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What is Fund Accounting?
Malcolm Tatum
Malcolm Tatum
Fund accounting is a type of accounting strategy that focuses more on accountability than on tracking the generation of profits. This particular approach to accounting is often utilized by entities that are not focused on profitability, such as non-profit organizations or government departments and commissions. One of the main features of this method is the use of multiple general ledgers that document the flow and usage of any funds that come into the entity, but without the emphasis on tracking profits.
The general function of fund accounting has to do with showing where money is spent. This emphasis is one reason for the maintenance of several general ledgers, rather than the self-balancing accounts reflected in a single general ledger, as is common with entities that operate for profit. Each of the ledgers tracks the receipt and disbursement of resources as they relate to the activities associated with a particular project or fund operated by the non-profit entity. For accounting purposes, each individual ledger or fund must be reconciled within itself, complete with detailed reports that support the current balance in the fund. All the reports associated with the different funds are used as the supporting detail for a cumulative report that is made available to members of the organization, as well as its directors.
With fund accounting, any donations or funds obtained from grants or endowments are posted directly to the ledger or fund that was designated by the contributor. There, any expenditures related to that particular project are deducted from the balance. This arrangement makes it very easy for the non-profit organization to report activity to its constituents, and also to any government entity that is charged with the responsibility of overseeing the operation of the non-profit.
The fund accounting approach can be very effective when reports must be sent to more than one government agency. For example, if a locally operated charity receives a grant earmarked for providing meals to shut-ins, a generous donation to support a homeless shelter, and an endowment for the operation of an after-school program, each of these projects is likely to fall into the jurisdiction of a different government agency. By creating and maintaining a ledger for each project, it is possible to always provide each monitoring agency with an accounting of what has been done with the money received to support each program. With the use of fund accounting, the local charity remains in compliance with regulations that allow it to operate, and can demonstrate that the received funds are being used in the manner specified.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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![Nonprofit organizations, such as those running a soup kitchen or shelter, often use fund accounting.]()
By: Jasmin MerdanNonprofit organizations, such as those running a soup kitchen or shelter, often use fund accounting.
Discussion Comments
There are quite a few accounting software solutions to help nonprofit organizations. There's software for grant management, fundraising, and more. They all range in features, functionality, etc. but can make nonprofit accounting much easier.
I have a friend who is going to school for accounting, and she's actually hoping to work as a fund accountant for a non-profit at some point in the future. Naturally, she will make less money doing accounting for a non-profit than for a big corporation, but she thinks it will be a lot more rewarding to work for a non-profit.
I don't blame her for wanting to work for a non-profit rather than a big corporation. It sounds like it would be a lot nicer to see money being spent on a good cause rather than just see profits for a big corporation.
@Monika - Yeah, non-profit and for-profit business definitely have separate goals, so it makes sense they would use a different system for keeping track of their financial actions.
I'm kind of wondering about fund accounting software for this type of accounting though. I imagine there must be some kind of software that focuses on this kind of accounting because it sounds kind of complicated.
From what I understand based on this article, the non-profit keeps a separate ledger for each source of money and tracks what they do with that specific money. That could get complicated if you have money coming in from a bunch of different places!
I've often wondered how non-profit organizations and charities do their accounting. I always knew it would be different than something like small business accounting. After all, a non-profit by nature isn't supposed to making a profit, but they are supposed to be using their funds to accomplish a set goal.
So the fund accounting system makes a lot of sense. You keep track of the money that comes in, and what it's used for. But not really of how much profit you make off of it. Which makes sense, because a lot of non-profits don't generate any kind of profit off their money, unless they invest it and earn interest or something like that.
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