Fund accounting


Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law. It emphasizes accountability rather than profitability, and is used by nonprofit organizations and by governments. In this method, a fund consists of a self-balancing set of accounts and each are reported as either unrestricted, temporarily restricted or permanently restricted based on the provider-imposed restrictions.
The label fund accounting has also been applied to investment accounting, portfolio accounting or securities accounting – all synonyms describing the process of accounting for a portfolio of investments such as securities, commodities and/or real estate held in an investment fund such as a mutual fund or hedge fund. Investment accounting, however, is a different system, unrelated to government and nonprofit fund accounting.

Overview

Nonprofit organizations and government agencies have special requirements to show, in financial statements and reports, how money is spent, rather than how much profit was earned. Unlike profit oriented businesses, which use a single set of self-balancing accounts, nonprofits can have more than one general ledger, depending on their financial reporting requirements. An accountant for such an entity must be able to produce reports detailing the expenditures and revenues for each of the organization's individual funds, and reports that summarize the organization's financial activities across all of its funds.
Fund accounting distinguishes between two primary classes of fund.: those funds that have an unrestricted use, that can be spent for any purposes by the organization, and those that have a restricted use. The reason for the restriction can be for a number of different reasons. Examples include legal requirements, where the moneys can only be lawfully used for a specific purpose, or a restriction imposed by the donor or provider. These donor/provider restrictions are usually communicated in writing and may be found in the terms of an agreement, government grant, will or gift.
When using the fund accounting method, an organization is able to therefore separate the financial resources between those immediately available for ongoing operations and those intended for a donor specified reason. This also provides an audit trail that all moneys have been spent for their intended purpose and thereby released from the restriction.
An example may be a local school system in the United States. It receives a grant from its state government to support a new special education initiative, another grant from the federal government for a school lunch program, and an annuity to award teachers working on research projects. At periodic intervals, the school system needs to generate a report to the state about the special education program, a report to a federal agency about the school lunch program, and a report to another authority about the research program. Each of these programs has its own unique reporting requirements, so the school system needs a method to separately identify the related revenues and expenditures. This is done by establishing separate funds, each with its own chart of accounts.

Nonprofit organizations

Nonprofit organization's finances are broken into two primary categories, unrestricted and restricted funds. The number of funds in each category can change over time and are determined by the restrictions and reporting requirements by donors, board, or fund providers.
Unrestricted funds are, as their name suggests, unrestricted and therefore organizations do not necessarily need more than a single General Fund, however many larger organizations use several to help them account for the unrestricted resources. Unrestricted funds may include:
  • General fund – This is the minimum fund needed for unrestricted resources and relates to current as well as non-current assets and related liabilities which can be used at the discretion of the organisation's governing board.
  • Designated fund – assets which have been assigned to a specific purpose by the organisation's governing board but are still unrestricted as the board can cancel the desired use.
  • Trading funds – Many large non-profit organisations now have shops and other outlets where they raise funds from selling goods and services. The profits from these are then used for the purpose of the organisations.
  • Plant fund – Some organizations hold their non-current assets and related liabilities in a separate fund from the current assets.
  • Current fund – unrestricted – If the organization holds his non-current assets in a plant fund then this is used to account for current assets that can be used at the discretion of the organization's governing board.
Restricted funds may include:
  • Endowment funds – permanent are used to account for the principal amount of gifts or grants the organization is required, by agreement with the donor, to maintain intact in perpetuity or until a specific future date/event or has been used for the purpose for which it was given.
  • Endowment funds – temporary are similar to permanent endowment funds except that at a future time or after a specified future event the endowment become available for unrestricted or purpose-restricted use by the organization
  • Annuity and Life-Income Funds are resources provided by donors where the organization has a beneficial interest but is not the sole beneficiary. These may include charitable gift annuities or life income funds.
  • Agency or Custodian funds are held to account for resources before they are disbursed according to the donor's instructions. The organisation has little or no discretion over the use of these resources and always equal liabilities in agency accounts.
  • Current funds – restricted are current assets subject to restrictions assigned by donors or grantors.

    Accounting basis and financial reporting

Like profit-making organizations, nonprofits and governments will produce Consolidated Financial Statements. These are generated in line with the reporting requirements in the country they are based or if they are large enough they may produce them under International Financial Reporting Standards, an example of this is the UK based charity Oxfam. If the organization is small it may use a cash basis accounting, but larger ones generally use accrual basis accounting for their funds.
Nonprofit organizations in the United States have prepared their financial statements using Financial Accounting Standards Board guidance since 1993. The financial reporting standards are primarily contained in and . FASB issued a major update in 2016 that changed reporting net assets from three primary categories to two categories, restricted and unrestricted funds and how these are represented on financial statements.
Nonprofit and governments use the same four standard financial statements as profit-making organizations:
  • Statement of financial activities or statement of support, revenue and expenses. This statement resembles the income statement of a business, but may use terms like excess or deficit rather than profit or loss. It shows the net results, by each fund, of the organization's activities during the fiscal year reported. The excess or deficit is shown as a change in fund balances, similar to an increase or decrease in owner's equity.
  • Statement of financial position or balance sheet. Similar to the balance sheet of a business, this statement lists the value of assets held and debts owed by the organization at the end of the reporting period.
  • Statement of changes in equity – just as for profit-making organizations, this shows the change in the organization equity over the year. Under IFRS the nonprofit organization can choose if it wants to produce this statement or not; some do, and some do not.
  • Statement of cash flows identifies the sources of cash flowing into the organization and the uses of cash flowing out during the reported fiscal year.
In the United States there may also be a separate Statement of functional expenses which distributes each expense of the organization into amounts related to the organization's various functions. These functions are segregated into two broad categories: program services and supporting services. Program services are the mission-related activities performed by the organization. Non-program supporting services include the costs of fund-raising events, management and general administration. This is a required section of the Form 990 that is an annual informational return required by the Internal Revenue Service for nonprofit organizations.

United Kingdom governmental system

The United Kingdom government has the following funds:
  • Consolidated Fund is the fund where all date-to-day revenues and expenses of the government are accounted. Each of the devolved governments also have a consolidated fund.
  • Trading fund is a government organisation which has been established as such by means of a trading fund order.
  • The National Loans Fund is the government's main borrowing and lending account. it is closely linked to the consolidated fund, which is balanced daily by means of a transfer to, or from, the national loans fund.
  • The Exchange Equalisation Account is the government fund holding the UK's reserves of foreign currencies, gold, and special drawing rights. It can be used to manage the value of the pound sterling on international markets.
  • National Insurance Funds are accounts which holds the contributions of the National Insurance Scheme.
  • The Contingencies Fund is an account which may be used for urgent expenditure in anticipation that the money will be approved by Parliament, or for small payments that were not included in the year's budget estimates.