Nonprofits follow the rules of the Financial Accounting Standards Board, which promulgates the accounting principles for this sector. The concept of fund balance, also known as "net asset balance," is discussed on FAS 117 -- Financial Statements of Not-for-Profit Organizations and FAS 116 -- Accounting for Contributions Received and Contributions Made. A fund balance usually comprises a beginning balance plus any increases less decreases.
The unrestricted fund balance, also known as unrestricted net asset balance, reflects the amount available to be used for general operations. For example, when you see a $100,000 balance in this fund, it means that an organization could use this amount for any purpose, with no restrictions. Most expenses are processed and reported in this fund, often presented as a separate column in financial statements. This fund balance typically increases with unrestricted revenues and is released from restrictions; it decreases with expenses.
A temporarily restricted fund or net asset balance holds donations and grants that are to be used in the future or for a specific program. When a donor gives a gift to be used next fiscal year, the journal entry is to credit a revenue-temporarily-restricted account and debit cash, which is often kept at a separate bank account. Most government grants are booked in this fund because they are often for a specific purpose. This fund balance traditionally increases with temporarily restricted revenues and decreases with releases of restrictions. Generally, no expenses are recognized in this fund.
Endowments are typical transactions involving a permanently restricted fund balance. Donations recognized in this fund are to be kept for perpetuity or for a very long time. Depending on terms of the endowment, interest and income generated by permanently restricted funds can be recognized in the unrestricted or temporarily restricted fund. In 2008, FAS Staff Position 117-1 Endowments of Not-for-Profit Organizations was released to clarify how to handle permanently restricted funds that lost value during the latest economic downturn. Usually, the balance on this fund stays the same throughout the years, but not always.
When a nonprofit closes its accounting books, it closes individual accounts in their own funds; not all accounts close in one fund. Some accounts may close in the temporarily restricted fund, while others close in other funds. This can pose a challenge to many nonprofits because typically, accounting systems close all accounts to one account and in one fund. Accountants usually need to manually correct the closing to the proper funds, a very detailed process. When you see $400 as the balance in unrestricted net asset, it means that all unrestricted accounts have been closed into that fund and the net result, including a beginning balance, is $400.
- Financial Accounting Standards Board, FAS 117 -- Financial Statements of Not-for-Profit Organizations, June 1993
- Financial Accounting Standards Board, FAS 116 -- Accounting for Contributions Received and Contributions Made, June1993
- Financial Accounting Standards Board; FAS 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, 2008
- John Foxx/Stockbyte/Getty Images