Fund accounting is the main type of accounting that is used primarily by the government and non-profit organizations in the United States of America. It is used to record and monitor the money and assets that were entrusted, awarded, appropriated or contributed to their coffers. The funds or assets were conveyed in order for the entity to carry out its mission or fulfill its purpose.
Overview of fund accounting:
Non-profit organizations and government agencies have a set of special requirements that must be shown in the financial statements and reports. It is more important to highlight how the money was spent rather than the amount of profit that was made.
The differences between profit oriented businesses is not only the amounts that they must indicate, it lies within their general ledger as well. Non-profit organizations use more than one general ledger but it depends on their financial requirements.
Different requirements for a government agency and non-profit organization:
An accountant that works for such an entity will be required to produce reports that provides details on all of the transactions made by the entity which affects their expenditures and revenues for every single fund that they have. After these reports have been completed, there must be reports that summarizes all of the entity’s financial activities across all of its funds.
A government agency does not provide its reports to one entity but it is required to draw up all of its reports and send them to the designated entity that handles them. For example, the school system would have various spending areas that needs to be evaluated. A special education program would go the state, while a research program would go to another authority that provides the funding. Each program a government agency uses, will have unique reporting requirements. This means that the agency would need a method to identify the expenditures and revenues that are related to each program. To accomplish this, they need to have separate funds and each one of these fund have their own charts of accounts.
Objective of fund accounting:
The main objective of fund accounting is to present accurate financial reports on the entity’s activities. In short terms, it present the information on the entity’s income and expenses so that the management can evaluate whether or not the entity followed its budget within the prescribed provisions as to the granting of the funds (if there are any conditions.)
If there were no or a shortage of restrictions or provisions for the use of the funds, the entity should still present a financial report on how the spending took place and how wisely in was done. It is required by the Financial Accounting Standard Board (FASB) fund accounting guidelines for unrestricted donations.