If you have worked in a school, church or government office, you have probably heard the term fund accounting. This method of accounting is chosen by most nonprofit organizations. It is required for all government bodies by the generally accepted accounting principles. It allows these organizations to separate income and expenses by class, which gives the reviewer of the financial statements a proper accounting of all like activities.
What Is it?
Simply speaking, fund accounting is like having an entire financial record set including balance sheet, income statement and statement of cash-flows for separate sub-entities within an organization. It is a method of accounting that allows the user to classify income and expense items according to a specific fund. For instance, a church may have a general fund, building fund, benevolence fund and a mission’s fund. These all receive revenue and have expenses associated with the individual fund, however they are all part of the larger entity. Fund accounting helps to keep track of the individual funds as well as the overall entity.
Governments and religious organizations receive money from donors who impose “regulations, restrictions, or limitations” to its use. Fund accounting helps to “ensure observance of limitations and restrictions” that have been placed on these resources. While the individual fund is accounted for in accordance with the imposed donor restrictions, fund accounting also allows management to view all funds in a consolidated statement to determine the financial status of the entity as a whole.
There is a wide array of accounting products designed specifically for the nonprofit seeking to set up this type of accounting system. Fund accounting can be set up in a basic software such as QuickBooks, by using their classes to structure your accounts. However depending on the size of the nonprofit you will likely be better off purchasing a software that has been designed specifically for fund accounting.
Most fund accounting programs have some form of a training and consulting program that is purchased with the software. Shelby Systems offers their church accounting products with free training. It is wise, however, to obtain a solid understanding of accounting before attempting to set up this type of system.
Don Masters started writing professionally in spring of 2008, and enjoys conveying interesting tax topics to his readers. He is a partner in an accounting firm in Arizona and enjoys writing about business and tax. Masters is a certified public accountant, and has a master's degree in business and a bachelor's degree in accounting.