Fund accounting is a mechanism used by non-profit organisations to account for cash or grants received from people, grant agencies, governments, or other organisations who have placed restrictions or limitations on how the monies from the grants are utilised (condition could be implemented on total funds or part of the funds as per the donor).
Interpretation of Fund Accounting
The financial reporting regulations and requirements for Non-Profit Organizations (NPOs) and governments differ from those for other organisations because these entities are not profit-oriented.
As a result, the main focus is on tracking and validating the numerous uses of the entity’s funds. NPOs receive two types of funds: one is a grant with no restrictions on how it is used, and the other with certain restrictions on how it is used.
As a result, fund accounting is employed to keep track of these funds. Therefore, it allows for bifurcation in the treatment of both types of funds, as well as traceability of funds subject to donor-specific restrictions or requirements.
Objectives of Fund Accounting
- The core goal of fund accounting is to establish distinct accountability for general-purpose and specific-purpose funds, allowing for amount traceability.
- It keeps track of out-of-pocket expenses and determines whether or not the expenditure was made against those funds (conditions the donor provides).
- It’s used to assess an entity’s financial health and to present accurate financial data for financial reporting.
- It gives a justification for the expenditures made against the particular purpose grant for any capital projects obtained.
How Does Fund Accounting Work?
- Non-profit and government organisations use it. It is a record of resources obtained for a specified purpose from a contributor. A limited fund and an unrestricted fund are two different sorts of funds. The restricted fund is utilised for a specific purpose, but the unrestricted fund can be used for anything.
- The standard used by non-profit organisations is the same as that of profit organisations. Nonetheless, phrases are used differently in non-profit organisations like as NPO prepares payment and receipt account, Revenue and expenses account, and Balance sheet instead of profit and loss account.
- All of an organisation’s amount of receipts will be accounted for on the receipt side, and all payments will be shown on the payment side.
- A non-profit organisation prepares revenue and expense account to reflect the usage of money that has been allocated to them. When revenue exceeds expenses, it is referred to as excess, and when spending exceeds income, it is referred to as a deficit.
- A balance sheet is a statement of financial situation; a non-profit organisation’s balance sheet is the same as a profit organisation’s. It depicts the value of an NPO’s assets and liabilities.
Example of Fund Accounting
- A school operates as a non-profit corporation. It has received a contribution to the building’s repair. They also received cash from a business to give nutritious food to students. In addition, the school also received a donation for general use rather than for a specific purpose.
- Donations for repair will henceforth only be utilised towards building repairs. Therefore, this donation needs to be set aside until the expense occurs. Similarly, food donation should be used solely for that reason. However, donations made for a general purpose can be used for anything, such as teacher salaries, school expenses, and so on.