Lesson 2 in the course Intro to Nonprofit Accounting
Fund Accounting is a standard almost all nonprofits and churches have to adhere to in one way or another. If you work for a nonprofit or church, this lesson is for you!
What is Fund Accounting?
Fund accounting is a method of accounting 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 that the money you have, receive, and spend is allocated for the proper purpose. Welcome to fund accounting.
Fund accounting can potentially get very complicated, depending on the needs of your organization. FASB117 and FIN46 are the IRS resources that outline all needs of a nonprofit accounting system. However, for this particular course, we will solely be focusing on what fund accounting is and how you can implement it for your organization.
What are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately from anything else. This can include, but is not limited to:
- Unrestricted, temporarily restricted, and permanently restricted net assets
- Designated funds
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… these methods will allow you to track how much money you’ve received and spent for a class, but 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 fund accounting system set up.
When do I use Fund Accounting?
Fund accounting is used for almost all nonprofit organizations, and will most likely be needed on a daily basis. Let’s walk through an example of how fund accounting becomes important in a nonprofit.
Let’s say you own a nonprofit that helps stray animals, and your operations are pretty straightforward at the moment. You receive money from contributions, you spend a little to keep the lights on, but nothing too fancy. Well, 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.
Everything sound alright so far? Here come the questions for you:
- How are you going to record the receipt of this $5,000?
- How are you going to record the expenses that use this $5,000?
- How, at any given point, will you know how much money is left of this $5,000?
Fund accounting allows you to answer these questions and more. In a properly set-up fund accounting system, this fund would have its own asset, liability, equity, income, and expense balances; thus, making it a completely separate entity within your organization. Don’t worry, you would still be able to see simple information for your organization as a whole, but each fund would be independent of others.
Why do I use Fund Accounting?
Fund accounting is very detailed, and can get confusing… but ultimately it is the most accurate method of accounting. By utilizing fund accounting, you can maintain accurate financial records for your organization and all of its directives; thus, empowering you to generate powerful financial statements and make key decisions.
In the previous lesson, we learned about accounting, and how it plays out in our daily lives. We also took a look at seven elements which make up a nonprofit accounting system:
- 1. Fund Accounting
- 2. Accounts
- 3. Transactions
- 4. Reporting
- 5. Internal Controls
- 6. Accounting Rules
- 7. Accounting Standards
The next step will be creating your nonprofit accounting system so that you can begin using it for your organization. You will first want to setup accounts to track the things you own, owe, receive, and spend, and your worth. Then, once you have those accounts set up, you can begin using them when recording transactions, which eventually allows you to see financial information on reports.
In the next lesson, we will take a deeper look at accounts and how they are used in a nonprofit accounting system.
P.S. — Are you using QuickBooks? You should try our software. We designed Aplos Accounting specifically for fund accounting!