Fund Accounting

Definition

Fund accounting is a specialized system of accounting used by nonprofit organizations and governmental entities where the focus is on accountability rather than profitability. The main purpose of fund accounting is to ensure the proper stewardship of financial resources that are entrusted to the entity and to comply with any legal or donor-specific restrictions on how these resources are to be used.

Since these entities do not operate with a profit motive, traditional financial reporting metrics used by for-profit businesses, like net income, are not relevant. Instead, fund accounting focuses on ensuring that funds are used according to their specified purposes and that financial reporting is directed at stakeholders such as the public, grantors, and oversight bodies, rather than private investors.

Examples

Governmental Fund Accounting

Government entities use fund accounting to manage various sources of revenue (e.g., taxes, grants) and to ensure that expenditures are made in compliance with approved budgets. Different funds (such as the general fund, special revenue fund, and capital projects fund) are established to segregate resources according to their intended use.

Nonprofit Organization Fund Accounting

Nonprofit organizations, such as charities, educational institutions, and foundations, also use fund accounting. For example, a university may have separate funds for general operations, scholarships, endowments, and restricted grants. This allows the university to report on its financial condition effectively and ensure that donor restrictions are adhered to.

Frequently Asked Questions

What is the primary purpose of fund accounting?

The primary purpose of fund accounting is to ensure accountability and stewardship of resources. It allows nonprofit and governmental entities to track resources separately, thus ensuring they are used in accordance with legal requirements and donor intentions.

What is a fund in fund accounting?

A fund in fund accounting is a self-balancing set of accounts created to track the finances of a specific activity, objective, or program individually. Each fund is treated as a separate entity with its own revenues, expenses, and net position.

What are the key differences between fund accounting and traditional accounting?

The key differences between fund accounting and traditional (for-profit) accounting include the emphasis on accountability rather than profitability, the use of multiple funds to track different resources, and the reliance on financial reporting aimed at public transparency and compliance, rather than investor information.

How does fund accounting ensure compliance with donor restrictions?

By segregating resources into different funds, fund accounting allows nonprofit organizations to report how specific monies are used for specified purposes, ensuring compliance with donor restrictions. This can include restricted grants or endowments designated for specific programs or activities.

Generally Accepted Accounting Principles (GAAP)

A collection of commonly followed accounting rules and standards for financial reporting.

Restricted Funds

Funds restricted by donors or regulatory agencies that dictate specific purposes for use.

Unrestricted Funds

Funds not subject to donor-imposed restrictions and can be used at the discretion of the entity for any purpose.

Fiduciary Responsibility

The obligation to act in the best interest of another party, such as a trustee’s duty to manage a trust.

Online References

Suggested Books for Further Studies

“Financial and Accounting Guide for Not-for-Profit Organizations” by John H. McCarthy, CPA, MBA, et al.
“Essentials of Accounting for Governmental and Not-for-Profit Organizations” by Paul A. Copley.
“Fund Accounting: Theory and Practice” by Victor B. Whittenburg and Steven Gill.

Fundamentals of Fund Accounting: Accounting Basics Quiz

### What is the main focus of fund accounting? - [ ] Profitability - [x] Accountability - [ ] Revenue Growth - [ ] Investment Performance > **Explanation:** The main focus of fund accounting is accountability, ensuring that financial resources are used according to legal and donor-specific requirements. ### Which type of organizations primarily use fund accounting? - [ ] For-profit businesses - [x] Nonprofit organizations and governments - [ ] Individual investors - [ ] International businesses > **Explanation:** Fund accounting is primarily used by nonprofit organizations and governmental entities to manage and report resources. ### What is a fund in fund accounting? - [ ] A single account for all financial transactions - [x] A self-balancing set of accounts for a specific purpose - [ ] A source of revenue - [ ] An investment portfolio > **Explanation:** A fund is a self-balancing set of accounts created to track the finances of a specific activity, program, or objective separately. ### Which type of fund can be used at the discretion of the entity for any purpose? - [ ] Restricted fund - [x] Unrestricted fund - [ ] Capital projects fund - [ ] Special revenue fund > **Explanation:** Unrestricted funds are those not subject to donor-imposed restrictions and can be used at the entity’s discretion for any purpose. ### Fund accounting ensures compliance with which of the following? - [ ] Market trends - [ ] Investment strategies - [x] Legal and donor restrictions - [ ] International trade laws > **Explanation:** Fund accounting ensures compliance with legal requirements and donor restrictions by segregating resources into separate funds. ### Which governing body sets standards for governmental accounting in the U.S.? - [x] GASB (Governmental Accounting Standards Board) - [ ] FASB (Financial Accounting Standards Board) - [ ] SEC (Securities and Exchange Commission) - [ ] IRS (Internal Revenue Service) > **Explanation:** The Governmental Accounting Standards Board (GASB) sets standards for governmental accounting in the United States. ### What is fiduciary responsibility in the context of fund accounting? - [x] The obligation to act in the best interest of another party - [ ] The need to maximize profits - [ ] The requirement to invest in high-return assets - [ ] The desire to increase market share > **Explanation:** Fiduciary responsibility pertains to the obligation to act in the best interest of another party, such as managing trust funds responsibly. ### On which financial statement is the proper use of fund accounting best demonstrated in non-profits? - [x] Statement of Activities by Fund - [ ] Balance Sheet - [ ] Cash Flow Statement - [ ] Income Statement > **Explanation:** The Statement of Activities by Fund demonstrates the use of fund accounting by showing how resources were utilized by fund. ### Can a fund in fund accounting be used for multiple unrelated activities? - [ ] Yes, funds can be used for any purposes interchangeably. - [x] No, funds are created for specific activities or objectives. - [ ] It depends on the organization’s rules. - [ ] Only under certain circumstances defined by GASB. > **Explanation:** Funds in fund accounting are created to track specific activities, objectives, or programs and should not be used interchangeably. ### What type of fund would be used in a government budget to account for day-to-day operations? - [ ] Capital Projects Fund - [ ] Trust Fund - [ ] Special Revenue Fund - [x] General Fund > **Explanation:** The General Fund is used to account for the day-to-day operations of a government, including most administrative, operational, and routine functions.

Thank you for your diligence in exploring the essentials of fund accounting! Continue to deepen your understanding and excel in financial stewardship practices.