In normal accounting, there are five areas you need to know how to log, located on the balance sheet and the income statement: assets, liabilities, equity, income, and expenses. While you do need to keep track of these for churches and nonprofits, there is something you have to consider as well: fund accounting.
In regular accounting, you’ll see the total balance of your bank account, but for nonprofit organizations, you need to know how much is set aside for each fund. This is because nonprofits are subject to restricted funds—if a donor gives money for a specific purpose, the nonprofit is not allowed to spend the money on anything other than that purpose. The key emphasis here with fund accounting is accountability.
There are different kinds of funds. There are unrestricted funds, which an organization can use in any way it wishes. There are current restricted funds, which are given to the organization as part of their normal activities, but for specific purposes. There are restricted endowment funds—the asset itself has to be kept intact, but the money that asset generates can be used for the organization’s choosing. For example, this can be an investment, where the organization can freely spend the interest made on that investment, but the investment itself can’t be touched, unless otherwise specified. And then there’s the
If money or an asset is designated for a specific fund, then it can’t be used for anything else. This is why fund accounting is important—it allows you to track how the total amount in your account is spread out across multiple funds.
So for instance: If there is $1,000 in your account, you can see that:
$500 is set-aside for your General Fund,
$300 is set-aside for the Equipment Fund, and
$200 is set-aside for the Building Fund.
Important Note: If a donor gave you the above $1,000 and your organization decided put it in three separate funds, you can move the money around as you see fit. They aren’t restricted funds. However, if the donor specifically said, “You can use $500 for whatever you want, but $300 has to be for buying new equipment and $200 has to be for your building,” that’s when it becomes restricted. How the donation is restricted is decided by the donor, but if the organization is given a lump sum and they decide to spread it out as they see fit, they can always change their mind.
Fund accounting is used for almost all nonprofit organizations, and will most likely be needed on a daily basis. Here’s a more detailed example of how fund accounting becomes important to a nonprofit:
Let’s say your nonprofit helps stray animals, and your operations are pretty straightforward at the moment. You receive money from contributions, you spend a little to keep the lights on, but nothing too fancy. Well, let’s say you decide to get a little fancy.
You apply for (and are awarded) a grant that provides $5,000 to be spent on veterinary functions. This money comes in the form of a check that you deposit into your organization’s checking account. Before this check you had $3,000 in your checking account.
Everything sound alright so far? Here come the questions for you:
How are you going to record the receipt of this $5,000?
How are you going to record the expenses that use this $5,000?
How, at any given point, will you know how much money is left of this $5,000?
Fund accounting allows you to answer these questions and more. In a properly set-up fund accounting system, this fund would have its own asset, liability, equity, income, and expense balances; thus, making it a completely separate entity within your organization. Don’t worry, you would still be able to see simple information for your organization as a whole, but each fund would be independent of others.
Fund accounting is very detailed, and can get confusing… but ultimately it is the most accurate method of accounting for nonprofit organizations and government agencies. By utilizing a good fund accounting software like Aplos, you can maintain accurate financial records for your organization and all of its directives; thus, empowering you to generate powerful financial statements and make key decisions.
Thanks to Clay Harmon at Aplos for writing this post for the Get Fully Funded blog. For accounting software for nonprofits, check out Aplos.