Fund Accounting Basics For NPOs

by Vickey Boatright
(U.S. Publisher of FreeChurchAccounting.com)

There are two main types of accounting. One is commercial accounting which is used mainly by for-profit organizations and fund accounting which is used mainly by nonprofits and governments.

Editor's note: Examples of NPFs are condo corporations, membership and professional organizations, societies, community associations ... to name a few. A registered charity can be an NPO but an NPO is not necessarily a registered charity. In Canada, registered charities have very strict compliance requirements including disbursement quotas that must be met annually, special requirements for the issuance of tax receipts, and surpluses.

The difference between the two is that a fund accounting system emphasizes accountability rather than profitability.

Fund accounting also segregates resources into categories or funds. By using this method of accounting you can properly identify the source of these funds and also the use of those funds.

Commercial accounting uses a single set of self-balancing accounts (a general ledger); however fund accounting can use multiple general ledgers or funds depending on their financial reporting requirements.

This is because nonprofit organizations often obtain their resources from a variety of sources. Many times, those funds from different sources cannot be comingled and must be used appropriately.

So fund accounting creates a distinction between the different types of funds, identifies the funds, and reports them separately and then collectively.

What exactly is a fund?

Wikipedia defines a fund as a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations.

The Merriam-Webster dictionary defines "fund" as "a sum of money or other resources whose principal or interest is set apart for a specific objective."

In simpler terms, a fund is an accounting entity (an entity is something that has a distinct, separate existence) that needs to be kept separate, having its own source(s) of income and its own expenses and restricted for a particular purpose.

To account for these funds and generate the proper financial statements, nonprofit organizations usually use standards set by the Financial Accounting Standards Board (FASB). Editor's note: Canadian equivalent is Accounting Standards Board (AcSB).

The Financial Accounting Standards Board (FASB) is a nonprofit organization that was started in 1973 to develop generally accepted accounting principles (GAAP).

To establish those accounting principles, FASB issued some rules and regulations that addressed specific accounting issues for nonprofits. Those rules are in the form of Statements of Financial Accounting Standards (SFAS).

SFAS Numbers 95, 116, 117, and 124 describe the method nonprofits should use to account for contributions, present their financial statements, and account for certain investments.

A few years ago FASB undertook a huge project to organize all these accounting standards for nongovernmental organizations, including churches and nonprofits together. It didn’t change any of the accounting standards for nonprofits, just tried to simplify them by putting them all together under one title: FASB ASC Topic 958, Not-For-Profit Entities. Editor's note: Canadian equivalent is The CICA Handbook-Accounting Part III Accounting Standards for Not-For-Profit Organizations.

The emphasis of the SFAS financial statement reporting is on “net assets” classification. (Net assets are the difference between what is owned and what is owed.)

The net asset categories are:

• Unrestricted
Assets available to use toward any purpose. They are not temporarily or permanently restricted. They include all net assets not restricted by the donors or by law. An example of an unrestricted net asset is your general fund.

• Temporary Restricted
Assets restricted by donor-imposed time or purpose restrictions. Time restrictions require resources to be used within a certain time frame or before or after a certain date. An example of such an asset could be a trust, annuity, or term endowment where the principal of the gift is restricted for a certain term of time. Purpose restrictions require resources to be used for a specific purpose. An example of this kind of asset could be a contribution for a certain project or for the purchase of equipment. Once the equipment or item is purchased or the project is completed the restriction is released.

• Permanently Restricted
Assets restricted by the donor for a designated purpose or time restriction that will never expire. An example of a permanently restricted asset could be an endowment contribution with the condition that the principal is permanently unavailable for spending, but the investment income from the principal may be used for daily operations or other donor specified operations.

Within each of these net asset categories and be multiple funds. That is where fund tracking comes in.

For example a church decides to raise money to purchase playground equipment. They create an accounting fund called “Playground Equipment”. All donations received for that purpose would be recorded to that fund as well as the equipment itself when purchased. This fund would be designated as “Temporarily Restricted”.

The general fund would fall under the “Unrestricted” category and if the church was blessed with an endowment gift it could be designated as “Permanently Restricted” depending on the donor’s stipulations.

When a for-profit organization records a financial transaction such as paying the electric bill it simply debits the expense account involved and credits “Cash”; however, a non-profit using fund accounting has to go an extra step and designate a fund to each recording entry.

For example:

To pay the electric bill, the church in the above example would record the transaction like this:

ACCOUNT            DEBIT             CREDIT            FUND*

Utilities                        $250.00                                   General Fund
Cash                                             $250.00              General Fund

They would record a $500.00 contribution designated for playground equipment like this:

Cash                        $500.00                                   Playground Equipment Fund
Contributions Revenue                       $500.00              Playground Equipment Fund

           *Editor's note: In QuickBooks, you would use "classes" to setup, track and report each fund.

Editor's note: In Canada, I believe the investment in / purchase of a capital asset would require four entries as it moves through the general fund to the capital fund with an offset to "Equity in Capital Assets", so you may need to ask your accountant to help you book this type of entry.

The advantage of fund accounting is the ability to see financial reports for all of a nonprofit organization’s funds as a whole as well as seeing each fund individually.

The “Statement of Activities”, a nonprofit equivalent of an Income Statement, can be generated by an organization to track its revenues and expenses by funds for a specific period of time.

A “Statement of Financial Position”, a nonprofit equivalent to a Balance Sheet, can be generated by an organization to show the balance of those funds as well at the assets and liabilities of the organization as a whole.

A “Statement of Cash Flows” can be generated by the organization to summarize all of the cash receipts and cash payments for a specific period of time.

Editor's note: In Canada, I believe you must also prepare a "Statement of Changes in Net Assets".

Editor's note: The tricky part of fund accounting is ensuring your funds are all in balance as you go through the year and especially at yearend. Please don't hesitate to ask your accountant to assist if / when you are out of balance and can't figure out what you did incorrectly. It is much easier to fix the error when it occurs than at yearend. Your NPO may also require allocating general administration expenses to your varying fundraising, education and development programs.

In conclusion fund accounting can help build a foundation of trust for a nonprofit organization. Through it, contributors can see the resources they donated are being used appropriately and responsibly.

Editor's note: In Canada, "Accounting Cycle" has a webinar on how to do bookkeeping for NPDs and Charities using QuickBooks software. A good reference for BC stratas is The Condominium Home OwnersAssociation of B.C. (CHOA)



About the author:

Vickey Boatright has worked as a fund accountant for a non-profit organization for over 12 years. She loves building free financial spreadsheets for thousands of churches worldwide. She is also the owner of three websites, one of which is Free Church Accounting.