Since nonprofit and government agencies do not base their financial success on profit, they need an alternative method of accounting to track finances – that method is fund accounting.
For nonprofit and government agencies, accounting is very different than traditional accounting. While the Generally Accepted Accounting Principles (GAAP) are still followed, there are significant differences in how financial transactions and balances are recorded.
What is Fund Accounting
Fund accounting is where each “fund” is a separate entity, with its own expenses, income, and balance sheet. Funds can be stored in the same checking and/or savings account, however, each fund has to balance separately.
Types of Funds
There are many different types of funds, depending on the structure and type of organization.
Typical government funds can include:
- General Fund
- Special Revenue Fund
- Debt Services Fund
- Capital Project Fund
- Permanent Funds
Nonprofit funds are usually specific to the mission, so funds could be labeled anything that represents those certain activities. Examples could be:
- General Fund
- Building Fund
- Medical Expenses Fund
- Special Events Fund
- Scholarship Fund
Each fund is separate, with its own expenses and source(s) of income. They should balance on their own, while still balancing overall using Assets = Liabilities + Fund Balances. After all, the overall goal and principle of accounting is to keep everything in balance.
This is just a general overview of fund accounting. There are several additional factors, like reserve and unreserved funds, that must be taken into account as well.
Invest in Fund Accounting Software for Your Organization
Because fund accounting is completely different from traditional accounting, your organization should invest in accounting software solutions that are fund-specific. This will allow you to easily manage the different funds, in addition to reporting and tracking tools to help your department heads plan for the future.
If you’re searching for a fund accounting software solution, download our free software comparison guide to help you find the software that is right for your organization.
Learn More About Fund Accounting from Our Experts
If you’d like to know more about fund accounting software, like MIP Fund Accounting and Financial Edge NXT, or need help setting up your software to suit your organization, call us today at (888) 249-6008 or fill out the form below.