WHAT IS FUND ACCOUNTING?
By Don Frey Accounting has two primary forms: Commercial or for-profit and Fund or not-for-profit. Both share many common aspects. However, there is a marked difference in the accounting procedures, management objectives and reporting requirements between the two. Before examining some of these differences, let’s review the generally accepted definition of a fund. “A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations.” More simply stated, you must set up separate funds based on regulations, restrictions and limitations. They must be treated as separate entities. Each fund must have their own general ledger and must provide individual revenue,
Most churches and nonprofits use fund accounting. It is an accounting method that groups assets and liabilities according to the specific purpose for which they are to be used. It helps to keep restricted (special) and unrestricted (general) funds separate. What is its main purpose? The main purpose is stewardship of financial resources received and expended in compliance with legal or other requirements. What is stewardship? Stewardship is a responsibility to take care of another person’s property or financial affairs. Why should churches and nonprofits utilize this method of accounting? Because with fund accounting, accountability is measured instead of profitability. Financial reports are directed toward contributors, church members, or the church/nonprofit’s governing body, who are more concerned with having adequate fund balances to carry on services provided rather than seeking a profit on investments as investors do. In fund accounting, funds are set up to provide reporting of e
