It’s designed to ensure that nonprofit organizations use donations and grants precisely as directed by donors, foundations, or government agencies. Statement of Financial Position – Nonprofit equivalent of a balance sheetThis report provides a snapshot of the organization’s financial health at a given point in time. It shows assets, liabilities, and net assets (the nonprofit version of equity), all broken down by fund. This helps stakeholders understand what the organization owns, owes, and has available to fulfill its mission—across every fund and initiative. Fund accounting relies on a set of core financial tools and reports that give nonprofits a clear picture of their financial health—while meeting the requirements of donors, auditors, and governing bodies. These components work together to ensure every dollar is tracked accurately and transparently.

Other special funds

It’s primarily used by nonprofit organizations, government agencies, and churches. unearned revenue Fund accounting is a system of accounting used by non-profit entities to track the amount of cash assigned to different purposes and the usage of that cash. The intent of fund accounting is not to track whether an entity has generated a profit, since this is not the purpose of a non-profit. Thus, the focus of fund accounting is on accountability, rather than profitability. Those running a non-profit need enough information to make decisions about how to use limited resources, as well as to report to third parties about how well they are preserving and using those resources.

Private Equity

• Fund accounting is more than a financial method—it’s a framework for transparency, compliance, and mission-driven success.
• A fund, in this specialized accounting context, is an independent fiscal and accounting entity with a self-balancing set of accounts.
• Nonprofits often receive donations or grants designated for a specific purpose–like a donation to a specific program or grant you have to spend within a calendar year.
• These funds often do not track a principal or corpus balance or have a prescribed spending policy.

It helps ensure that restricted donations are used correctly, which builds trust and supports long-term growth. Nonprofit organizations using fund accounting can include churches, hospitals, universities and colleges, nursing homes, and artistic foundations. It’s particularly common among those registered as 501(c)(3) organizations with the IRS to show that spending is allocated for specific purposes. Fund accounting helps track how the money is used, who gave the funds, and how its use was restricted. Fund accounting, however, focuses on accountability—a principle shaped by standards that have undergone significant and far-reaching change over the last few decades. Its main purpose is to show that funds are being spent according to legal or donor-imposed restrictions.

• By showing the amount of their equity that is restricted funds, Wellington Zoo is being transparent about their accounting practices and assuring donors they’re using funds as designated.
• Fund accounting classifies all resources into funds according to specific limitations placed on their use by the resource providers.
• FASB standards for non-profit entities simplify the reporting structure but focus keenly on the nature of net assets.
• This involves setting up procedures for approvals, separating duties (e.g., the person recording transactions shouldn’t be the same one approving expenses), and conducting regular audits.
• I’ve seen organizations lose team members and spend hours trying to figure out how to reproduce work that team member did.

Categorize funds based on their purpose

Government fund accounting is similar to non-profit fund accounting because they both use an accounting model different from the traditional one. This method relies on revenue from multiple resources and has certain restrictions on the usage of these funds. Government fund accounting uses the words such as deficit and surplus instead of using profit and loss as the main focus is on accountability instead of making a profit. Fund accountants are responsible for day-to-day accounting activities for a group of assigned funds. They are required to calculate monthly or weekly financial statements along with income and expense accruals.

The money from the interest earned is designated for a specified purpose, and the principal cannot be touched. The FASB requires that you set up at least 2 different “funds” within your accounts– one to track assets with donor-imposed restrictions, and one to track assets without donor-imposed restrictions. In many cases, though, you’re going to want to have more funds in order to optimize accuracy and transparency in your finances.

Cookie and Privacy Settings

With these general principles in mind, let us take a look at Wellington Zoo’s annual report that highlights its fund accounting efforts. This report includes their financial statements (from page 44) such as a Statement of Financial Position, Statement of Cash Flows, and Statement of Changes in Equity. Nonprofits have a big responsibility when it comes to their accounting practices. Anytime you accept donations from the public, it’s your responsibility to keep track of that money responsibly and effectively. In fund accounting, a journal is maintained that keeps a record of all the incoming cash from donors and the expenditure done by the non-profit entity.

Key Differences from For-Profit Accounting

The Governmental Accounting Standards Board (GASB) sets the accounting and financial reporting standards for state and local governmental entities in the United States. Instead, the expenditure for the acquisition of a fixed asset is reported as a current-period expenditure in the governmental fund, reflecting the outflow of current financial resources. The assets and long-term debt themselves are tracked and accounted for outside of the governmental funds. This structural separation is reconciled and presented comprehensively in the government-wide financial statements. You need fund accounting Retained Earnings on Balance Sheet to manage restricted funds, comply with grants, track programs, and provide transparency to stakeholders.