Fundraising, as well as maintaining accurate funding records, are two vital functions of any nonprofit. With iWave’s nonprofit fundraising platform, you can make the right asks with the right donors, so you can make the most of your efforts.

Below, you can learn more about the importance of fund accounting and find out how our platform can help guide you forward!

What Is Fund Accounting?

To break down fund accounting, let’s first look at how nonprofits run compared to their for-profit counterparts. Though it may seem obvious, for-profit businesses focus on profit when organizing their finances. Nonprofits, on the other hand, are about giving. They’re using funds to charitably power community improvements.

Since nonprofits rely on donations, grant requests, and other means to operate, they need a way to prove they’re acting responsibly as they carry out their mission. To ensure accountability, all these different fundraising streams must be accurately recorded.

Fund accounting is the method used to not only keep record of all funds, but to show that they are being used legally and appropriately.

Unrestricted and Restricted Funds

Each fund account will house the specific fund’s assets, balances, revenue, expenses, and any liabilities related to the fund. For further clarity, funds are divided into unrestricted and restricted categories. Just like it sounds, an unrestricted fund doesn’t have any restrictions built into it. This means it can be used at the discretion of the nonprofit.

Alternatively, a fund can be a restricted gift, which is designated into two types, including:

  • Temporarily Restricted Fund: Must be used for a particular purpose, program, or campaign, or must be used during a set timeframe. The clearest example of this type of fund is for a capital campaign, such as for the completion of a building.
  • Permanently Restricted Fund: Though they never expire, these types of gifts or assets are required to remain unchanged for a period of time or indefinitely. Only income earned from it can be used. An example of this is a fund that is part of an endowment.

In addition to these three main types, a nonprofit can further organize its finances by creating subcategories for specific funds. Often used with unrestricted funds, subcategories designate a portion of a larger fund to be used for something more defined.

Fund Accounting Overview

Keeping separate fund accounts increases transparency, ensures governmental compliance, and helps nonprofits demonstrate their integrity to the public.

With restrictions in place, things can get complicated quickly. Proper fund accounting ensures everything remains in check and nothing is misused. Since each fund acts like its own entity, each account will maintain a record of the specific fund’s:

  • Revenue
  • Expenses
  • Calculations
  • Balance sheet

The easiest way to keep track of your nonprofit’s distinct funds is by using a fund accounting system. Most of these systems will designate the net assets of funds as unrestricted, temporarily restricted, or permanently restricted.

The Donation Rulebook

Often times, the restrictions of funds from grants are clearly and explicitly defined. However, things can get a bit muddled when requesting donations from individuals. In some cases, a donor will include the restrictions for their gift in writing, such as through a letter, an agreement, or in their will.

Noncompliance with a specific fund can not only result in legal issues and a removal of the fund, but it also sullies the nonprofit’s credibility. A simple way to mitigate any confusion is to let donors choose the parameters of their gift when they make a contribution.

Fund Accounting and Nonprofit Fundraising

With reliable revenue streams and a well-organized fund accounting system in place, your nonprofit will be ready to fulfill its mission and further its impact.

iWave offers fully customizable fundraising solutions to amplify your nonprofit’s financial success. Along with that, we provide personalized onboarding and unlimited support, so you’ll always have help when you need it. Contact us to schedule your free demo or to get an assessment today!