fund accounting meaning

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. It’s hard to turn away money, but think things through before accepting restricted funds if you’re a small organization.

Let’s look at the type of organizations that use it and how the fund accounting principles play a role in their day-to-day operations. This method of accounting is used by almost all nonprofit organizations, and will likely be needed on a daily basis. Smaller organizations often don’t have the resources to find a dedicated fund accounting professional.

How to Share Your Impact With a Nonprofit…

A nonprofit might choose, for example, to spend unrestricted funds on operational expenses, emergency repairs, or any other initiative that aligns with the organization’s mission. Fund accounting is used by nonprofit organizations to track money and make sure it’s being used as intended. Each fund must be managed separately to ensure the funds are being used for the purpose intended. These assets are not fungible in the same way revenue is in a commercial enterprise.

Temporarily restricted funds have been designated for a particular program or purpose. The difference between temporarily restricted and restricted funds is that a temporarily restricted fund has an expiration date, typically within a year. You can spend the unrestricted money in your general operating fund on things like salaries, administrative expenses, and supplies for operating your shelter. But the restricted donation has to go toward the designated fund, even if you don’t have an immediate need to buy dog food. Where regular accounting tracks money in and money out and is meant for for-profit companies, fund accounting is more specific. It tracks the funds themselves – the money that comes into each fund and how the organization is using it.

Restricted and Unrestricted Funds

For example, a board might designate a portion of unrestricted funds for future expansion or a specific project to support the organization’s growth. One of the core principles of fund accounting is segregating funds based on their designated purposes. This separation helps organizations maintain clear records and track the financial performance of each fund independently. Segregating funds also ensures that organizations comply with donor restrictions, legal mandates, and regulatory requirements, promoting transparency and accountability.

They’re all different, but the one thing they have in common is their funding streams. The majority of these organizations, and thousands of others like them, receive their funds through public support or through grants. By categorizing funds into fund accounts, organizations can easily demonstrate compliance with any restrictions placed on the use of the money. Donors, government agencies, and other stakeholders often appreciate this transparency.

How can a nonprofit ensure compliance with fund accounting standards?

It ensures that money is allocated and spent in line with the organization’s mission and donor intentions. First, assign a code for each transaction, facilitating financial management. Additionally, unrestricted funds are not tied to any specific purpose, meaning that organizations can move the fund accounting meaning money to different funds, depending on the need. This flexibility allows organizations to be more agile and adaptable, which can be extremely beneficial in today’s ever-changing environment. Lastly, unrestricted funds can provide organizations with a source of income if they are invested wisely.

fund accounting meaning