What is Fund Accounting?
Fund accounting is a specialized accounting method that focuses on the allocation, management, and reporting of funds that carry a donor or government agency restriction. The nonprofit is obligated to use these funds as directed by the donor or grantor. Specialized tracking and reporting helps ensure transparency and accountability that the contributed assets are being used for their intended purpose. In this guide, we will cover what types organizations need it, different funds, best practices and more!
Table of Contents
- What Types of Organizations Need Fund Accounting?
- What Types of Funds Need Accounting?
- Fund Accounting Best Practices
- Fund Accounting vs. Traditional Accounting
- Summary FAQs
What Types of Organizations Need Fund Accounting?
Nonprofit organizations, such as charities and foundations, need fund accounting to manage donations, grants, contracts, and other financial resources earmarked for specific purposes. This accounting method helps ensure that funds are utilized according to donor restrictions and regulatory requirements, promoting trust and transparency with donors.
Government entities, including federal, state, and local bodies, rely on fund accounting to allocate taxpayer money and track spending for various projects, programs, and services. By segregating funds based on their intended use, fund accounting allows governments to demonstrate fiscal responsibility and compliance with legal mandates.
Educational institutions, such as public and private schools or universities, require fund accounting to manage their financial resources effectively. These organizations receive funding from various sources such as tuition, grants, and donations. They often manage very large endowments consisting of hundreds or thousands of individual donor restricted gifts—each of which must be tracked to ensure these assets are used appropriately.
What Types of Funds Require Accounting?
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.
- General Fund: This fund covers an organization’s day-to-day operations, including staff payroll and running basic programs.
- Restricted Fund: A fund established to support specific purposes, such as scholarships or building projects, as dictated by donor restrictions or legal requirements.
- Endowment Fund: This fund represents long-term investments made by an organization, with the goal to generate income through interest, dividends, or capital gains, while preserving the principal amount.
- Capital Projects Fund: This fund is designated for financing large-scale projects, such as the construction or renovation of facilities.
- Debt Service Fund: A fund set up to accumulate resources for the repayment of long-term debt obligations, such as bonds or loans.
- Special Revenue Fund: This fund accounts for revenues that are legally restricted for specific purposes, apart from those covered by other funds, such as grants or user fees.
- Permanent Fund: A fund established to support a specific cause or program indefinitely, typically utilizing only the investment earnings and not the principal amount.
Fund Accounting Best Practices
In order to be accurate, transparent, and accountable, it’s worth adopting these fund accounting best practices.
Separate Funds by Purpose
One of the core principles of fund accounting is segregating funds based on their designated purposes. This separation helps organizations maintain clear records and track the financial performance of each fund independently. Segregating funds also ensures that organizations comply with donor restrictions, legal mandates, and regulatory requirements, promoting transparency and accountability.
Establish Strong Internal Controls
Maintaining accurate financial records and reducing opportunities for fraud in fund accounting necessitate the use of effective internal controls. This involves doing things like recording standard operating procedures, task delegation, and conducting regular audits. The confidence of stakeholders and the standing of an organization can be strengthened by dependable financial reporting built on a foundation of internal processes.
Maintain Accurate Record-Keeping
This involves maintaining detailed documentation of financial transactions and ensuring that all entries are correctly categorized and allocated. Accurate records enable organizations to generate insightful financial reports, which help make more informed decisions and demonstrate fiscal responsibility.
Adopt Consistent Reporting Standards
Adhering to consistent reporting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), is essential for generating clear and comparable financial reports in fund accounting. These standards provide a framework for presenting financial information in a consistent manner, allowing stakeholders to assess an organization’s financial health and performance accurately and maintain regulatory compliance.
Invest in Fund Accounting Software
Investing in fund accounting software can streamline and automate the accounting process, increasing efficiency and accuracy. Modern software solutions, such as Blackbaud’s Financial Edge NXT, are designed to handle the unique requirements of fund accounting, enabling organizations to track multiple funds, generate customized reports, and maintain compliance with ease. Utilizing a robust fund accounting software also helps organizations save time and resources, allowing them to focus on achieving their mission and goals.
Fund Accounting vs. Traditional Accounting
While both fund accounting and traditional accounting share the goal of providing accurate financial information, they differ in certain aspects due to their specific applications. Below are some key differences between the two:
- The most obvious difference is the types of organizations. Traditional accounting is utilized by for-profit businesses while nonprofits mostly use fund accounting. Money within a commercial organization can be redirected at any time if the business wants to capitalize on an opportunity. Nonprofits do not have that flexibility with any of their restricted dollars.
- Fund accounting focuses on tracking and managing financial resources based on their designated purposes, whereas traditional accounting aims to track and measure a business’s overall financial performance.
- Fund accounting separates financial resources into distinct funds with individual financial statements, while traditional accounting typically combines all resources into a single financial statement.
- In fund accounting, organizations emphasize accountability and transparency to stakeholders, whereas businesses utilizing traditional accounting prioritize profit maximization and shareholder value.
Who is in charge of managing fund accounting?
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.
Can a for-profit business use fund accounting?
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. For example, a business might use fund accounting to manage resources for a dedicated project or to track the performance of a specific department.
Do I need special software for fund accounting?
The answer to this really depends on how many and how many different types of restricted funds an organization is managing. As an organization grows and receives either more donor restricted funds and endowments or if they are managing multiple government grants or contracts, a fund accounting system provides the types of internal controls and business rules that streamline managing the inherent complexity created by the acceptance of these dollars. Dedicated fund accounting software isn’t required, but is a huge asset that can assure that the organization is in compliance with externally imposed restrictions.