An Intro to Nonprofit Fund Accounting: Lesson 2
What is fund accounting, and what does it have to do with nonprofits, charitable, or religious organizations? It’s a standard almost all nonprofit organizations and churches have to adhere to in one way or another, and it differs from basic accounting. If you work for a nonprofit or church, this information is for you.
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Fund accounting is a method of bookkeeping 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 your income and expenses are allocated for the proper purposes.
It can potentially get very complicated, depending on the needs of your organization. FASB117 and FIN46 are the government agencies that outline all needs of a nonprofit accounting system. However, for this particular course, we will solely focus on what it is and how you can implement it for your organization.
Luckily, there is accounting software made specifically for nonprofit organizations, and it can make handling these things much easier.
What Are Funds?
A fund is an area or purpose within your organization that needs to be tracked separately from anything else. This includes, but is not limited to:
- Unrestricted funds
- Designated funds, such as funds with donor restrictions
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. Although these methods will allow you to track how much money you’ve received and spent for a class, 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 system set up.
When to Use Fund Accounting
This method of accounting is used by almost all nonprofit organizations, and will likely be needed on a daily basis. Here’s an example of how it becomes important for a nonprofit.
Suppose you manage a nonprofit that helps stray animals, and your operations are pretty straightforward at the moment. You receive money from donations, and you spend a little to keep the lights on. Nothing too fancy.
Now 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.
Here come the questions for you:
- How are you going to record the receipt of this $5,000?
- How will you record the expenses that use the funds from the grant?
- Will you know how much money is left at any given point in time?
Accounting for funds in this fashion allows you to answer these questions and more. In a properly set-up system, this fund would have its own asset, liability, equity, income, and expense balances, making it a completely separate entity within your organization. You would still be able to see simple information for your organization as a whole. However, each fund would be independent of others.
Why Your Organization Needs It
Fund accounting is a very detailed and confusing process. Ultimately, it is the most accurate method of accounting. By utilizing this system of tracking funds, you can maintain accurate financial records for your organization and all of its directives, empowering you to generate powerful financial statements and make key decisions. Most importantly, it can keep government agencies like the IRS off your back.
In the next lesson, we will look at money that goes into and out of your organization, and how to set up your chart of accounts.
If you haven’t done so, sign up for our free Nonprofit Accounting 5-Day Email Course. We also have a church version of the course. We’ll go over everything you need to excel at several aspects of accounting.
If you’re currently using QuickBooks® or another for-profit accounting software, we invite you to try Aplos for free and see the difference. (You can select our Nonprofit Accounting or Church Accounting version.) Aplos was created specifically for nonprofits and churches, and you’ll find tools and reports inside that other accounting software doesn’t offer.