Fund Accounting

Fund accounting is an approach employed by non-profit organisations (NPOs) to manage and account for funds received under various conditions or restrictions. These funds are typically provided by individuals, grant agencies, governments, or different organisations specifying how the grant must be used.

The financial reporting guidelines and obligations for NPOs and governments are unique due to their non-profit nature. The primary focus primarily lies on tracking and validating the varying applications of the entity’s resources. Such organisations typically obtain two categories of funds: unrestricted grants and those subjected to certain usability constraints. Fund accounting enables the segregation and traceability of these funds, depending on any donor-related restrictions.

The key objective of fund accounting includes establishing specific accountability for general-use and special-use funds while also ensuring traceability. It also helps in scrutinising the entity’s financial health and formulating accurate financial data. Besides, it provides justification for expenditures against purpose-specific grants for acquired capital projects.

Non-profit and governmental entities employ fund accounting to record resources obtained from contributors for a specified purpose. They are classified into restricted and unrestricted funds. Non-profit organisations use standard financial protocols akin to profit organisations but with adapted terminologies. These include a payment and receipt account, a revenue and expenses account, and a balance sheet, replacing the profit and loss account. The revenue and expenses account represents the usage of resources allocated to them, termed ‘excess’ when revenue prevails and ‘deficit’ when expenses do.

In fund accounting, entities maintain a balance sheet illustrating their assets and liabilities. For instance, a non-profit school might receive funds for building repair, food provision, and general-purpose use. Each of these funds will be utilised appropriately per donation condition. Thus, fund accounting ensures financial transparency and accountability within non-profit organisations.