Nonprofits have a big responsibility when it comes to their accounting practices. Anytime you accept donations from the public, it’s your responsibility to keep track of that money responsibly and effectively. And that’s where fund accounting comes into the picture.
Fund accounting is a way for nonprofits to stay in control of their finances and make sure they’re living up to the public’s expectations when it comes to handling money.
In this comprehensive guide, we’ll walk you through everything you need to know about the practice of accounting for funds as a nonprofit entity. We’ll also give you some tips to help start ‘fund accounting’ in your nonprofit.
What is Fund Accounting?
Fund accounting is a system of accounting used by nonprofits to make sure money donated for a specific purpose is spent on that specific purpose. It’s a way to track that nonprofits are being financially responsible and transparent.
Organizations need to track these designated or restricted funds so they can report to donors and granting institutions. It’s not appropriate and in some cases illegal to use restricted funds for the wrong purpose.
With Donorbox, your nonprofit can easily accept and manage designated donations. You can then integrate Donorbox with leading accounting software like QuickBooks to sync donation data in both systems and utilize it for your accounting needs. We’ve discussed more on this later!
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Who uses fund accounting?
Organizations that use fund accounting include nonprofits, charities, non-government organizations (NGOs), government entities, and churches.
These all have something in common: their money doesn’t come from providing a service or selling a product, but rather from support from the public.
Fund accounting vs. regular accounting
Where regular accounting tracks money in and money out and is meant for for-profit companies, fund accounting is more specific. It tracks the funds themselves – the money that comes into each fund and how the organization is using it.
Unlike regular accounting, fund accounting is applicable to organizations that do not operate to earn a profit.
According to Harvard Business Review, nonprofits must create financial statements for each group of funds. Each fund should self-balance, meaning its financial statements account for money in and out, noting if there is an excess or a deficit for each fund. Nonprofit leadership will then review these balance sheets to ensure the organization is on the right financial path.
The Pros and Cons of Fund Accounting
Even though nonprofit fund accounting is an advisable practice for nonprofits, there are a few pros and cons to consider when taking on this type of accounting.
- It helps keep track of donations designated for a specific purpose.
- Separating funds helps nonprofits budget for each fund.
- Nonprofits know how much money they’ll need to keep a fund healthy and can launch fund-specific fundraising campaigns.
- It helps nonprofits with their annual financial reporting.
- It requires extra work to keep track of separate fund accounting.
- It doesn’t always show a full picture of how responsibly a nonprofit has used its funds.
- It doesn’t show the good work of the nonprofit, only their financial position. No sense of if or how the funds used have been effective.
- The more complex an organization becomes, the more complicated fund accounting becomes.
With anything in nonprofit management, there are pros and cons. The most important thing is finding what works for your organization’s needs!
Types of Funds Included in Fund Accounting [+ Example]
Organizations can personalize the funds they account for to match their unique mission and work. But there are three basic funds to keep in mind.
- Restricted funds are given with a specific purpose designated by the donor.
- Unrestricted funds are given with no designations, so they can go toward anything an organization needs to operate.
- Temporarily restricted funds have a designation that will be removed at some point in the future. Donors make these kinds of designations to ensure the financial longevity of organizations.
Fund accounting in action
Let’s say at your animal shelter nonprofit, you receive one unrestricted donation and another designated for purchasing dog food.
You can spend the unrestricted money in your general operating fund on things like salaries, administrative expenses, and supplies for operating your shelter. But the restricted donation has to go toward the designated fund, even if you don’t have an immediate need to buy dog food. And your fund accounting needs to reflect that.
With these general principles in mind, let us take a look at Wellington Zoo’s annual report that highlights its fund accounting efforts. This report includes their financial statements (from page 44) such as a Statement of Financial Position, Statement of Cash Flows, and Statement of Changes in Equity.
We have shown the Statement of Financial Position in the image below to help you understand how the restricted funds reflect in it.
By showing the amount of their equity that is restricted funds, Wellington Zoo is being transparent about their accounting practices and assuring donors they’re using funds as designated.
3 Tips to Help Get Started with Fund Accounting
It can feel daunting to take on a new way of accounting, but with the right tips and tools, you can start fund accounting with no stress.
1. Track your funds using donation management software
If you aren’t already using one, donation management software is a great way for you to get strong insights into every step of your fundraising. You can also use your donation management software to help track restricted funds. Here’s how.
With Donorbox Donor Management, you can securely store and manage every donation you receive through Donorbox. You can also manually add other donations easily.
Once you have your donations in one place, use filters to organize donations you’ve received by campaign, time frame, donation frequency, amount, and more. You can easily also see the donations that donors designated to specific funds.
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This makes fund accounting much easier because you have a running list of every donation made to a specific fund, so you can check your accounting as you go.
2. Sync your donations with your accounting software
Another way to make your transition to fund accounting smooth is to choose an online donation tool that easily integrates with your accounting software.
Donorbox lets you integrate with over 2,000 tools using Zapier. These include accounting tools like QuickBooks, Xero, Microsoft Excel, and more.
There are 2 different and simple ways to connect Donorbox with QuickBooks and easily sync donation data in both systems. This means every new donation in Donorbox syncs up with your accounting software – making your fund accounting hassle-free!
Here are the guides to help leverage this powerful integration –
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3. Think about your annual reporting
You should plan on creating financial statements that can be sent out to your donors and other supporters, likely in an annual report or impact report.
But fund accounting isn’t just for the public and for your board leadership to review. The IRS will review it during your annual financial reporting.
Keeping the requirements of Form 990 in mind as you set up your accounting processes will save you time and effort when it’s time to create your reports. If they’re similar, transferring information to the form will be easy!
Over to You
Fund accounting makes it easier to be as transparent and clear about your organization’s finances as possible. Although there are some complications to this system, it’s ultimately worth it to make sure you’re being as responsible with your donated funds as possible.
We have a number of useful guides to help your nonprofit understand accounting, financial statements, tax filing, and more. Find them as well as other insightful fundraising-related resources at the Donorbox Nonprofit Blog. Subscribe to our newsletter to receive the best collection of these resources directly in your inbox every month!
Donorbox can help you take control of your fundraising. From increasing your donations to helping you organize restricted donations on the backend, Donorbox has easy yet powerful tools to help scale your fundraising and donor management efforts. Over 80,000 organizations including nonprofits, churches, schools, political organizations, and more are using us to successfully boost donations – sign up now to begin this incredible journey with us!
Disclaimer: By sharing this information we do not intend to provide legal, tax, or accounting advice, or to address specific situations. The above article intends to provide generalized financial and legal information designed to educate a broad segment of the public. Please consult with your legal or tax advisor to supplement and verify what you learn here.