Fund Accounting

1. Fund Accounting
A governmental accounting system should be organized and
operated on a fund basis. A fund is defined as a fiscal and
accounting entity with a self-balancing set of accounts
recording cash and other financial resources, together with all
related liabilities and residual equities or balances, and
changes therein, which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in
accordance with special regulations, restrictions, or
limitations.

2. A fiscal Entity means the fund that is established through the
legislature. A Fiscal Entity is a party that is ultimately responsible
for the procurement of goods and services as well as meeting any
grant-required terms and conditions.
Accounting Entity: The assets/liabilities and the income and
expenditures pertaining to each fiscal entity are separately
managed and recorded. An accounting entity is a clearly defined
economic unit that isolates the accounting of certain transactions
from other subdivisions or accounting entities. However, the
accounting entity must have a separate set of books or records
detailing its assets and liabilities from those of the owner.

3. Objectives
 The fund accounting’s fundamental objective is to provide separate
accountability for the general-purpose fund & specific purpose
fund, enabling the traceability of the amount.
 It tracks the expenditure that incurs out of funds and if the usage is
in such a field was against those funds (conditions which are
provided by donor).
 It is used to evaluate the financial condition of the entity & to show
reliable financial information regarding the entity for financial
reporting.
 It provides a justified basis for the expenditure incurred against the
specific purpose grant received for any capital projects.

4. Application of Fund Accounting
 Non-profit organizations or government organizations use it. It is a
recording of resources received from a donor for a specific purpose.
There can be two types of funds one is restricted, and the other is
unrestricted. The restricted fund is used for a particular purpose, but
unrestricted funds can be used for any purpose or general purpose.
 The non-profit organization uses the same standard as a profit
organization uses. Still, terms are different in no-profit organizations
Instead of preparing a profit and loss account, NPO makes a payment
and receipt account, Revenue and expenses account, and Balance sheet.
 Payment and receipt account- All the Amount receipts in an organization,
would be accounted for on the receipt side, and all the payments done
will be shown on the payment side.

5.  Revenue and expenses account- Non-profit organization prepares
revenue and expenditure account for showing the use of funds
they have received and the allocation of the fund. If income
received is more than expenses incurred, then it is called an
excess, and if expenses are more than income, then it is called a
deficit.
 A balance sheet of a statement of financial position– the Balance
sheet of the non-profit organization is the same as a profit
organization. It shows the value of assets and liability of an NPO.

6. Example
 A School is working as a non-profit organization. It has received a
donation for the repair of the building. Also, they received funds from
a company to provide good food to students. Schools also received a
donation for general-purpose means, not for any specific purpose.
 Now donations for repair will be used only for building repair. Till the
expense does not occur, that donation will be kept aside. Same the
donation received for food will be spent for that purpose only. But
donations received for general purposes can be used for any purpose,
like for the salary of teachers, expenses of school, etc.

7. Advantages
 It separates specific purpose funds from general-purpose
funds.
 It segregates funds depending on the purpose of the fund
provided by law or the donor at the time of giving a grant. By
dividing funds, it helps in budgeting and projection of funds for
future purposes.
 This requires preparation of receipt and payment account that
accounts show how much amount collected in a year or in a
specific period of time and how much amount paid in a
particular period of time. And how much amount has still
remained in a fund?

8. Disadvantages
 It becomes challenging to maintain the amount in separate funds means it
is difficult to separate the amount from the general fund to a specific
purpose fund.
 The account doesn’t reflect the real and actual value of the fund.
Sometimes no-profit organization misappropriates the fund by including the
use of cash.
 Sometimes it leads to excess spending of a fund but lower control of the
fund; mostly, it happens in government organizations.
 The fund accounting does not provide quality analysis of the performance
of NPO or government entities. It only focuses on the accounting of the
different funds.
 With the increase in types of grants or funds and management of different
accountability, eventually, the accounting and tracking of the funds become
too complicated.

9. Types of Funds
Governmental units should establish and maintain those funds required by law and
sound financial administration. Unnecessary funds result in inflexibility, undue
complexity, and inefficient financial administration. There are different types of funds,
depending on the structure and type of organization. Typical government funds can
include:
A. Governmental Funds B. Proprietary Funds C. Fiduciary Funds
i. General Fund; i. Enterprise Fund; i. Trust Fund;
ii. Special Revenue Fund; ii. Internal Service Fund. ii. Agency Fund.
iii. Debt Services Fund;
iv. Capital Project Fund;
v. Permanent Funds.

10. Conclusion
Fund accounting provides essential accounting methods for Non-
profit organizations & governments to record their funds and
grants received from other parties (any grant – general purpose or
specific purpose grant). It provides accountability of the recorded
funds and transactions against it with the statutory obligations
applicable to the entities. Helps the auditors by providing
traceability towards the different funds or grants received from the
donors and the transaction or expenditure incurred by the
management against those funds.