating as a non-profit. It receives a donation for building repairs, a separate one from a local business to provide healthy meals for students and a general fund donation with no specific purpose attached.

The donation earmarked for repairs can be used only for that purpose and needs to be set aside until needed. Likewise, the food-related donation should be used solely for that purpose. The general fund donation, however, can be spent freely, such as on teachers’ salaries or overall school expenses.