A lot of different types of accounting services exist. You have your general business accounting for companies that are out for a profit. Then you have non profit fund accounting for organizations that are not out there to generate profits. Within the nonprofit sector, organizations are structured differently. This unfortunately leads to different accounting practices for different types of nonprofits.
We debated whether or not we should just simply lay out how fund accounting works in this article. If we simply lay out the rules of funds accounting, then many of you would end up making erroneous entries. First you need to identify to which category of non-profit organizations yours belongs.
There are basically two types of nonprofits: (1) governmental nonprofits and (2) private nonprofits. Nonprofit entities that are run or controlled by the government can seek out information from the Governmental Accounting Standards Board (GASB). Governmental accounting is a bit odd to say the least. But what else would we expect from our beloved government?
Those nonprofit entities that are private can turn to the Financial Accounting Standards Board (FASB) for information on fund accounting. For those of you who want to really get their hands dirty, here is a list of the most relevant FASB statements for nonprofits:
FASB 93 – Guides depreciation for Nonprofits
FASB 116 – Guides accounting for contributions. This is probably the most relevant information for any of the fund accountants who came to this site looking for information on fund accounting. The basic idea behind this type of accounting is that you have to create separate funds for the different types of contributions received. We’ll talk more about this below, but for those of you who are taking this serious, you should definitely read this guideline.
FASB – 117 Guides financial display requirements. Some of them are a smidge different than for profit companies.
FASB 124 – Talks about how to account for investments in a nonprofit.
FASB 136 – Discusses how to deal with transfers of assets to nonprofit entities.
If you have made it this far and you are not asleep, then you are serious about learning fund accounting. This next section explains exactly what these funds are.
Interesting tidbit: Fund accounting is not required, but it may help your organization keep donations in the categories that are required.
Financial Accounting Concepts Statement No. 6, the mothership of all non-profit accounting, explains that private nonprofits must categorize their net assets into three mutually exclusive classes. Remember net assets simply means assets minus liabilities.
Category 1: Unrestricted. These are nonprofits favorite type of assets/donations. There are no strings attached. The donor doesn’t say, “This money has to be used for Asian men who teach first and second level Spanish at community colleges.” The donor says, “Here’s $100, use it for what you think is best.” These monies are placed in the unrestricted section and can be used for general operations.
Category 2: Temporarily Restricted. These are the assets/donations that come with strings attached. The restrictions can be based on time or purpose. For example, the donor may say, “You can only use this money after 30 days has passed.” In which case, the donation goes into the temporarily restricted fund until 30 days have passed. At which point, the money moves to the unrestricted section.
A more common restriction than time, is money. For example many donors specify that their funds be used for a specific program or building. Nonprofits need to make sure these types of donations are in the temporarily restricted fund. In addition, they need to track the specific purpose of the donation. This is the heart of what separates nonprofits from for profit organizations.
Category 3: Permanently Restricted. At this point, you may be wondering what good what a permanently restricted donation do. This type of donation actually does happen, and they are actually quite useful to the receiving organization. A person may donate a million dollars to a nonprofit and tell the nonprofit that it is allowed to use the interest on the million dollars, but the principal must not ever be used. Note that there are fund accounting software packages available that will help you keep all this information organized.
These are the three basic categories of nonprofit accounting. Companies may choose to use fund accounting to structure their accounting in a way that aligns with these basic categories. For example, anything in the general fund would roll up into the unrestricted section. Specific-purpose, endowment, time-restraint, and building funds might be some funds that would roll up into the temporarily restricted or permanent restricted section.
At the end of the day it is important to realize that fund accounting is a means to an end. It only exists to help aid in classifying assets in one of the three aforementioned categories. There are some organizations that do not even use fund accounting; they simply keep a record of the items that go into these three classifications. If your organization is pretty simple, then this might be a good route. However, when there are donations for hundreds of different purposes, funds help maintain order.
