What is Fund Accounting?

Fund accounting is a system of accounting used primarily by nonprofit organizations and governments to track and manage their financial resources. It involves segregating the organization’s resources into different funds, each of which has its own set of accounts and financial statements. This allows the organization to track how money is being raised, where it is coming from, and how it is being used. Fund accounting is designed to provide transparency and accountability, and is intended to help organizations demonstrate that they are using their resources in accordance with donor restrictions and legal requirements.

How Does Fund Accounting Impact the Chart of Accounts for an Organization?

Fund accounting impacts the chart of accounts for an organization by requiring separate accounts and categories for each fund. Each fund is treated as a separate entity, with its own set of accounts for recording revenue, expenses, assets, and liabilities. This means that the chart of accounts must be structured in a way that allows for the proper segregation and tracking of funds. Each fund will have its own unique codes, account numbers, and categories within the chart of accounts. This can make the chart of accounts more complex than in a for-profit organization, but it is necessary in order to accurately track and report on the financial activity of each fund.

Sample Chart of Accounts for Different Funds

Account CategoryFund 1 Annual DriveFund 2 Program Event
1100 ContributionsX
1200 GrantsX
1300 FundraisingX
1400 Program RevenueX
1500 Investment IncomeX
2100 Salaries and WagesXX
2200 Employee BenefitsXX
2300 Professional ServicesXX
2400 Office and AdministrationXX
2500 FundraisingX
2600 Program ExpensesX
2700 OccupancyXX
2800 Equipment and SuppliesXX
3100 CashXX
3200 Accounts ReceivableXX
3300 Prepaid ExpensesXX
3400 InvestmentsXX
3500 Property and EquipmentXX
4100 Accounts PayableXX
4200 Accrued ExpensesXX
4300 Deferred RevenueXX
Net Assets
5100 Unrestricted Net AssetsXX
5200 Temporarily Restricted Net AssetsXX
5300 Permanently Restricted Net AssetsXX

Note that this is just an example and that the chart of accounts for each organization will be unique to their specific needs and operations.

How Can Accounting Software Help with Fund Accounting?

Accounting software can help with fund accounting in several ways, including:

  1. Segregation of funds: Accounting software can segregate funds and maintain separate accounts for different funds. This helps in keeping track of the revenue and expenses of each fund separately.
  2. Accurate financial reporting: Fund accounting software provides accurate financial reporting, including balance sheets and income statements for each fund. This helps organizations to monitor the financial health of each fund and make informed decisions.
  3. Budget management: Accounting software can help manage budgets for each fund, allowing organizations to track actual revenue and expenses against projected budgets.
  4. Donor management: Accounting software can help manage donations and track donor information, including donor preferences and restrictions. This ensures that funds are used in accordance with donor intent.
  5. Compliance management: Fund accounting software can help manage compliance with regulatory requirements and reporting obligations. This includes tracking compliance with grant requirements, tax reporting requirements, and other regulatory obligations.

Fund Accounting is an essential tool for nonprofits to manage their finances. With this approach, they can keep track of their funds in a transparent and accountable way while complying with regulatory requirements. And what’s more, the unique chart of accounts associated with fund accounting makes it easier for organizations to report on individual funds. Plus, using accounting software designed specifically for fund accounting can automate accounting processes, reducing the likelihood of errors and streamlining financial management.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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