Fund Accounting Basics: Guide to Proper Stewardship

4 min readAug 9, 2021

Understanding fund accounting basics helps nonprofits identify revenue sources, ensuring proper stewardship of funds. Subsequently, raising more money and achieving its mission.

Fund Accounting Basics

Fund Accounting Basics

Nonprofit fund accounting tracks and manages finances for nonprofits and government agencies. It shows how revenue is being spent and whether funds are used for its designated purpose.

For-profit businesses have one bottom line. While, nonprofits have two bottom lines. One bottom line fulfills their stated mission. The other one shows it has the necessary funding to support their mission. More than anything else, nonprofits are held to different standards than for-profits. Nonprofits must demonstrate accountability. For-profits show profitability.

Above all, fund accounting helps your nonprofit identify areas of strength and weakness. For example, a fund is like a separate company within the organization. Each fund tracks assets, liabilities, revenue, expense and fund balances or net assets. Therefore, revenue earned by nonprofits is different from revenue earned by for-profit businesses.

Purpose of Fund Accounting

Fund accounting focuses on accountability and proper stewardship. This is a must-have for compliance with government regulations. It monitors donor restrictions by separating different types of revenue into individual funds. Thereby, preventing mismanagement of funding.

Each fund has its own:

Revenue and expense report
Excess or deficiency calculation
Balance sheet

Nonprofits treat revenue in specific ways. Some donations have donor restrictions. Other sources of revenue have restrictions placed by the board. Some restrictions are for a limited time. Some are permanent.

Principles of Fund Accounting

Assigning a code for transactions helps track revenue and expenses. This provides a way to measure how well your nonprofit meets their goals. You will need a nonprofit accounting system to accomplish this.

Fund Accounting System

To set up a fund accounting system, start with net assets without donor restrictions. This includes the general activities of the organization. It is also known as the unrestricted fund. Other names include: operating fund, general fund or current unrestricted fund. This fund is the backbone of financing your organization’s mission.

Next, set up net assets with donor restrictions. Nonprofits must use this revenue in the way the donor intended. However, nonprofits can use earned income to carry out the organization’s ongoing activities. You will find some endowment gifts stipulate how to use the funds.

Unique Identifiers

Unique identifiers, or codes, classify donors, grants, projects, locations and more. Most importantly, this helps an organization identify the sources of its revenue. It also determines whether donations are used for its designated purpose. Proper fund accounting highlights areas of strengths and weaknesses. It provides transparency for outside audiences.

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What Is A Fund?

Funds classify the type of revenue received by a nonprofit and purpose of these funds. Every nonprofit has its own individual programs and administrative activities. They establish funds to track revenue and expenses. Some funds represent donor restrictions or board designations.

Examples of funds

Unrestricted Fund: No restrictions placed on the resources of this fund. The organization can use the revenue in the fund as it chooses.
Current Restricted Fund: Revenue used for specific purposes.
Restricted Endowment Fund: Organizations can use earned income. The original gift remains restricted either forever or for a specified time.
Capital Fund: Used to track all revenue and expenses for capital, building projects.
Fixed Asset Fund: Used for fixed assets, buildings, land, etc.

Subcategories Help Identify Funds for Specific Purpose

In addition, there are also sub-categories of funds that can be part of your financial makeup. For example, board designated funds can be a subcategory of unrestricted funds. Sometimes a board will transfer funds into a special fund for a specific purpose.

You can also set up a Fixed Asset Fund to track your buildings, furniture and fixtures and equipment. The board may want to separate these assets from the unrestricted fund. The unrestricted fund will represent the current activity of the organization better. It will show the funds available for current program use. The decision to establish a separate fixed asset fund is up to the board.

Donor Designated Donations

Donations are either restricted or unrestricted as designated by the donor. To be clear, they can specify their intention through an agreement with the nonprofit. Likewise, nonprofits must be transparent when asking for money.

Case for Unrestricted Funds

When reaching out to potential donors, organizations can ask for unrestricted donations. They must state this on the donation form or the gift acknowledgment.

Following Protocols

Following protocols ensure proper use of donations. Problems occur when donors discover their donation was not used according to their wishes. To avoid this, give donors a choice at the time of the donation. This lets donors choose their intended purpose. If their wishes are not followed, the donor can demand a refund or take legal action.

Grants from foundations are usually restricted to a particular program or purpose. Under these conditions, documentation will specify restrictions of the grant award.

Bottom Line

In conclusion, nonprofits must maintain a clean reputation to maintain their nonprofit status.

By implementing fund accounting, organizations become more compliant and accountable to funding sources. Above all, fund accounting provides a birds eye view for the nonprofit board and the general public.

Is your nonprofit organization applying fund accounting methods? We welcome your thoughts and comments.

Originally published at https://araize.com/nonprofit-fund-accounting-basics/