A State By State Accounting Guide

Fund Accountancy

Although accountants are often associated with increasing the profits of businesses through financial planning and management, this description doesn't necessarily describe the role they play in nonprofit organizations and government agencies.

Organizations that receive revenue through public and private sources of funding use the system of fund accountancy rather than traditional business methods of accounting. Fund accounting refers to the management and allocation of revenue an organization acquires through donations, tax payments, grants and other public and private sources. The basic idea behind fund accounting is to monitor and document the use of assets that are donated by outside parties. In many cases, donations made to nonprofit organizations must be used to pay for a specific project or purpose. Accountants involved in fund accounting keep track of the restrictions that are placed on each donation that is acquired by the organization to ensure the money is used properly.

Private nonprofit organizations aren't the only ones that use the methods of fund accounting. Government agencies at the local, state and federal levels also use these methods. Consider the ongoing debate over the Federal Government's multi-trillion dollar budget deficit. The IRS brings in revenue through taxes that it collects from both individual citizens and businesses. In accordance with the methods of fund accountancy the government is restricted to using tax revenue to pay for the general administration of the government and the services that it provides. When government expenditures exceed tax revenue in a fiscal year, a budget deficit is created.

The goal of most nonprofit organizations and government agencies is to avoid budget deficits while providing the greatest benefit to the public by strategically allocating the resources that are available. In this respect, accountants working with nonprofit organizations are diligent in seeing to it that available funds are being used in the most efficient way possible so as to maximize the potential benefit of each dollar.

Types of Organizations Using Fund Accountancy Methods

Many organizations outside of the business sector use fund accounting principles to manage their assets. These include:

  • Private and public universities
  • Charities
  • Churches and religious institutions
  • Hospitals
  • Nursing homes
  • Orphanages
  • Government agencies
  • Private trusts
  • Artistic and civic foundations

Objectives and General Practices of Fund Accountancy

The overarching objectives of fund accounting for nonprofits and government agencies differ in many respects from those used in the for-profit world of business. Some of the main objectives of fund accounting include:

  • Making decisions regarding the best uses of limited resources
  • Identifying crucial decisions, objectives and goals as they relate to the financial management of the organization
  • Reporting on the custodianship of available resources
  • Providing information to help resource providers assess the services that the organization provides and its ability to continue to provide those services
  • Providing information about the organization during a specific period of time to measure the changes in the amount and nature of the net resources of the organization
  • Providing information regarding how the organization obtains and spends cash and other liquid resources

While nonprofit and governmental organizations aren't typically concerned with accounting methods used for measuring and analyzing profits, some of the methods used in fund accounting are actually strikingly similar to those used in business. Among these are:

  • Using a double-entry system of accounts
  • Using documents to form basic records
  • Keeping books of original entry or journals which are posted to general and subsidiary ledgers
  • Drawing trial balances to prove the equality of debits and credits
  • Using a chart of accounts that is properly classified and fitted to the organization's structure

Fund Categories

Those involved with fund accounting are usually tasked with identifying and keeping track of a number of separate funds. Each fund will have certain characteristics that will dictate how it's to be used. There are six main categories that can be used to identify most funds:

  1. Current Unrestricted Funds: Funds that fall into this category are used for the general operating expenses of the organization or governmental entity. These funds do not contain restrictions on the use of the assets that they contain. This allows an organization's board of directors to use these funds in essentially any way that they see fit so long as the funds are being used to carry out the purposes for which the organization was founded.
  2. Board-Designated Funds: These funds are created when an organization's board of directors transfers assets from a current unrestricted fund into a new fund that is designated for a particular purpose. With board-designated funds the board rather than the donor determines the use of the fund.
  3. Current Restricted Funds: A restricted fund holds donated assets with the expectation that they'll be used for a particular purpose. The restriction applies to the use of the money only. For example, a donor may give $1,000 and specify that it must be used to purchase books for a library. The organization's board may then only use those funds to pay for books; they may not use the funds to pay for building an addition onto the library.
  4. Endowment Funds: An endowment fund holds assets that earn additional income. Organizations are generally allowed to use the income generated by endowment assets, so long as they don't touch the principal. Endowment fund income may be placed in either a restricted or unrestricted account depending on the donor's instructions. In some cases, endowment income must be placed back into the endowment fund to continue earning interest for a number of years before excess income can be placed in an alternative fund.
  5. Fixed Asset Funds: Monetary assets that are placed in fixed asset funds are generally used to pay for the organization's long-term assets such as land, buildings and equipment. These items are usually paid for in fixed installments over time. The main purpose of this type of fund is to prevent money for fixed payments from being withdrawn from the unrestricted fund. This allows the organization to get a clearer picture of the current activities of the organization by comparing and contrasting discretionary spending from year to year.
  6. Specialized Fund Groupings: As an example, some universities establish scholarship funds for exceptional students or for those who have demonstrated financial hardship. Essentially, specialized funds can be established for any purpose, but money donated to a specialized fund must be used towards the purpose for which the fund was established.

Legal and Quasi-Legal Considerations

Many of the operational facets of nonprofit organizations and governmental entities are regulated by both legal and quasi-legal requirements. Legal requirements include relevant federal, state and local laws such as tax regulations and reporting procedures. Quasi-legal requirements are those that are implemented by the organization itself. These internal regulations are included in each organization's charter or bylaws.

Accountants engaged in the practice of fund accounting should be aware of the external and internal laws, rules and regulations that impact the organization's accounting practices. Accountants can stay apprised of legal developments by working closely with the organization's legal counsel and keeping up on legislative developments at the federal and state levels.

Fund Accountancy Education and Degree Options Until recently, there were few specialized degree programs specific to fund accounting for a nonprofit organization or government agencies. Accountants were typically trained on the job. Today, there are more options open to students who wish to pursue careers in this field. Options include:

  • Obtaining a bachelor's degree in accounting, finance, economics or a related field and working for a nonprofit or government agency to gain relevant experience in fund accounting principles
  • Obtaining an associate's degree or bachelor's degree followed by a certificate program in fund accounting. Some higher education institutions now offer fund accountancy certificate programs online as well as in the classroom
  • Obtaining a bachelor's degree in accounting or a related field followed by a master's degree in fund accounting

Most bachelor's degree level general accounting programs offer courses in fund accounting, government accounting procedures and taxation for nonprofit organizations. Students interested in a career in fund accounting would be well advised to take advantage of such courses.

Many government entities only hire Certified Public Accountants. Becoming a CPA requires earning a bachelor's degree, taking the Uniform CPA exam, gaining two years of on-the-job experience and becoming licensed through one of the 55 U.S. jurisdictions.

Nonprofit and Government Accountancy Certification Credentials

Several nationally recognized professional associations provide certification credentials in fund accounting for nonprofit organizations and government agencies:

  • The National Association of Nonprofit Accountants and Consultants (NPAC) offers a "Certified Nonprofit Accounting Professional" designation to accountants and other finance professionals who have worked for a nonprofit organization for at least 18 months. The certification process consists of a training and exam component. Certification provides nonprofit accountants and finance professionals with national industry recognition, enhanced industry knowledge and increased value to their employer or organization.
  • The Association of Government Accounting (AGA) currently provides a "Certified Government Financial Manager" designation for accountants and other finance professionals who have earned a bachelor's degree with at least 24 credit hours of accounting, finance, economics, budgeting, auditing or public administration courses. In order to become receive the certification, you must complete and pass an exam administered by the AGA.

Fund Accountancy Careers

Universities, religious institutions, elementary and secondary schools, private foundations, hospitals and charitable organizations are great places for accountants to find work in fund accountancy. Federal, state and local governments also retain accountants to manage tax revenues, administrative funds and the financial aspects of public service programs.

Both the government and nonprofit sectors have experienced significant growth in recent years. Naturally, as these sectors grow, they will require additional accountants to manage their funds and financial accounts. According to the U.S. Department of Labor, Bureau of Labor Statistics, accountants and auditors are expected to experience "much faster than average employment growth" until the year 2018.