What is fund accounting?

Mar 31, 2023 | Business

Accounting for nonprofits is very different from accounting for regular profit-seeking businesses and can be a bit more complicated.

In particular, you’ll need to know about something called ‘fund accounting’. Here’s everything you need to know about it in one convenient place.


What is fund accounting?

Put simply, fund accounting tracks accountability, rather than profits, by ensuring all money that goes to a nonprofit organisation is used for its intended purpose.

This is especially important for nonprofits that receive cash from numerous sources, as things can get muddled pretty quickly without a proper accounting system — and you could get in trouble.

All UK charities must practice proper fund accounting regardless of whether they prepare accounts on a receipts and payments basis or an accruals basis.

But with fund accounting, you can use separate accounts and balance sheets for different types of donations that individuals and organisations give you for specific reasons.

This restricts the use of funds, grants transparency and gives you more control and focus over your finances by making it easier to monitor which campaigns are doing well and which need more attention.But exactly are these ‘different types’ of donations that can only be used for certain reasons?


Restricted funds

First are restricted funds, which are funds given to a nonprofit for a specific purpose that is legally binding. As such, the organisation’s trustees cannot change how the funds are used.

However, the terms of endowment contain mechanisms for the restriction to be reviewed, while the Charities Act allows for some restrictions to be changed under some circumstances, usually by consulting with the Charity Commission and getting its express permission.

While you should separate restricted funds from other funds, you don’t have to put them in a different account if you don’t want to.

There are two types of restricted funds you need to know about:

  • Income that a donor gives for a specific purpose. 
  • Endowment. Funds that under trust law require charities to invest the assets or keep them to further benefit the charity.


Unrestricted funds

These funds are given to your nonprofit as general donations meant for no specific purpose.

In other words, you can use unrestricted funds as you see fit (in accordance with your organisation’s function, of course).

There are multiple different types of restricted funds:

  • General. Income that can be spent on anything within the charity objectives and activities.
  • Designated. Still unrestricted, but designated funds have been set aside by trustees for a particular purpose.
  • Revaluation reserve. Very specific funds that mirror the value of assets held on the balance sheets which have been revalued.


How we can help

If you own a nonprofit, you probably didn’t set it up to crunch the numbers and huddle over paperwork. However, you must stay on top of your fund accounting, which is what we’re here to help you with.

Unfortunately, many accounting packages, such as Sage and Xero, are designed for businesses and don’t have the tracking and reporting functions charities need to create fund accounts. They also aren’t designed to manage donations and Gift Aid.

Therefore, you might benefit from an expert who can do all these things for you while you focus on your charitable objectives.

As specialist accountants for nonprofits, we can review your accounts, balance the books, prepare you for audits, and more – so you’re free to focus on the job at hand.

If you need help with your fund accounting, don’t hesitate to get in touch with us

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