Those who repeat the mantra “accounting is black-and-white” are wrong because not all accounting is the same. It changes based on the industry in which the accountant operates. This is because the financial goals change per industry and therefore the management of those finances will also change.
While for-profit companies are focused on generating a profit (as indicated in the name), other not-for-profit organizations like nonprofits, government agencies, associations, and churches leverage a type of accounting called fund accounting. This financial management system focuses on leveraging finances to be as accountable to the revenue generation sources as possible and to advance the organization rather than generate a profit.
In this guide, we’ll discuss the essentials of fund accounting, covering the common questions associated with it. We’ll cover the following:
Ready to get started with this discussion on fund accounting? Let’s dive in!
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.
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.
For example, when a nonprofit organization earns a $100 donation from a donor, that money can be used to fund the operational costs of the organization, be dedicated toward a specific program, or be used to help host the next fundraising event. The money is not collected as profit.
Fund accounting is unique to organizations that do not aim to earn a profit. The element that makes it truly unique is that it focuses on ensuring the “accountability” of the organization because these organizations generally rely on the generous contributions of supporters (donors at a nonprofit, congregation at a church, etc).
Some of these supporters may give a large gift to organizations, but require the money to be maintained, invested, and only the interest spent on specific projects. These are referred to as restricted gifts and they must be honored by the organization that agrees to the terms.
For example, a major donor at a church may ask their contribution to be dedicated to the mission trip scholarship program, allowing members of the youth group to attend mission trips.
When these organizations encounter financial audits, their accounting documents are checked to ensure that the funds they accepted are dedicated to the proper projects and causes. Essentially, this is designed to ensure organizations have remained accountable to those who ask to restrict funding.
Fund accounting is generally used by any organization that focuses on accountability rather than profitability. This includes nonprofit organizations, government entities, churches, and associations.
These 501(C)(3) organizations are the primary type of organization discussed in matters of fund accounting.
Charitable organizations rely on contributions from supporters, grants from numerous organizations, federal and state funding, and sponsorships. These generous contributions all play an important part in keeping the organization afloat and working toward the mission.
Nonprofits must restrict their funding to keep track of how their monies are used based on who contributed those funds and how they were restricted. For example, organizations that rely heavily on grants likely have specific deadlines and requirements they need to meet for each grant. Therefore, they use fund accounting to keep track of those deadlines in addition to tracking donor-restricted funds.
Governing entities are not focused on generating a profit. They need to keep a tight grip on their finances to determine how funds are leveraged for a variety of purposes and different projects. This is true for all levels of government—federal, state, and local.
These governments must stay true to the standards set by the Governmental Accounting Standards Board (GASB). This board has the responsibility of setting financial standards for state and local governments. Its purpose is essentially the same as the Financial Accounting Standards Board (FASB), which holds the same responsibilities, but for non-governmental organizations.
Fund accounting helps government entities keep accurate and tight control over their financial information, with a particular focus on the remaining resources. This helps prevent general overspending or overspending in areas outside of the set budget for the government.
Consider what all the church needs to pay for out of their bank account. They have a general fund, a missions fund, and a building fund:
Because these expenses fall somewhat neatly into different categories and because the church is (like nonprofits and governments) working to keep a close eye on how their finances are used, fund accounting is the perfect system of financial management and reporting for churches.
Churches also run into fund restrictions and grant management needs, requiring them to remain accountable to their generous funders. Therefore, church accounting is similar to nonprofit accounting in the need to organize finances into funds.
Imagine you purchase a new pair of shoes for $50. At the time of the purchase, you’re primarily excited about the fact that they look good, are comfortable, and match an outfit you look forward to wearing to a big event.
You’re probably not thinking as much about where you’re money went when you purchased the shoes. You may have checked up on the company to be sure they treat their employees well and have a positive community impact, but this just means you wanted to support a good company. If you hear that the $50 is going to help pay the salary of an employee, you’ll probably be happy that it’s not going into the pocket of the CEO.
Now, imagine you give a $50 donation to a nonprofit organization. You might be more interested in how that money is used because you gave it out of the goodness of your heart. You want to make sure that money will help people in need. You may even be less excited to hear that the money was used to help pay someone’s salary.
Fund accounting is important because it helps organizations appeal to these supporters who want to better understand where their money is going and how it’s helping.
Fund accounting helps organizations stay accountable in several ways:
Fund accounting allows organizations to allocate their funds based on the liquid assets in their system. Restricted monies, grants, and other funds are less liquid than other monies at the organization. Therefore, they can’t be used as easily as other funds to help the organization operate.
Fund accounting allows your organization to separate your revenue into buckets, including the restricted, unrestricted, and temporarily restricted funds:
When contributions are made to nonprofits, they are recorded in the chart of accounts based on where they came from and how they’re used. The organization assigns numbered classifications for funds. For example, contributions may be listed under the 4000s, with individual contributions listed as 4100s and in-kind contributions listed as 4200s.
This breakdown helps keep the funds all organized. This organization and allocation also acts as the basis for various statements that help nonprofits make financial decisions. For example, the following statement of financial position breaks down monies by liabilities and assets as well as restricted and unrestricted funds.
This particular statement allows organizations to see their liquidity because it takes restrictions into account when measuring net assets. Other statements also take these restrictions and fund accounting specifics into account, allowing the organization to further analyze its finances and make smarter financial decisions.
This template provides a clear and organized way to present financial information, including revenues, expenses, and net change in financial position, by class, location, and project.
Smaller organizations often don’t have the resources to find a dedicated fund accounting professional. Therefore, they end up relying on their executive director to complete all of their financial management tasks. However, these individuals likely didn’t enter the field the crunch numbers and have other things to worry about than learning how to do fund accounting.
For most organizations, the best way to get started and ensure fund accounting is completed correctly is by outsourcing their needs to a dedicated accounting firm that understands (and specializes in) the intricacies of fund accounting.
By putting your accounting needs in the hands of fund accounting experts, your organization will ensure you meet all of the Generally Accepted Accounting Principles (GAAP) and FASB requirements.
Here at Jitasa, we’d be honored to be those experts for your organization!
Our team works with nonprofits, churches, and other organizations that leverage fund accounting, helping them maintain an organized accounting system and answering any of their questions. We focus on helping these organizations get back to their missions while we take care of ensuring they’re in a financially sound position.
Get a quote to see how affordable it is to work with dedicated experts!
Fund accounting allows organizations to ensure they remain accountable to their funders and to their missions. It’s a system of organization that makes it easy for organizations to track their funding, how it’s allocated, and how they can best keep the organization operating at the highest caliber.
If you’re curious to learn more about fund accounting and financial management for organizations that leverage this type of accounting, check out these additional resources:
But our Jitasa experts can make it easy!
