Common nonprofit fund accounting mistakes involve the practice of making separate funds for each program activity, or grant received by your organization.
In Episode 3 of our Nonprofit Financial Management Video Series, we cover common misconceptions of fund accounting and how it can lead to problems and frustration down the road.
Common Nonprofit Fund Accounting Mistakes
One of the many mistakes utilizing nonprofit fund accounting for your organization is the notion that every program activity, or grant received by your nonprofit must be set up as a separate fund. While management might think this is giving them better information, it really is clumsy, confusing and creates an inordinate amount of work. With the proper accounting software tools and management practices that establish budgets for each of your program activities, money that is set aside for specific purposes can easily be tracked in the same fund.
Another misconception is thinking that your fund balance must equal your cash balance, so organizations will set up separate cash accounts for each fund. Fund accounting does not require a physical segregation of the assets of each fund. So you don’t need separate bank accounts for each fund, or separate receivables or payables for revenue and expenses related to the fund. All the organization’s cash may be kept in a single bank account and the receivables and payables are kept in the general fund. With a true fund accounting software system, you will be able to track the accountability of each fund.
Proper Fund Accounting Classifications
In our nonprofit financial management series episode 2, we talked about How Fund Accounting Makes Nonprofits More Accountable using two main categories of funds:
- Net assets without restrictions – Revenue received has no restrictions place on it by the donor and management can use the funds where needed to help fulfill its mission in both program and support services.
- Net assets with restrictions – Revenue received cannot be spent, but must be invested and the earnings from the investment can then be used for the purposed designated by the donor.
Understanding proper fund accounting methods will give you a better understanding of your financial activities, provide more meaningful information to your nonprofit board, funding sources and the general public.
Is your nonprofit organization following the rules of fund accounting? We welcome your thoughts and comments on how you are implementing fund accounting within your organization to become more accountable to your funding sources.
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