Fund Accounting: A Comprehensive Guide With Example

Today, organizations use non-profit accounting software that operates efficiently and per all requirements. Most nonprofits use the fund method of accounting, which separates income and The Key Benefits of Accounting Services for Nonprofit Organizations expenses based on their source. For instance, donations would be in a separate income ‘fund’ than government grants when using the fund accounting method.

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Additionally, accounting software can be configured to integrate with your nonprofit’s other tools, such as CRM systems and grant management platforms. With an organized system, your nonprofit can access and utilize numerous data points for a comprehensive approach to financial management. As we discuss in our list of resolutions every nonprofit should make, technology is a powerful tool for helping your nonprofit evaluate its financial and mission-centric goals. In the same way that an accountant needs specialized education and nonprofit experience, your accounting software must be set up specifically to address nonprofit financial reporting and requirements. For-profits plan, track, and report their financial activities with the goal of making a profit. In contrast, nonprofit accounting involves allocating funds effectively across operational goals to achieve their mission while demonstrating accountability to donors and other stakeholders.

• Organizations that promote this encourage employees to enhance their skills and knowledge so they can further themselves professionally and become more effective contributors to the organization.
• Budgeting and planning are two essential aspects of a nonprofit accounting system.
• This statement is issued by a nonprofit instead of the income statement issued by a for-profit business.
• The IRS grants nonprofit designation to organizations formed to promote religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention causes or purposes.
• Nonprofits are vital organizations that differ from for-profit companies in many ways.
• Nonprofits have to adhere to tight rules around what they can and can’t spend money on, and there are specialized tax rules and accounting practices that they have to follow.

Types of Funds

While basic accounting principles remain consistent, you can better understand nonprofit accounting by analyzing a few key differences from other businesses. It’s common for leaders to feel intimidated by nonprofit accounting, which has many nuances and regulations. We aim to help you better understand how to introduce compliant and efficient practices that support your organization’s growth with this nonprofit accounting guide. Non-profit organizations must follow certain accounting guidelines to ensure accuracy and reliability. The Financial Accounting Standards Board (FASB) has set general guidelines for all organizations. These rules are commonly known as the generally accepted accounting principles (GAAP).

What Is Nonprofit Accounting?

Your specific needs might vary—organizations with government contracts might require bigger reserves to handle payment delays. While managing individual gifts might seem easy, they often require sophisticated tracking systems. These systems handle recurring donations, matching gifts, and varying restriction levels. Remember to provide transparent and detailed guidelines for compensation and include employee benefits—even if they are nonmonetary, such as flexible working hours and paid time off. In the Statement of Financial Position, these categories show the amount of net assets available for any purpose compared to the net assets available only for restricted purposes.

• The FASB requires every nonprofit to present expenses by function and nature in one place (statement or notes).
• This comprehensive approach to donor management through proper nonprofit accounting practices helps create sustainable funding relationships that support your organization’s long-term success.
• But to be successful, nonprofit leaders need a functional grasp of the basics of nonprofit accounting and financial management.
• Budget vs. Actual is an internal report which displays your planned budget and your actual performance side-by-side.
• Nonprofits should regularly conduct audits on themselves to ensure all accounting is up to the standards of both GAAP and the organization itself.
• Accounting rules exist to help you record transactions accurately and consistently over time.
• Accrual accounting is required by Generally Accepted Accounting Principles (GAAP), which means that you’ll need accrual-based reports to complete a nonprofit audit.

Create a regular cadence for budget review with key players on your team to ensure it evolves with your organization and priorities. It’s a good idea to start with a budget that you document and make accessible for regular review within your nonprofit. Your budget will list any expenses and revenue https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ you plan to encounter in a year, even if you’re using estimates. Hence, such organizations record net assets in the financial position statement. They’ll also be used throughout the year as a way to compare actual income and expenses versus the projections listed in the budget.

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Instead of identifying these assets with the intention of distributing them to stockholders, they are intended to be reinvested into the nonprofit. Because nonprofits are so unique, they leverage a different type of accounting, also known as “fund accounting” to manage their finances. Nonprofit cash flow statements will refer to “change in net assets” instead of “net income,” and will sometimes list cash flows that are restricted to certain uses.

Automated and Continuous Compliance

• These principles are vital for any organization establishing its accounting system, so familiarize yourself with them.
• Fund accounting isn’t just a financial system—it’s a critical tool for building trust, maintaining compliance, and guiding smart decision-making.
• The systematic allocation of the cost of an asset from the balance sheet to Depreciation Expense on the income statement over the useful life of the asset.
• At The Charity CFO, we work exclusively with nonprofit organizations and offer a start-to-finish solution for outsourcing your bookkeeping, financial statements, and expert advice.
• Fund accounting, commonly used by nonprofits, separates resources into different “funds” based on restrictions and purposes.

When you do have expenditures, make sure they’re well-communicated and can be authentically defended if necessary. When you can’t reduce an expense, be sure to find ways to describe its impact on the organization’s mission. Depending on the location of your nonprofit, you may be required to abide by certain state reporting requirements.