Fund Accounting is unique to nonprofits and governmental agencies. Understanding funds and the proper implementation of fund accounting in your organization will help make your nonprofit more accountable to your funding sources.
Episode 2 of our Nonprofit Financial Management Video Series introduces fund accounting and how it helps your nonprofit achieve its financial goals. Knowing why your nonprofit needs fund accounting gives you a clear picture of the role accountability plays in raising more money and fulfilling your mission.
Fund Accounting Focuses On Accountability
The emphasis of fund accounting is accountability. A fund is like a separate company within your organization with its own self-balancing set of books to track assets, liabilities, revenue, expenses and fund balances, or net assets.
Fund accounting is necessary for nonprofits because the revenue earned by a nonprofit has different characteristics. Some funds are unrestricted, some have restrictions placed on them by either by the funding source, such as donors or grantors, some have restrictions placed on them internally by the board. Some restrictions are temporary, some are permanent.
3 Main Categories of Funds
Let’s start with net assets without donor restrictions, which contains the general activities of the organization. It may be known as the Unrestricted Fund, Operating Fund, General Fund, or most commonly Current Unrestricted Fund. This fund contains no restricted resources, and management can use the revenue in this fund as it chooses, to carry out the purposes for which the organization exists.
Then, there is the net assets with donor restrictions, which contains resources donated to the organization with the stipulation by the donor that only the income earned by these assets can be used while the original gift is kept intact, either forever (permanent endowment) or for a stated time (term endowment). Generally the income itself is not restricted and can be used to carry out the organization’s ongoing activities, but some endowment gifts also have restrictions on the uses to be made of the income.
Subcategories Help Identify Funds for Specific Purpose
Those are the two main categories of funds, but there are sub-categories that can be part of your overall financial makeup such as Board Designated Funds which are a subcategory of unrestricted funds. They are established when the board acts to transfer or segregate part of the unrestricted into a fund that the board intends to use for a specific purpose.
You can also set up a Fixed Asset Fund to track all of your buildings, furniture and fixtures and equipment. The principle reason for using this fund is that the board wants to separate these assets from the unrestricted fund. The unrestricted fund will then represent more closely the current activity of the organization, that is, the funds available for current program use. The use of a separate fixed asset fund is largely a board decision, and there is no reason why a separate fund must be established.
Why You Need To Understand Fund Accounting
There is nothing difficult about fund accounting other than mechanics. It reflects an accountability or stewardship concept, used principally by not-for-profit and governmental organizations that are legally responsible for seeing that certain resources are used only for specified purposes or during specified time periods.
Is your nonprofit organization applying these methods of fund accounting? We welcome your thoughts and comments on fund accounting.