Fund Accounting 101: The Basics and Best Practices

A fund is a project or purpose within an organization that needs to be tracked separately. Fund accounting for nonprofits allows organizations to separate their resources into different categories, including unrestricted, restricted, and temporarily restricted funds. To maximize accuracy and efficiency, these organizations often use fund accounting software for nonprofits. Fund accounting is primarily seen in nonprofit organizations, government agencies, and churches.

What types of organizations need fund accounting?

While standard business accounting measures the profit a business generates, fund accounting is all about accountability for financial resources. It allows organizations to keep tabs on fund accounting meaning money assigned for specific purposes to ensure it’s spent as intended. Funds in accounting can sometimes refer to available cash, but when used in the context of “fund accounting,” it’s different. In fund accounting, a fund is a separate set of books maintained by nonprofits that tracks the assets, liabilities, income and expenses designated for a particular purpose.

Regulatory and compliance requirements

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. Additionally, fund accounting is the only way to show the church a consolidated financial statement for all funds. This type of report shows how the organization is doing financially overall. Board-designated funds are set aside for a specific purpose by the nonprofit organization’s board.

Fund balances and reserves

For example, 501(c)(3) organizations must submit Form 990 annually to report how funds are used. These organizations handle everything from operational funds to capital normal balance projects. Nonprofits need to know how much money they have received and spent and what’s left over across different areas of their organization. It can feel daunting to take on a new way of accounting, but with the right tips and tools, you can start fund accounting with no stress.

Think twice before accepting restricted funds

• In fund accounting, organizations divide their money into funds to ensure it’s used for the right purpose.
• Most nonprofit organizations have at least one professional accountant in charge of managing and reporting across all funds held by that organization.
• Choose fund accounting software to automate this process and generate reports to track balances.
• We’ll also cover why they might have different purposes in their queries about the financial health of the organization.
• It provides additional transparency and accountability to stakeholders by showing how contributions and earnings are spent.
• Nonprofit leadership will then review these balance sheets to ensure the organization is on the right financial path.
• For example, on the donation funds, the finance stewards like to compare a specific funds.

Whether it’s nonprofits, government agencies, or universities, each uses fund accounting to ensure funds are tracked for the right purpose. In fund accounting, one of the main principles is distinguishing between restricted and unrestricted funds. When you use nonprofit accounting software to track your funds, you demonstrate that your organization is a responsible steward of the financial resources entrusted to you.

• The expense accounts can’t tell you how much is remaining in the utility envelope or any other envelope like gas, groceries, and so on.
• Correctly allocating revenue and expenses is key in nonprofit fund accounting.
• This involves creating the legal and regulatory framework for the fund, including the creation of governing documents such as partnership agreements and subscription agreements.
• We have shown the Statement of Financial Position in the image below to help you understand how the restricted funds reflect in it.
• This accounting system includes managing funds where resources from different contributors are allocated while demonstrating accountability.

Fund accounting is an accounting practice that’s common among nonprofit organizations. Unlike traditional accounting processes that focus on recording profits and losses, it focuses on tracking money to make sure it’s being used for its designated purpose. For instance, a nonprofit may need to track specific grants with deadlines or conditions, and fund accounting helps ensure that the money is used as intended. According to Harvard Business Review, nonprofits must create financial statements for each group of funds. Each fund should self-balance, meaning its financial statements account for money in and out, noting if there Interior Design Bookkeeping is an excess or a deficit for each fund.

• Investing in financial transparency builds trust with donors and stakeholders, making them true partners in your mission.
• Fund administrators navigate an environment where every transaction comes with extra baggage.
• So it is important that they are tuned in to the organization’s finances, and not turn a blind eye to it because someone “else” takes care of it.
• When a nonprofit records activity, it needs to not only choose the accounts affected but also designate a fund.

Fund accounting basics: 5 key principles

When organizations receive contributions, they record them in the chart of accounts depending on where they come from and how they are expected to be used. For example, in a church fund accounting chart of accounts, each fund has a numbered classification for easier categorization and decision-making. Donations may be recorded under the 2000s, with individual contributions under 2100s, donations in kind under 2200s, and so on. By categorizing funds into fund accounts, organizations can easily demonstrate compliance with any restrictions placed on the use of the money. Donors, government agencies, and other stakeholders often appreciate this transparency. Choose fund accounting software to automate this process and generate reports to track balances.