In this guide to fund accounting, we will discuss the difference between the two main forms of accounting. One form is commercial accounting that is used primarily by for-profit organizations and the other is fund accounting which is used almost exclusively by non-profit organizations. One of the biggest hurdles that new church and nonprofit volunteer staff face...is understanding the difference between these two forms of accounting.
Commercial accounting is all about the bottom line...determining whether a business is making a profit.
Fund accounting is about making sure there are enough monies in each fund to carry out the church’s or nonprofit’s mission.
To accomplish this goal, churches and nonprofit organizations set up their accounting systems to identify both the source of funds and the use of funds.
The dictionary defines a fund as a sum of money or other
resources whose principal or interest is set apart for a specific
Before I go any further in this guide to fund accounting let me emphasize what a fund is not. A fund is NOT an asset account--a checking or savings account.
A fund is something restricted for a particular purpose.
For example, your church is saving for renovations to your Sunday School rooms. You have opened a saving account to deposit all the monies received for this purpose. In your accounting, you would not set up the name of the savings account as a fund. You would set up a fund titled “Building” or “SS Renovations”, etc.
Let me also state here that you do not need to open a separate checking or saving account for each fund. All funds can be placed in one bank account as long as the accounting system clearly documents income and expenses in each fund apart from operational cash flow.
Note: Most small churches and nonprofits use this type of basic fund accounting to monitor the activities of each fund internally. If you need to prepare financial statements for external organization such as a financial institute, you will need to check their regulations regarding their required financial statements.
Some banks require you to prepare your financial statements using the Statement of Financial Accounting Standards (SFAS) Numbers 116 and 117, which describes the way nonprofits should account for contributions, and present their financial statements.
The emphasis of the SFAS financial statement reporting is on “net assets” classification, rather than tracking each fund.
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