What is fund accounting, and what does it have to do with nonprofits and charitable or religious organizations? It’s a standard almost all nonprofits and churches have to adhere to in one way or another, and it differs frombasic accounting. If you work for a nonprofit or church, this information is for you.
Fund accounting is a method of bookkeeping used by a nonprofit organization that illustrates accountability, rather than profitability. In a business, you want to know how much was spent, how much was earned, and how much was left over. With a nonprofit, you want to know these things, but you also want to make sure your income and expenses are allocated for the proper purposes.
Fund accounting can potentially get very complicated, depending on the needs of your organization.FASB117andFIN46are the IRS resources that outline all needs of a nonprofit accounting system. However, for this particular course, we will solely focus on what it is and how you can implement it for your organization.
Luckily, there isfund accounting softwaremade specifically for nonprofits, and it can make handling these things much easier.
What Are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately from anything else. This includes, but is not limited to:
- Unrestricted, temporarily restricted, and permanently restricted net assets
- Designated funds
- Grants
- Departments
- Campaigns
When trying to think of what a fund might be for your organization, ask yourself, “Do I need to know how much money I have set aside for _____?” This is the key question. Some programs and software will mask funds as classes or categories. But beware. Although these methods will allow you to track how much money you’ve received and spent for a class, it’s very difficult to find out how much money you have set aside for it at any given time.
If you can think of answers to the above question, write them down. These will be the funds you will want to track once you have your system set up.
When To Use Fund Accounting
Fund accounting is used for almost all nonprofit organizations, and will likely be needed on a daily basis. Here’s an example of how it becomes important for a nonprofit.
Let’s say you manage a nonprofit that helps stray animals, and your operations are pretty straightforward at the moment. You receive money from donations, and you spend a little to keep the lights on. Nothing too fancy. Let’s say you decide to get a little fancy.
You apply for (and are awarded) a grant that provides $5,000 to be spent on veterinary functions. This money comes in the form of a check that you deposit into your organization’s checking account. Before this check you had $3,000 in your checking account.
Here come the questions for you:
- How are you going to record the receipt of this $5,000?
- How will you record the expenses that use the funds from the grant?
- Will you know how much money is left at any given point in time?
Fund accounting allows you to answer these questions and more. In a properly set-up system, this fund would have its own asset, liability, equity, income, and expense balances, making it a completely separate entity within your organization. You would still be able to see simple information for your organization as a whole. However, each fund would be independent of others.
Why Your Organization Needs Fund Accounting
Fund accounting is a very detailed and confusing process. Ultimately, it is the most accurate method of accounting. By utilizing this system of tracking funds, you can maintain accurate financial records for your organization and all of its directives, empowering you to generate powerful financial statements and make key decisions.
FAQs
Fund accounting is a specialized accounting method that focuses on the allocation, management, and reporting of funds that carry a donor or other funder restriction. The nonprofit is obligated to use these funds as directed by the donor, foundation or government agency. Government funding can also be contractual.
Is fund accounting easy to learn? ›
Very small organizations might have a single unrestricted fund, so fund accounting is pretty simple as all net assets of the organization belong in the single fund. These organizations can typically use inexpensive accounting software designed for for-profit organizations without any special modifications.
What are the three types of fund accounting? ›
The Generally Accepted Accounting Principles (GAAP) basis classification divides funds into three fund categories: governmental, proprietary, and fiduciary. The GAAP basis classification assigned to a fund impacts how the fund is displayed in the Annual Comprehensive Financial Report.
What are the three principles of fund based accounting? ›
Fund accounting principles
Fund investment accounting principle dictates that the account reporting should go to the individual investor. Unrestricted net assets temporarily restricted net assets, and permanently restricted net assets are considered to determine where and when to invest.
What are the golden rules of fund accounting? ›
The Golden rule for Personal, Real and Nominal Accounts: a) Debit what comes in. b) Credit the giver. c) Credit all Income and Gains.
How can I be a good fund accountant? ›
Skills required to become a fund accountant
- ability to make analytical decisions.
- deep understanding of financial instruments and investment options.
- ability to be detail-oriented and organised.
- experience in the investment industry.
- understanding of equities and bonds.
While not all those in fund accounting need a CPA in order to find work, the designation can make them more attractive to potential employers. CPA certification opens the door to additional opportunities and higher pay—both in the public and private spheres.
Do fund accountants make a lot of money? ›
The average base salary for a fund accountant in the US falls between $55,000 to $85,000 annually. Total compensation can reach up to $100,000 with bonuses and profit sharing.
What are the disadvantages of fund accounting? ›
It requires additional effort and resources to meet the financial reporting requirements of managing separate funds. You'll need financial records and reports for each fund, which can be time-consuming. Another disadvantage is that it doesn't show the complete picture of an organization's financial health.
Is fund accounting cash or accrual? ›
As nonprofits engage with large donors, foundations and government agencies, accrual-basis accounting is the only method that will support the audits and financial documents required by those funders.
Fund accounting also means the methods of accounting used by investment funds. It's sometimes called investment accounting or investment fund accounting. To be more specific, one could use terms such as. Mutual fund accounting. Hedge fund accounting.
What is the 3 fund strategy? ›
A three-fund portfolio is a portfolio which uses only basic asset classes — usually a domestic stock "total market" index fund, an international stock "total market" index fund and a bond "total market" index fund.
Can QuickBooks do fund accounting? ›
When using Fund Accounting in QuickBooks Online, you can use Class tracking and banking sub-accounts to track individual funds. In this article, we'll explain how Fund Accounting works with non-profits and the steps necessary to take to track the funds in QuickBooks Online.
What is an example of a fund accounting? ›
An example would be a special revenue fund to record state and federal fuel tax revenues, since by federal and state law the tax revenue can only be spent on transportation uses. Capital projects funds are used to account for the construction or acquisition of fixed assets, such as buildings, equipment and roads.
What is the best fund accounting software? ›
Top 5 Fund Accounting technologies in 2024
| companyName | marketShare |
|---|
| NetSuite | 52.1 |
| Xero | 35.19 |
| Sage Intacct | 5.89 |
| Aplos Accounting | 3.55 |
2 more rowsThe concept of Fund Based Accounting refers to the accounting whereby receipts and incomes relating to a particular fund is credited to that particular fund and payments and expenses are debited to it. Such funds are created for specific purposes such as Building Fund, Library Fund, Sports Fund and Prize Fund etc.
What are the duties of fund accounting? ›
What are the roles & responsibilities of a fund accountant?
- Preparation of annual financial statements. ...
- Preparation of management accounts. ...
- NAV calculations. ...
- Tailored fund reporting. ...
- Fee calculations. ...
- Waterfall calculations. ...
- Audit liaison. ...
- Portfolio analysis and reports.
Fund accounting recognises assets and liabilities, along with income and expenses. The liabilities of the fund are largely made up of the investors' money, but would also include management fees charged by the fund, such as Annual Charges and Performance Fees.
How to do fund based accounting? ›
Fund based accounting is used in Non-Profit concerns to record transactions related to certain items. In such cases a fund is created in the books of accounts & all the revenues related to that item, for which we have created a fund, are added to the fund and all the related expenses are subtracted from the fund.
