What Is Fund Accounting?

What is fund accounting?

Fund accounting is a type of accounting undertaken by non-profit organisations which controls the incomings and outgoings in a way that ensures money is being used honestly and transparently. It is both a required element of running a non-profit organisation and a key to its success, as accurate and up-to-date fund accounting contributes to maintaining its reputation with would-be donors. Ensuring that all financial activity is legitimate and above board helps to maintain the trust of the public.

How does fund accounting work?

There are a number of different aspects to fund accounting that make it a uniquely complicated and demanding form of accounting, but the way accounts are managed can be divided into three main categories:

• Unrestricted income funds: These can be used for any of what are called the organisation's permitted activities (ie, the activities that the public would reasonably expect the organisation to be involved in, whether they relate to the work that it does or the day-to-day running of it). These funds can move around the organisation with a lower level of scrutiny and may also be designated for a particular purpose by the organisation itself.
• Restricted income funds: These can only be used within certain parameters. A member of the public donating to the organisation has a reasonable expectation that the funds will be used as they have been led to believe, whether that has been stipulated at the point of donation or the donation has been made towards a specific campaign. Restricted income funds cannot move freely around the organisation and must be used for the purpose they were originally intended for.
• Restricted capital funds: These do not count as income and should not be treated as such. These should not be used directly for the day-to-day work of the charity.

Which entities should use fund accounting?

Any charity or other organisation that presents itself to the public as being not-for-profit is required to undertake fund accounting as opposed to other accounting methods that different types of companies might use. This is because cash coming into the organisation needs to be tracked with a greater level of scrutiny, to make sure it is being spent according to the intentions of donors. It is also important to determine whether any unauthorised profits are being generated by the organisation.

Non-profit organisations are not the only ones that may use fund accounting - governments also use a form of it, as do investment banking companies.

What makes fund accounting different from non-fund accounting?

While the accounting standards and balance sheets used in fund accounting are broadly the same as any other, there are specific differences between fund accounting and other types of accounting (non-fund accounting). These include:

• Not focusing on the analysis of the organisation’s financial performance: Fund accounting is purely based on scrutiny and regulation.

• The type of financial statement preparation involved: In non-fund accounting, this is expanded to include profit and loss accounts rather than simply revenues and expenses. In theory, this makes it a simpler concept, but in practice, the specific requirements and regulations around fund accounting make it a complex and time-consuming process that can benefit from fund accounting software.

• Splitting funds into restricted and non-restricted: This classification does not exist in other companies that don’t use fund accounting.

• The rules around how accounts can be used in court: For profit-making organisations, audit reports may be deemed to have less legal relevance.

Find out more about fund accounting software

At AccountsIQ, we offer specialised accounting software that can cater to any type of business, ranging from charity accounting software to private equity and venture capital accounting software. Our fund accounting software is specifically designed to help non-profit organisations stay on top of fund accounting and navigate the requirements, keeping up their reputation in the process. Get in touch today to find out more about how we can help your organisation to move forward in the digital accounting age.

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