What Is Fund Accounting and How Does It Work? (With FAQs)

Updated September 30, 2022

If you work for a nonprofit organization or the government, it's essential you track the resources assigned for various purposes to ensure transparency. Using fund accounting, you can monitor resource use to recommend financial changes or sustain strategies. Learning what fund accounting is and how it works can help you better manage contributions from individuals or groups to an organization. In this article, we answer the question, "What is fund accounting?" explain the types of nonprofit funds, present the difference between the restricted fund and deferral methods of accounting and show financial statements for nonprofits using fund accounting.

What is fund accounting?

Knowing the answer to "What is fund accounting?" can help you understand its benefit to nonprofit organizations and government agencies. Fund accounting is a system of recording limited resources from donors, grant authorities, and government agencies. It involves creating individual funds, each having assets, liabilities, revenues, and expenses. For example, a nonprofit organization might have separate funds for street repairs and sewage treatment.

A fund refers to money available or saved, which can direct how an organization uses cash flows. For example, if a zoo receives donations for animal exhibits, its directors can record the donations within the animal exhibits fund and use it for this purpose. The fund method of accounting prioritizes accountability over profit generation because it better aligns with the government and a nonprofit organization's activities.

Why do organizations use fund accounting?

Fund accounting offers workplace leaders insights to improve financial decision-making. It also enables directors to compare a program's operational results with its expenditure. For example, suppose philanthropists donate money to a hospital's emergency centre. They can evaluate how well the hospital reaches its goals for emergency responses if the hospital uses fund accounting. Aside from hospitals, here are examples of other organizations that may use fund accounting:

Artistic foundations
Charities
Colleges and universities
Charities
Nursing homes

Types of funds in nonprofit organizations

Nonprofit organizations may receive the following types of funds:

Unrestricted funds

These are funds an organization may use for any purpose, such as covering operating expenses. Unrestricted funds may include:

General fund: Records all resource flows and are typically for administrative tasks
Designated fund: Refers to funds assigned to a specific purpose by an organization but remains unrestricted because workplace leaders can cancel the desired use
Trading fund: Refers to fund that many nonprofit organizations raise from selling products or services
Plant fund: Refers to fund an organization keeps for various assets and liabilities, such as land, building, and equipment

Restricted funds

Restricted funds refer to a money reserve that nonprofit organizations can only use for specific projects. The organization's leaders or donors can establish restrictions on how to spend funds, which may be temporary or permanent. For example, a donation toward a scholarship fund might be temporary until recipients graduate from a university program or permanent.

Endowment fund: Is an investment fund established by a foundation that makes consistent withdrawals from invested capital
Annuity fund: Is a resource from a donor that involves multiple beneficiaries
Agency or custodian fund: Refers to money saved to account for resources before a donor provides instructions on how to disburse it

Restricted fund vs. deferral method of accounting

If a company decides to use fund accounting, it can choose between the deferral or restricted fund method of accounting. The deferral method involves recognizing revenue for restricted contributions in the period an organization incurs expenses. For example, suppose a charity receives money to build a playground in March and construction starts in November. The company can recognize this donation when it purchases equipment and breaks the ground, which are expense activities. Using the restricted fund method, an organization recognizes funds when it receives them.

Financial statements for nonprofit organizations using fund accounting

A financial statement is a document showing an organization's financial status. Nonprofit organizations that use fund accounting typically create the following financial statements:

Statement of financial position

A statement of financial position lists assets and liabilities that comprise each fund. For example, you may find assets, such as grants receivable, prepaid expenses, cash and cash equivalents, and investments. Similarly, liabilities may include mortgage payable, deferred contributions, and accounts payable. In this financial statement, the difference between an organization's total asset and total liabilities is its fund balance, represented by the formula:

Fund balance = total assets - total liabilities

Example: A charity has prepaid expenses of $3,000 and total investments of $400. It owes a bank $800 and has $300 in deferred contributions. Its total assets equals $3,000 + $400, which results in $3,400. Its total expenses equals $800 + $300, which results in $1,100. The charity calculates its fund balance as:

Fund balance = $3,400 - $1,100 = $2,300

Statement of cash flow

A statement of cash flow shows cash inflow and outflow across all funds. For example, a fund's cash inflow might indicate its excess of revenue over expenditure, and a cash outflow might be the cost of purchasing assets. You can find an organization's cash balance from this financial statement. Cash balance is the money available for financial activities. You can find this figure by adding a previous period's cash balance with the current cash flow. Reviewing the Canada Revenue Agency financial statements can help you gain more insights into creating a statement of cash flow.

Statement of operations and changes in fund balances

This statement presents the revenues and expenditures for each fund. Revenue may include contributions, investment income, foundation grants, and interests. Expenditures may include salaries and benefits, equipment rental, marketing and communications expenses, and rent. This financial statement also shows the excess of revenue over expenditures over a reporting period, represented by the formula:

Excess of revenues over expenditures = total revenues - total expenditures

Example: A company generates $10,630 in total revenues from grants, fundraising events, and investments. It spends $10,578 in total expenditures due to equipment rental, amortization, and building occupancy. It calculates its excess of revenues over expenditures as:

Excess of revenues over expenditure = $10,630- $10,578 = $52

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FAQs about fund accounting

Here are helpful answers to questions about fund accounting that can help you gain more insights into applying the concept in nonprofit organizations:

What is a fund accountant?

A fund accountant is responsible for accessing investment portfolios and ensuring they're accurate. These portfolios may include hedge funds, institutional funds, or mutual funds. They calculate and report an organization's net asset value daily to influence decision-making. Fund accountants may also conduct research in fund management. For example, they may compare funds' performances and analyze the effects of corporate actions on a fund's value. As accounting professionals, fund accountants typically collaborate with finance professionals to review accounting books and financial statements. The national average salary for a fund accountant is $52,978 per year.

What skills can you expect to use in fund accounting?

Here are the skills successful fund accountants use at work:

Attention to detail: This skill refers to the ability to be thorough and mindful at work. Being detail-oriented can help fund accountants to verify financial data contained in each fund and calculate accurate net asset values.
Computer literacy: Knowing how to use computer systems is crucial in fund accounting. Many fund accountants manage multiple funds, and using accounting software and tools can help them work more efficiently.
Data analysis: This skill involves gathering data and obtaining relevant information from it. Data analysis can help fund accountants to create informational financial reports based on data, such as fund balances, cash balances, revenues, and expenses.
Critical thinking: This skill refers to the ability to examine situations objectively and generate rational conclusions. Developing this quality often helps fund accountants evaluate a fund's performance and identify solutions to financial issues, such as nonpayments and unbalanced budgets.
Effective communication: This quality is the ability to exchange information for others to understand. Fund accountants typically convey financial reports and accounting information to stakeholders, such as company executives, organizational directors, and investors.

Why consider using fund accounting software?

A fund accounting software tracks funds, expenses, and transactions. It can offer visibility to manage organizational growth while handling process costs. Using one can simplify the accounting process for individual funds and offer increased access to financial records.

Salary figures reflect data listed on Indeed Salaries at time of writing. Salaries may vary depending on a hiring organization and a candidate's experience, academic background and location.

Please note that none of the companies mentioned in this article are affiliated with Indeed.

What Is Fund Accounting and How Does It Work? (With FAQs)