Fund Accounting

What is Fund Accounting?

Fund accounting is a method used by Non-Profit Organisations & governments for the accountability of funds or grant received from individuals, grant authorities, governments or other organizations, etc. who has imposed restriction or conditions on the utilization of the funds from the grants (condition could be implemented on full funds or part of the funds as per the donor).

Explanation

In the case of Non-Profit Organization (NPO) & governments, the financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more rules & requirements are different from those other organizations as these entities are not profit-oriented. Hence the main focus is to track and validates the various uses of the funds available to the entity. The NPOs receive two types of funds, one is the grant with no restriction for its use, and the others are with some limitation to the usage of the funds. Therefore, it is used for the accountability of these funds.

Hence, it provides the bifurcation in the treatment of both types of grants and provides traceability to the usage of funds having donor-specific restrictions or conditions.

Fund-Accounting

Objectives

How Does Fund Accounting Work?

Example

  • A School is working as a non-profit organization. It has received a donation for the repair of the building. Also, they received funds from a company to provide good food to students. School also received a donation for general-purpose means, not for any specific purpose.
  • Now donation for repair will be used only for building repair. Till the expense does not occur, that donation will be kept aside. Same the donation received for food will be spent for that purpose only. But donation received for general purpose can be used for any purpose, like for the salary of teachers, expenses of school, etc.

Fund Accounting vs. Non-Fund Accounting

Advantages

Disadvantages

  • It becomes challenging to maintain the amount in separate funds means it is difficult to separate the amount from the general fund to a specific purpose fund.
  • The account doesn’t reflect the real and actual value of the fund. Sometimes no-profit organization misappropriates the fund by including the use of cash.
  • Sometimes it leads to excess spending of a fund but lower control of the fund; mostly, it happens in government organization.
  • The fund accounting does not provide quality analysis to the performance of NPO or government entity. It only focuses on the accounting of the different funds.
  • With the increase in types of grants or funds and management of different accountability, eventually, the accounting and tracking of the funds become too complicated.

Conclusion

Fund accounting provides essential accounting methods for the Non-profit Organisation & governments to record their funds and grants received from other parties (any grant – general purpose or specific purpose grant). It provides accountability of the recorded funds and transactions against it with the statutory obligations applicable to the entities. Helps the auditorsThe AuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more by providing traceability towards the different funds or grants received from the donors and the transaction or expenditure incurred by the management against those funds.

Recommended Articles

This has been a guide to what is fund accounting and its definition. Here we discuss objectives, examples, and how does fund accounting work along with advantages and disadvantages. You can learn more about Financing from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *