Fund accounting

Fund accounting is a system of accounting used by non-profit entities to tracking 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.

A non-profit may use a number of funds, each of which is set up with a separate set of accounts and a balance sheet, so that users can determine the extent to which cash has been used for its intended purpose. For example, a city government might have separate funds for street repairs, police, sewage treatment, and schools. 

Funds are intended to restrict the uses to which certain cash flows can be used. For example, if a zoo receives donations that are intended solely for animal exhibits, then the cash is recorded within the fund for animal exhibits, and cannot be spent on any other activities, such as general maintenance. By taking this approach, an organization has better control over the uses to which cash inflows are used. Also, the operational results of a program can be compared to the expenditures coming from a related fund, so that the supporters of a non-profit can evaluate the extent to which the entity is meeting its goals.

A separate budget may be established for each fund. By doing so, the manager of a non-profit can track the amount of expenditures against the level of available funding and manage the expenditure level so that the services provided via a fund are made throughout the budget year without triggering a deficit in the amount of available funds.

Examples of the types of entities that may use fund accounting are:

  • Artistic foundations
  • Charities
  • Churches
  • Colleges and universities
  • Governments
  • Hospitals

Related Courses

Governmental Accounting