What is fund accounting?

Fund accounting is a method of bookkeeping used by non-profit organizations that separates resources into different categories (funds) based on their purpose and restrictions. Unlike regular accounting that focuses on profit, fund accounting tracks dollars for their specific intended purposes, ensuring that restricted donations and grants are used appropriately.

Why do non-profits use fund accounting?

Non-profits use fund accounting because they often receive money with specific donor restrictions or designated purposes. Fund accounting helps organizations track these different pools of money separately, ensuring compliance with donor wishes, grant requirements, and maintaining transparency and accountability in how funds are used.

What is a restricted fund in non-profit accounting?

A restricted fund is money that has been designated for a specific purpose, either by the donor (externally restricted) or by the organization's board (internally restricted). These funds must be used only for their designated purpose and tracked separately from general operating funds. Common examples include program-specific grants, capital campaign donations, or scholarship funds.

What is an encumbrance in fund accounting?

An encumbrance in fund accounting is a commitment to spend funds that haven't been spent yet. It's essentially 'calling dibs' on money in your budget. When you record an encumbrance, you're setting aside funds for a planned expense, which helps prevent overspending and ensures that money remains available when it's time to make the actual payment.

How do you record a grant in fund accounting?

To record a grant in fund accounting, create a journal entry debiting Cash (or Grants Receivable if not yet received) and crediting Grant Revenue. Both accounts should be marked as restricted if the grant has specific use requirements. For example: Dr. Cash - Restricted $50,000, Cr. Grant Revenue - Restricted $50,000. This clearly separates the grant money from unrestricted operating funds.

What is a fund transfer and how is it recorded?

A fund transfer occurs when money moves from one fund to another within the same organization. It requires two journal entries: one showing the money leaving its original fund (Dr. Transfers Out, Cr. Cash) and another showing it arriving in the destination fund (Dr. Cash, Cr. Transfers In). This maintains the integrity of each fund's balance while allowing organizations to reallocate resources when appropriate and permitted.

Can software like Aplos help with fund accounting?

Yes, specialized fund accounting software like Aplos can significantly simplify the process of managing non-profit finances. Aplos provides features specifically designed for fund accounting, including visual fund management dashboards, interfund transfer capabilities, restricted fund tracking, and comprehensive reporting tools. These features help non-profits maintain proper fund separation, ensure accurate financial records, and demonstrate accountability to donors and board members.

Free Tools & Downloads

Nonprofit (NPO) Resources

Fund Accounting Journal Entries: Break It Down Without Breaking a Sweat

What is fund accounting and who do nonprofits need it

Nonprofit Accounting

min read

Fund Accounting Journal Entries: Break It Down Without Breaking a Sweat

Erica Weslowski

Director of Demand Generation

Published on

February 28, 2025

Collapse

Nonprofit Accounting

min read

Fund Accounting Journal Entries: Break It Down Without Breaking a Sweat

Erica Weslowski

Director of Demand Generation

Published on

February 28, 2025

View Full Course Here

Expand Video

Contents

Fund vs standard accounting
Best Practices

Ever found yourself staring at fund accounting journal entries like they're written in alien hieroglyphics? You're not alone! Today we're diving into the fascinating (yes, I said fascinating) world of fund accounting with some real-world examples that won't put you to sleep. Promise! ✨

What's the Big Deal About Fund Accounting? 🤔

Unlike regular accounting where it's all about profit, fund accounting is about tracking those dollars for their specific purposes. It's like having separate piggy banks for different goals - one for that community program, another for your capital campaign, and maybe a tiny one for the staff appreciation events.

Non-profits use fund accounting because they've got money coming in that needs to stay in its lane. Let's see how that works on paper! (Need help setting up your fund accounting system? Aplos offers specialized software designed specifically for non-profits.)

Journal Entry Examples That Actually Make Sense

Example 1: The Basic Grant Receipt 💰

Your non-profit just received a $50,000 grant for a new community garden project. Cha-ching! Here's how you'd record it:

Dr. Cash - Restricted $50,000 Cr. Grant Revenue - Restricted $50,000

See that "restricted" label? That's your reminder that this money has to go toward those garden beds and workshops, not general operating expenses.

Example 2: Spending From That Grant 🌱

Time to buy some gardening supplies:

Dr. Program Supplies Expense $5,000 Cr. Cash - Restricted $5,000

Example 3: Fund Transfer 🔄

Your organization needs to move money from the general fund to the scholarship fund:

Dr. Transfers Out - General Fund $10,000 Cr. Cash - General Fund $10,000 Dr. Cash - Scholarship Fund $10,000 Cr. Transfers In - Scholarship Fund $10,000

Two entries here! One showing the money leaving its original home, another showing it arriving at its new destination.

Example 4: Encumbrance (AKA "Calling Dibs") 🏷️

When your non-profit is planning to spend but hasn't yet:

Dr. Encumbrances $25,000 Cr. Budgetary Fund Balance $25,000

This is like putting a sticky note on those funds saying "Don't touch! We've got plans for you."

Wait, Why Does This Matter? ⚖️

Fund accounting keeps money honest. It ensures that:

Donor-restricted funds go where they're supposed to
Grant money is used for its intended purposes
Organizations stay accountable and transparent to their donors and board

Plus, it helps prevent that awkward moment when someone asks "What happened to the money for the afterschool program?" and you're like "Umm... about that..." 😬

Aplos's reporting tools make it easy to demonstrate this accountability to your board, grantors, and donors with clear, professional financial statements.

The Bottom Line 🎯

Fund accounting journal entries might look intimidating at first, but they're really just telling the story of where money comes from and where it goes. Master these basics, and you'll be talking fund accounting at non-profit networking events in no time! (Your fellow finance directors will be impressed, promise! 🤩)

Want to simplify your non-profit's fund accounting process? Try Aplos free for 15 days and see how their purpose-built software can save your organization time and headaches.