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.