Fund Accounting Fundamentals
Fundraising and maintaining accurate funding records are two vital functions of any nonprofit. But how do you keep track of all the funds coming in or monitor where they’re headed within your organization? This is where proper fund accounting comes into play.
Every nonprofit is unique. While your specific fund accounts will be distinct to your organization, there are some helpful fund accounting best practices that any organization should follow.
With iWave, you can make the right asks with the right donors, so you can make the most of your efforts. Below, learn more about the importance of fund accounting and how to maintain accurate records, as well as how our platform can 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 a record of all incoming funds, but to show that they are consistently being used legally and appropriately.
Unrestricted and Restricted Funds
The process of fund accounting helps nonprofits oversee the restrictions of all types of revenue to ensure every contribution is used as it was intended. 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 categories or fund 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.
Subcategories for Unrestricted Funds
By separating unrestricted funds into subcategories, you can closely track and efficiently distribute your nonprofit’s revenue to meet a variety of needs across your organization. One way to do this is by making Board Designated Funds.
For example, the Board Designated Funds could channel resources into capital assets, such as for purchasing supplies, fixing buildings, or meeting other physical necessities to run your programs. Creating additional subcategories for unrestricted funds like this can make your nonprofit even more transparent by clearly demonstrating how every penny is spent.
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 fund accounting systems will group all your categories of net assets into one of the three designations including: unrestricted, temporarily restricted, and permanently restricted. Nonprofits can then use these categories to meet GAAP and FASB 116/117 regulations.
When it comes to tax season, having everything sorted ahead of time will make reporting your nonprofit’s breakdown of net assets on IRS form 990 much easier and more streamlined.
Sorting Funds with Program Codes
A key aspect to note about fund accounting is that it isn’t necessary to create completely separate funds or bank accounts for every program your nonprofit initiates or grant it receives. Instead, to save time and energy, you can simply track the activity within funds.
Rather than establishing many independent funds, you can track and organize your nonprofit’s many projects using your chosen fund accounting system by designating program codes within the broader fund categories you’ve assigned. The three main categories of program codes or functional areas include: program services, fundraising, and management/general.
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.
Keep Your Clauses Clear
When requesting donations from individuals, the specifications for the desired donation must be clearly stated. If your nonprofit is requesting unrestricted fund donations from prospects through an email or physical letter, be sure to include a clause identifying the type of fund on the donation form or within the official gift acknowledgement.
However, if your organization is fundraising for a capital campaign, scholarship fund, or other type of restricted fund, take care to use these funds only for their planned purposes. Donors who make restricted gifts may feel passionately about contributing to a specific aspect of your organization, and it is crucial to honor their intention.
Noncompliance with a specific fund can result in legal issues, a removal of the fund, and could sully your nonprofit’s credibility for years to come.
A simple way to mitigate any confusion is to let individual donors choose the parameters of their gift when they make a contribution by offering several possible options. Doing so builds trusts with donors of all kinds, which in turn may increase the likelihood of receiving recurring or future donations.
Fund Accounting and Nonprofit Fundraising
Once you choose and set up a fund accounting system for your nonprofit, you’ll need to ensure there are plenty of funds coming in. Then, with reliable revenue streams and a well-organized fund accounting system in place, your nonprofit will be well on its way to furthering its mission and its impact.
iWave offers fully customizable fundraising solutions that can 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!
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