Fund Accounting Basics

What is Fund Accounting?

Fund accounting refers to a system of record keeping mainly used by non-governmental organizations for purposes of accountability. Every business takes the aspect of profits seriously and thus the need for accounting; but the focus of nonprofits is on how well the available funds were used. Even though nonprofits also keep records of income, expenditure, surplus and deficits, the intention is to align expenditure to various purposes. Therefore, the emphasis of fund accounting is on whether the objectives of a certain project were met using the funds committed.

What is the relationship between fund accounting and charitable organizations?

Any institution that has been established for any other reason other than making profit will at one point or the other employ GAAP accounting principles as a standard measure. If you have ever worked for a charity, religious organization or NGO, you might relate to the procedures involved when creating accountability reports. Let us look at an example of how fund accounting applies to real organizations;

A nonprofit is involved in the rescue and care of stray animals. Using money received from donations, the owners use just enough to keep the shelter running. There is nothing fancy as far as record keeping is concerned and no one is following up anyway. What if the shelter receives a grant of $5,000 that is intended for the establishment of a veterinary unit? Despite the channel through which the money follows to reach the organization, a few questions must be considered for proper accountability;

• How is the receipt of this grant money supposed to be documented?
• What system will be used to account for expenses that are funded from the grant?
• How can the grant fund balance be determined as long as it has not been depleted?

The only way to answer the above questions is by use of fund accounting techniques to ensure that the objectives for which the grant was issued have been met. With a proper system, a fund account should comprise of income, equity, liability, asset and balance. If a separate record is maintained for each of these main fund areas, a clear picture of an organization’s goals is established.

Difference Between Fund Accounting and Regular Accounting

The greatest purpose of financial accounting is for a business or company to determine whether they are operating at a loss or profit. Regardless of which side the scale tips, it is the role of an accountant to calculate the exact figure. With fund accounting, an organization seeks to demonstrate that every single cent of a certain fund is used as was intended. Since the nature of fund accounting is to record usage of a certain fund, portfolio businesses as well as investment banking businesses benefit a lot from it.

On the flip side of fund accounting is non-fund accounting which deals with letters of credit and bonds. Here are the major differences between fund accounting and regular accounting;

1. In fund accounting a specific fund can only be used for the purpose for which it was given, a regular purpose fund takes care of all manner of expenses including salaries.
2. A fund account is treated like a separate business within the main organization; regular accounting on the other hand acts as the unifying force between various departments within an organization.
3. Financial reports involved in fund accounting include balance sheet, income and expenditure account, payment and receipt account while those that characterize regular accounting are balance sheet, profit and loss account, trading account.

Types of Fund Accounting

Based on the above discussion, it makes sense to define a fund as an area of purpose within an organization that requires tracking. All records pertaining to this area of the business should be stored separately for easier documentation. Types of fund accounting include but are not limited to;

• Campaigns – These are funds used for creating awareness on the objectives of an organization. They are supposed to be spent to reach out to targeted parties.
• Departments – Fund accounting at the departmental level involves taking care of the financial records of a specific function of the organization. In a church setup, this fund account could for instance cater for the different ministries that make up the whole.
• Grants – Fund accounting for grants is focused on accounting for grants given to an organization. The grants can be assigned to either one or multiple projects.
• Designated funds – Designated funds are supposed to be spent according to the wishes of the donor. Accounting is done to demonstrate compliance and transparency.

Before you create a fund account for your organization, think about the purpose for which the money/account has been set aside for. If you are using digital tools and programs to run your fund accounts, you might need to either musk funds or run your own queries to establish specific categories and classes.

Although fund programs are designed to track expenditure and income on a general scale, it might be a challenge finding one that gives a breakdown of the account over a certain period of time. The solution to this challenge would be to have your records as clear as possible so that details such as date and description of expenditure can be accurately captured.

Advantages of Fund Accounting

1. It keeps a separate profile of organizational expenditure that is different from the overall general purpose fund.
2. It classifies funds according to the intended purposes as defined by law or funds donor. These individual funds facilitate proper account keeping as well as forecasting.
3. It breaks down expenditure into timelines, revealing the available balance in the account all through.

Disadvantages of Fund Accounting

1. The process of maintaining a separate fund outside of the main fund is quite challenging. There is need for extra resources including staff to successfully keep a fund account autonomous.
2. It is impossible to detect funds misappropriation because everything eventually balances.
3. By focusing on account use instead of impact, the effectiveness of nonprofit operations is often lost.
4. Fund accounting does not offer detailed analysis regarding the performance of an entity.
5. An increase in the types and sources of grants renders the tracking of funds in different documents to be very complicated.

What is a Fund Accountant?

A fund accountant is a professional whose primary responsibility is to account for all the aspects of the mutual fund that has been assigned to them. Ideally, fund accountants are trained accountants who have knowledge of finance or business management. While the task of managing a fund account is easy for those who have some form of accounting training, most employers prefer candidates that have relevant experience. The main reason for this is that fund accountants work with special tools and systems which are extremely beneficial for the job.

 1. What does a fund accountant do?

The role of a fund accountant revolves around activities that ensure that the financial records of government agencies and nonprofits are well documented.

• Fund accountants preserves the integrity of any data that they have access to in the course of executing their duties.
• Providing a detailed account of how specific funds are being utilized even when it involves generating different reports as per the number of individual funds.
• Listing down duties or maintain a chart with all the accounts that require reporting.
• Recording of expenditure and income should be done on a rolling basis to avoid instances of missed entries.

It is important for fund accountants to be highly organized to be able to thrive in their capacity as fund managers.

2. How to become a fund accountant

Do you have a basic accounting qualification? How would you define your accounting work ethic? That right there is the magic combination to a successful accounting career. Graduate level accountants are believed to be able to handle any nature of accounting task, particularly those that relate to fund accounts. If you desire to work as a fund accountant, think about all the organizations that can offer you a job. The next move after identifying potential employers is to apply for entry level positions. Some organizations offer internships to aspiring fund managers; this is valuable experience you can use on your resume.

Fund accountants mostly work under pressure so it is important to perfect your management skills. Since fund account reports are prepared on a monthly, quarterly and yearly cycle, consider polishing up your presentation skills because chances of breaking down the fund statements in a briefing are high. The average team size in this industry ranges between 8 – 12 people so it is important to condition your mind to team work as an aspiring fund accountant.

3. Fund accountant career path

Fund accounting has one of the most straightforward career paths and that could be the reason why many general accountants eventually take this branch. The average duration of time it takes a fund accountant to progress from junior accountant to senior accounting is 3 years. Most fund accountants eventually make it to management level but this depends on the organizational structure of an organization.

4. Fund accountant salary

According to data collected by indeed.com in 2022 from current and former fund accountants, the average annual salary for this role is $68,706.

5. Fund accounting software

Organizations that use fund accounting software to manage their accounting and portfolio management functions, have a great chunk of the work taken off their shoulders. Such softwares are diverse and selection is based among things like, size of organization and number of funds to be managed. Here are a few of the popular softwares that most fund accounts would be familiar with;

Accounting Suite by AccuFund

This accounting tool is a comprehensive system that was designed for government agencies and nonprofits. By offering its users the option to choose between a cloud-based and an on-premise version, the application allows flexibility for its users. Fund accountants will find value in the software due to its robust capabilities and dynamic features.

Aplos

Aplos is a nonprofit fund accounting software with a clientele comprising of churches, schools and nonprofits. Small organizations prefer this software for its ease of use and streamlined system of keeping track of gifts and donations. The application is cloud-based and this allows for integration with donor reports, event registration, and online donation tools. Organizations using Aplos term this software as the best accounting solution.

Sage Intacct

Sage Intacct is a popular accounting software used by nonprofits. With an open API, it is the most customizable system because other software can be easily integrated with it. Many nonprofits that use it report it as all-inclusive, additional modules are available on request. The system is easy to learn and the intuitive interface allows for easy navigation.

Fund accounting is an important process for organizations that are focused on delivering specific services, goods and privileges without much need for social accountability. A fund accountant must be able to prepare clear and accurate reports for building the confidence of fund sponsors – this is the only way that their operations can be kept alive.

A fund accountant should also should be familiar with tax accounting and cost accounting for they are also essential when running a business.

Learn More

Explore the additional relevant resources below.

1. Prepaid Expenses Journal Entry
2. Asset Management Ratios
3. Conversion Cost
4. Write Off Accounts Receivable
5. Cannibalization Rate
6. Net Operating Assets
7. Substantive Audit Procedures
8. Predetermined Overhead Rate