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Fund Accounting Basics

Fund accounting is often used by governments, churches, non-profits or any organization that needs to segregate accounts. Basic accounting includes the accounting equation: Assets = Liabilities + Equity. Part of Equity is accumulated Net Income which equals Income - Expenses. Even a non-profit, church, or government organization has Net Income although it is not considered to be profit. Fund Accounting then is often about accountability rather than profit.

A government wants to track its departments, a church its missions, or a non-profit its grants. Each of these segregated purposes needs to track its own assets, liability, and equity. A simple way to do the segregation is to keep separate accounting books for each function, however, that often is not practical because an organization frequently needs to comingle money such as in a bank account. While keeping separate books is effective, it is also cumbersome.

This is where Fund Accounting comes to the rescue. It permits the combining of resources in common accounts like banks or administrative expenses while maintaining separate assets, liabilities, equity, income, and expenses in addition to satisfying the basic accounting equation.

 

Each of these separate entities is called a fund within the overall accounting structure. While you may have one expense account for office rent, you need to be able to specify the usage per fund for the check that you write to pay the rent. For example, in QuickBooks you can use a class on each transaction item to indicate the fund.

However, tagging transactions is only part of a fund accounting system. You have to be able to have meaningful reports, track inter-fund transfers, distribute common expenses over funds, and have specialized fund balancing. So while QuickBooks is a great small organization accounting package, it does not have specialized features for fund accounting. Using the FundsFix add-on with QuickBooks provides those missing functions.

Think of Fund Accounting as providing an extra dimension to your books. The accounts indicate the functional use while the funds indicate the separate areas of responsibility and accountability.