Definition
Fund accounting is a specialized system of accounting used by nonprofit organizations and governmental entities where the focus is on accountability rather than profitability. The main purpose of fund accounting is to ensure the proper stewardship of financial resources that are entrusted to the entity and to comply with any legal or donor-specific restrictions on how these resources are to be used.
Since these entities do not operate with a profit motive, traditional financial reporting metrics used by for-profit businesses, like net income, are not relevant. Instead, fund accounting focuses on ensuring that funds are used according to their specified purposes and that financial reporting is directed at stakeholders such as the public, grantors, and oversight bodies, rather than private investors.
Examples
Governmental Fund Accounting
Government entities use fund accounting to manage various sources of revenue (e.g., taxes, grants) and to ensure that expenditures are made in compliance with approved budgets. Different funds (such as the general fund, special revenue fund, and capital projects fund) are established to segregate resources according to their intended use.
Nonprofit Organization Fund Accounting
Nonprofit organizations, such as charities, educational institutions, and foundations, also use fund accounting. For example, a university may have separate funds for general operations, scholarships, endowments, and restricted grants. This allows the university to report on its financial condition effectively and ensure that donor restrictions are adhered to.
Frequently Asked Questions
What is the primary purpose of fund accounting?
The primary purpose of fund accounting is to ensure accountability and stewardship of resources. It allows nonprofit and governmental entities to track resources separately, thus ensuring they are used in accordance with legal requirements and donor intentions.
What is a fund in fund accounting?
A fund in fund accounting is a self-balancing set of accounts created to track the finances of a specific activity, objective, or program individually. Each fund is treated as a separate entity with its own revenues, expenses, and net position.
What are the key differences between fund accounting and traditional accounting?
The key differences between fund accounting and traditional (for-profit) accounting include the emphasis on accountability rather than profitability, the use of multiple funds to track different resources, and the reliance on financial reporting aimed at public transparency and compliance, rather than investor information.
How does fund accounting ensure compliance with donor restrictions?
By segregating resources into different funds, fund accounting allows nonprofit organizations to report how specific monies are used for specified purposes, ensuring compliance with donor restrictions. This can include restricted grants or endowments designated for specific programs or activities.
Related Terms
Generally Accepted Accounting Principles (GAAP)
A collection of commonly followed accounting rules and standards for financial reporting.
Restricted Funds
Funds restricted by donors or regulatory agencies that dictate specific purposes for use.
Unrestricted Funds
Funds not subject to donor-imposed restrictions and can be used at the discretion of the entity for any purpose.
Fiduciary Responsibility
The obligation to act in the best interest of another party, such as a trustee’s duty to manage a trust.
Online References
- Governmental Accounting Standards Board (GASB)
- FASB Not-For-Profit Financial Reporting
- Nonprofit Accounting Basics
Suggested Books for Further Studies
- “Financial and Accounting Guide for Not-for-Profit Organizations” by John H. McCarthy, CPA, MBA, et al.
- “Essentials of Accounting for Governmental and Not-for-Profit Organizations” by Paul A. Copley.
- “Fund Accounting: Theory and Practice” by Victor B. Whittenburg and Steven Gill.
Fundamentals of Fund Accounting: Accounting Basics Quiz
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