What is Fund Accounting and Why Should Churches and Nonprofits Utilize This Form of Accounting?

Nonprofit and church accounting is unique because most churches and nonprofits use fund accounting.

"Fund Accounting "is an accounting method that groups assets and liabilities according to the specific purpose for which they are to be used. It helps to keep restricted (special) and unrestricted (general) funds separate.

You should utilize this method of accounting because:

• With fund accounting, accountability is measured instead of profitability. (Financial reports are directed toward contributors, church members, or the church/nonprofit's governing body, who are more concerned with having adequate fund balances to carry on services provided rather than seeking a profit on investments as investors do).
• In fund accounting, funds are set up to provide reporting of expenditures for designated purposes.
• You must be able to produce reports that can detail expenditures and revenues for these multiple funds.

Profit oriented businesses only have one set of self-balancing accounts or general ledger. However, churches and nonprofits can have more than one general ledger depending on their need.

For example...you may have one general ledger account titled "General Fund" which all unrestricted funds pass through. Then you may have several more general ledger accounts titled "Missions", "Building Fund", "Vacation Bible School", etc. which restricted funds pass through. These are funds that are set aside for a specific purpose.

An example of this would be if your church sponsors a church camp every year and pays the preparation costs beforehand. Donations from parents during the church camp recapture the up-front cost and maybe a little bit more. Without fund accounting, the church would simply see the expense of the church camp out of the general fund, and the church camp specific donations would be accumulated with other donations. The church would not be able to document the net cost of the church camp.

Treasurers or finance administrators may think that the best way to handle restricted funds is to open a separate checking account for each fund. This approach multiplies paperwork and makes determination of a balance sheet much more difficult.

All funds can be placed in one bank account as long as the accounting system clearly documents net assets and liabilities in each fund apart from operational cash flow. Also...you must be able to produce reports that summarize the financial activities of the church or nonprofit with all of your funds.

You can set your church or nonprofit accounting up on paper, in spreadsheets, or through a church or fund accounting software. No matter how you choose to set it up. It is very important that your financial administrators understand the underlying concepts of fund accounting and accurate financial statement preparation

Want to learn more about fund accounting?

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