I should mention upfront that there are two general categories of non-profits: governmental and private. This article will focus on nonprofit fund accounting for private organizations. All private means in this situation is that the Government is not managing your organization.
First of all before we delve too deeply into fund accounting, I should mention that if you really want to be an expert on this stuff you should read FASB Statement Number 116 and also Financial Accounting Concepts Statement Number 6. The FASB is the body that governs private nonprofit fund accounting.
The most important part of fund accounting is classifying any donations into three categories: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. If you have your net assets (assets-liabilities) all properly placed in these three categories, then you are winning the battle.
Unrestricted net assets are donations that you receive that have no restrictions on them. The person giving your organizations the donation basically is giving you the green light to use the money when and where you want to. These are the donations that non profits like the best.
Temporarily restricted net assets are assets received from donors that either have a time restriction or a purpose restriction on them. A time restriction means that your nonprofit organization cannot use the donation until a certain period of time has passed. A purpose restriction means that your organization can only use the asset on the donor-specified purpose. These type of donations are very common within the nonprofit world. You’ll need to make sure you cave these categorized in the correct net-asset class if you want to be in full compliance.
The third fund category is permanently restricted net assets. I remember the first time I heard about this type of donation I thought to myself, “what good would a permanently restricted donation do anyone?”. The truth is that this type of donation can be very helpful. Even though your nonprofit organization can never use the actual money that is donated, your organization is allowed to use the interest created from the money. A lot of times scholarships work like this where a rich donor will donate a large principal amount that is restricted forever. All of the interest created from the principal amount is used to fund scholarships.
After you have these three categories down, then you are winning the battle of non profit fund accounting. The next step is to set up an accounting services system that gets you there. There is no “right” way of doing this, but I’ll offer you some general advice.
Many non profit organizations create funds or accounts within each of the three aforementioned categories. The most common fund for the unrestricted category is the General Fund. Common funds in the temporarily restricted category include specific-purpose funds, time-restricted funds, and endowment funds. And the most common type of fund for the restricted-asset section is the endowment fund. The truth is you will probably want to hire outside help, like an accountant, to get your non profit fund accounting system set up. However, after the accountant has set it up and shown you how it works, you should be able to do this all by yourself. For more information on managing nonprofits I’d recommend visiting this nonprofit site. It is a free library that has a ton of information.
That sums up our discussion on nonprofit fund accounting. Remember that the most important point is making sure donations are classified into unrestricted, temporarily restricted, and permanently restricted. From there you’ll probably need some nonprofit accounting software and an accountant to get the ball rolling. However, once the system is set up you should be able to do it by yourself.
