All organizations need systems in place to record financial transactions and report their activities. Nonprofit and government agencies receive money through donations or contributions and spend these funds to further their missions. These agencies use fund accounting to record financial actions and to communicate their financial positions. Fund accounting reports both restricted and unrestricted net assets on the balance sheet.
Fund accounting relies on knowing the purpose of the money received and reporting the organization’s finances based on the purpose. These agencies often collect money for a variety of purposes, such as a building fund or a mission fund. Some donors contribute funds for a specific purpose; others contribute funds for the agency to use for any reason. Fund accounting allows the organization to manage the funds according to each purpose, assuring contributors that their money will serve the purpose for which it was intended.
The balance sheet is one of the main financial statements issued by the agency. The balance sheet, or the statement of financial position, communicates the balances maintained by the agency for each asset, liability or net-asset account. The balance sheet lists the assets and liabilities in order of liquidity; in other words, the assets closest to converting to cash are listed first. The liabilities closest to using cash are listed first in the liabilities section.
Net assets on the balance sheet fall into several categories, including temporarily restricted, permanently restricted and unrestricted net assets. Permanently restricted net assets are funds contributed for a specific purpose. The contributor determined the parameters for which the funds could be used, and the agency cannot use them for any other purpose; this restriction remains in place as long as the funds remain with the agency. Temporarily restricted net assets are also contributed for a specific purpose, but, once the purpose of the contribution has been met or a specific amount of time has passed, the restriction expires and the funds may be used for any purpose.
Unrestricted net assets hold no restriction regarding their usage. The agency uses these funds to pay general expenses or to fund specific purposes of the group. The donor contributes the funds and allows the agency to make all decisions regarding the money’s use.