What Is Fund Accounting?

Definition

Fund accounting is an accounting method that tracks resources by fund or purpose, so a nonprofit can show donors and funders how their money was used rather than how much profit was made.

A for-profit company asks one main question: did we make money? A nonprofit has to answer a different one: did we use every dollar the way it was intended? Fund accounting is built around that second question. It groups money by its source and purpose, so the organization can show accountability to donors, grantors, boards, and auditors.

Fund accounting vs. for-profit accounting

• Goal: for-profit accounting measures profit for owners. Fund accounting measures stewardship of resources for a mission.
• Equity: a company reports owners' equity. A nonprofit reports net assets instead.
• Tracking: a company tracks revenue and expenses by department or product. A nonprofit also tracks them by fund, program, and grant.
• Reporting: nonprofits report to many audiences at once: the board, each funder, auditors, and the IRS on Form 990.

Net assets with and without donor restrictions

Under current U.S. nonprofit reporting standards (ASU 2016-14), net assets fall into two classes:

• Net assets without donor restrictions: money the organization can use for any purpose that supports its mission, including amounts the board has set aside on its own.
• Net assets with donor restrictions: money a donor has limited to a specific purpose or time period, including endowments. See restricted funds.

When the organization meets a restriction, for example by spending a grant on the program it was meant for, the amount is released from restriction and moves to net assets without donor restrictions.

Using dimensions vs. separate ledgers

Older fund accounting systems often kept a separate, self-balancing set of books for every fund. That works, but it multiplies the chart of accounts and makes organization-wide reporting slow.

Modern systems take a different approach. A single general ledger tags each transaction with dimensions such as fund, program, grant, and funding source. The organization can still produce a balance sheet or activity report for any fund, but without maintaining dozens of separate ledgers. See dimensional general ledger.

Fund accounting in Sage Intacct

Sage Intacct is widely used by nonprofits for fund accounting. Dimensions track funds, programs, grants, and restrictions on every transaction, and reports can be run by any combination of them. Restriction releases, allocations, and functional expense reporting can be automated instead of rebuilt in spreadsheets each month.

Acumen helps nonprofits design funds and dimensions around the reports their board and funders actually ask for.

Example: one expense, three views

A community health nonprofit pays a $3,000 invoice for clinic supplies. The expense is tagged with program: mobile clinic, grant: county health grant, and fund: restricted operating fund.

That one entry shows up in the organization's statement of activities, in the mobile clinic program report for the board, and in the county grant report showing how much of the grant has been spent. Because it is tagged as spending on a restricted purpose, the matching amount is released from restriction automatically.