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Accumulated Fund

Updated on April 15, 2024
Article byPriya Choubey
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Accumulated Fund Meaning

An accumulated fund is the excess of revenue over the expenses of a non-profit organization (NPO) that gathers over a period. It is just like the retained earnings of any profit organization, and the money can be used to pay off the liabilities when there is a deficit.

What Is Accumulated Fund

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It is the budgetary surpluses reserved over the years by a non-profit organization when it receives a higher amount from charity, donations, and other fundraising activities while its liabilities are comparatively low. The NPO should only utilize this excess money towards its cause.

Key Takeaways

  • An accumulated fund refers to the money amassed by a non-profit organization over the period by keeping aside the budgetary surplus, i.e., excess of revenue over expenses as per the income and expenditure account.
  • Similar to retained earnings in a for-profit organization, the funds can be utilized to settle outstanding debts during a shortfall.
  • Such funds are the same as the retained earnings for a profit-making organization. The NPO can use it for meeting the budgetary deficit, such as operating expenses, buying assets, etc.
  • The accumulated fund is represented as a Capital Fund Account that appears as a liability on the Balance Sheet of an NPO. Thus, any budgetary surplus is added to the Capital Fund while the budget deficit is deducted.

Accumulated Fund Explained

The accumulated fund is the retained earnings of a non-profit organization (NPO). An NPO is an association with a specific purpose (except for profit making), i.e., initiating a social cause or ensuring public welfare. The NPOs serve in education, religion, public safety, environmental protection, etc. It includes schools, colleges, universities, hospitals, churches, national charities, social clubs, foundations, etc. Such an entity is not liable to pay taxes and, thus, acquires a tax-exempt status from the Internal Revenue Service (IRS). Some non-profit organizations are tax-exempt under Section 501 (c)(3) if they aid the public interest rather than the personal interest of the founder, shareholders, their family, or any other individual.

An NPO sources revenue from donations, charity, and other fundraising activities while it has to meet various operating and capital expenditures from this money. Sometimes, the revenue of an NPO is higher than its expenditure in a particular accounting period. This is known as a budgetary surplus. When the budgetary surpluses of various years pile up to form a considerable sum, it is termed an accumulated fund.

However, there are times when the organization doesn’t have enough revenue to meet its liabilities, resulting in a budgetary deficit. At that time, the entity can use its accumulated fund to pay off various operating expenses, procure assets, or realize any other financial purpose.

An organization usually opens a savings account to keep its accumulated fund since it allows the NPO to withdraw funds without any penalties or charges. However, some NPOs select alternative options for retaining the sum where they can earn interest, like in an interest-bearing checking account.

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How To Calculate Accumulated Fund?

The accumulated fund is the reserved balance of the budgetary surpluses a non-profit organization generates over the years. A budgetary surplus is an additional revenue the NPO has after paying off its annual expenses. It is denoted as:

Budgetary Surplus = Revenue – Expenditure

Thus, it is a positive or debit balance of the income and expenditure account.

Similarly, the budgetary deficit is adjusted from the accumulated fund. A budgetary deficit is the excess of expenditure over the revenue of a non-profit organization in a particular accounting year. It is represented as:

Budgetary Deficit = Expenditure – Revenue

Thus, it is a negative or credit balance of the income and expenditure account.

Accumulated fund calculation adjustment:

1. In case of a budgetary surplus, the amount makes an addition to the accumulated fund.

2. When there is a budgetary deficit, the amount is deducted from the accumulated fund.

Examples

Check out these examples to get a better idea:

Example #1

In 2021, the GoHigh club generated revenue of $141,000 and incurred an expenditure of $119,000. Thus, there was a budgetary surplus of $22,000 ($141,000 – $119,000). In the following year, the club makes a revenue of $110,000 and incurs an expenditure of $113,000. Thus, it has a budgetary deficit of $3,000 ($113,000 – $110,000). 

The accumulated fund of the organization at the beginning of the accounting year 2021 was $65,000. Thus, the accumulated fund balance at the end of the year 2022 is as follows:

$65,000 + $22,000 – $3,000 = $84,000

Example #2

2016 report suggested that the non-profit humanitarian organization American Red Cross has utilized its surplus funds from the Haiti program on internal expenses. The accumulated funds were directed from the donations from the Haiti earthquakes that took place in 2010. The allegations also included false disclosure of accumulated funds balance by the charity. 

Accumulated Fund vs Income Fund vs Distributed Fund

The accumulated fund is a completely different concept from the income and distributed funds. The broad distinctions between the three terms are as follows:

BasisAccumulated FundIncome FundDistributed Fund
MeaningIt is an accounting term that refers to the reserved budgetary surpluses of a non-profit organization amassed when the revenue surpasses the expenses in multiple accounting periods.It refers to an exchange-traded or mutual fund that offers the investors a monthly or quarterly income (interest or dividend) instead of capital appreciation over the period.It is a distribution of interest income, dividends, and capital gain generated on the mutual funds by the investors in a calendar year. After such disbursement, the value of the fund falls.
IncomeAn NPO can earn interest when the accumulated fund is kept in a Savings Account or an Interest-Bearing Checking Account.It provides regular income to investors in the form of interest or dividends.It provides the investors regular income as interest/dividends or one-time capital gain.
Money is Saved or Invested inA savings account or interest-bearing checking account.Equity, bonds, or other money market instruments.Bonds, debentures, or preference shares.

Frequently Asked Questions (FAQs)

Why are accumulated funds more expensive?

The NPO sometimes invests the money available as the accumulated fund in the equity and bonds to multiply in itself. Thus, these funds serve as an additional source of revenue for an NPO as it increases over time. But withdrawing money from it results in a decrease in income.

Is accumulated funds an asset?

Though the accumulated funds are the surplus revenue over liabilities, it is adjusted under the capital fund section in the liabilities side on an NPO’s balance sheet.

How to prepare accumulated funds?

In an accounting book, the accumulated fund is the capital fund on the liabilities side of the balance sheet. Therefore, when the NPO’s Income and Expenditure Account indicates a surplus income, it makes an addition to the capital fund. However, if there is a deficit of income, it is deducted from the capital fund.

What is the importance of accumulated funds?

The accumulated fund adds to the savings of a non-profit organization which can be used for fulfilling the budgetary deficit. It is thus utilized for buying assets, meeting operating expenses, and accomplishing any other specific purpose for the benefit of society. 

This has been a guide to Accumulated Fund and its meaning. We explain how to calculate it, its examples, and comparison with income and distributed fund. You can learn more about from the following articles –

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Comments

  1. Lipuo says

    Can you help me with some tutorial,

  2. Lipuo says

    This has been helpful to me

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