Fund Accounting

Fund Accounting is an accounting system often used by nonprofit organizations and by the public sector.

[edit] Overview

Fund accounting serves any nonprofit organization or the public sector. These organizations have a need for special reporting to financial statements users that show how money is spent, rather than how much profit was earned. Profit oriented businesses only have one set of self-balancing accounts or general ledger. On the other hand, nonprofits can have more than one general ledger depending on their needs. A business manager in charge of such an entity must be able to produce reports that can detail expenditures and revenues for multiple funds, and reports that summarize the financial activities of the entire entity across all funds. For example, if a school system receives a grant from the state to support a new special education initiative, and receives federal funds to support a school lunch program, and even receives an annuity to award to teachers for research projects - at any given time, the school system must be able to extract the financial activities attributed to these programs and report on them.

Given that funds are essentially having more than one general ledger, the accounts can be designed by the special use of account numbers, each set of numbers therein represent a specific fund. Alternatively, they can be designed by using certain recording and reporting capabilities and features of the accounting software being used. For this reason, many nonprofit organizations and the public sector will often use off-the-shelf or custom-designed accounting software that is flexible enough to accommodate the needs of special reporting.

The use of fund accounting has often been a topic of debate in the accounting profession who question its usefulness, particularly in the standard-setting process. However, it is the unique nature in which nonprofit organizations and the public sector operate that has made fund accounting a useful system for financial reporting to meet the needs of financial statement users. To that end, the accounting profession has recognized this need and continues to support the use of fund accounting by providing extensive standards and principles in this area.