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Let’s start with a look at what funds are and why you need them. Check out the video for today’s lesson:
Prefer the skim-able crash course? Keep reading.
What Are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately from anything else in the accounting. This may include:
- Designated funds
- Departments, such as Events
- Campaigns, like for a building
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.
Pro tip: Beware of having too many funds. If dollars are set aside in too many buckets, you may find less flexibility in how to cover daily operations. Start small and only do those absolutely necessary.
Why Do You Need Funds?
Let’s say you get a grant that provides $5,000 for an animal shelter’s veterinary services. This money is deposited into your organization’s checking account that had an existing balance of $3,000.
- How will you report that this $5,000 in income is different than your standard donations?
- How are you going to record the expenses that use this $5,000?
- In a few months, how will you know how much money you have left from this $5,000?
- How can you assure the grantor that those dollars were used for the correct purpose?
You need this money set aside in a fund in your accounting. In a properly set-up fund accounting system, you separate those dollars into their own fund so you can tell how much of it you have spent, confirm all those expenses were actually for the designated cause, and see how much is available to spend in the fund. It is almost like you have set up separate checking accounts for each fund, without the hassle of going to the bank and making separate deposits.
Pro tip: Some business accounting software will mask funds as classes or categories to track income and expenses. But beware, it’s very difficult to find out how much money is remaining in your fund (the fund balance).
Nonprofit Accounting 5-Day Email Course
Want to learn more? Sign up and we will send you the entire course through email. We’ll discuss how to set up your chart of accounts, what to manage in your accounting on a day-to-day basis, and so much more.
If you’re ahead of the curve and want to get started with awesome fund accounting, feel free to learn more about Aplos Accounting.